<PAGE>
As filed with the Securities and Exchange Commission on September 14, 2000
Registration No. 333-94189
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NORTHERN STAR FINANCIAL, INC.
(Name of small business issuer in its charter)
Minnesota 6021 41-1912467
(State or other (Primary Standard (I.R.S.
jurisdiction of Industrial EmployerIdentification
incorporation or Classification Code) Number)
organization)
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, Minnesota 56001
(507) 387-2265
(Address and telephone number of registrant's principal executive offices and
principal place of business)
----------------
Thomas Stienessen, Chief Executive Officer
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, Minnesota 56001
(507) 387-2265
(Name, address, and telephone number of agent for service)
Copies to:
Daniel A. Yarano, Esq. Les Smith
James H. Snelson, Esq. General Counsel
Fredrikson & Byron, P.A. Berthel Fisher & Company Financial
Services, Inc.
900 Second Avenue South, Suite 1100
701 Tama Street, Bldg. B
Minneapolis, Minnesota 55402 Marion, IA 52302
(612) 347-7000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effectiveness until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sell is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion; dated September 14, 2000
PROSPECTUS
[Northern Star Financial, Inc. LOGO]
300,000 Shares
of
Common Stock
Northern Star Financial, Inc. is offering a minimum of 50,000 and a maximum
of 300,000 shares of common stock.
Our common stock is quoted on the OTC Bulletin Board under the symbol "NSBK."
The shares will be sold primarily by our sales agent, Berthel Fisher &
Company Financial Services, Inc. The sales agent has agreed to use its best
efforts to sell the shares offered but must sell a minimum of 50,000 shares in
order to sell any shares. The offering is scheduled to end on [ ], but we
may extend the offering until December 31, 2000 at the latest. The minimum
purchase requirement is 100 shares and the maximum purchase is 45,000 shares,
although Northern Star may waive this requirement, in its sole discretion, to
sell a lower or higher number of shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to the
Price to Public Commissions Company
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ 10.50 $ 0.735 $ 9.765
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Total (Minimum 50,000 shares)... $ 525,000 $ 36,750 $ 488,250
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(Maximum 300,000 shares)........ $3,150,000 $220,500 $2,929,500
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</TABLE>
Our common stock is a risky investment. It is not a deposit or an account and
is not insured by the Federal Deposit Insurance Corporation or any other
government agency. Before investing, you should read the "Risk Factors"
section, which begins on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if
this prospectus is truthful and complete. Any representation to the contrary is
a criminal offense.
Berthel Fisher & Company Financial Services, Inc.
The date of this Prospectus is September , 2000
<PAGE>
PROSPECTUS SUMMARY
We encourage you to read the entire prospectus carefully before investing in
our common stock. Please note that an investment in our common stock is not a
deposit or savings account and is not insured or guaranteed by the FDIC or any
other governmental agency.
Our Company
Northern Star Financial is a one-bank holding company. We provide commercial
and retail banking services through our operating subsidiary, Northern Star
Bank. We formed Northern Star Bank as a Minnesota start-up bank in January
1999. We serve customers and borrowers located primarily in Mankato, Minnesota
and the counties of Blue Earth and Nicollet. On July 15, 1999, we acquired 49%
of Homeland Mortgage, LLC, a loan servicer and originator and jointly operated
Homeland with First Federal Savings Bank, a majority-owned subsidiary of First
Federal Holding Company of Morris, Inc. On September 1, 2000, we sold our
minority interest to First Federal Savings Bank for approximately $68,000.
We are primarily a community bank providing a broad range of commercial and
retail banking services designed to meet the borrowing and depository needs of
small and medium-sized businesses and consumers in the communities we serve. We
offer a full range of deposit accounts that are typically available at banks
and savings associations, including checking accounts, commercial accounts,
savings accounts and other time deposit accounts. We also provide a range of
lending services, including commercial, real estate and consumer loans to
individuals, small and medium-sized businesses and professional associations.
We believe that many businesses and individuals in our market area are under-
served by larger regional and national lending institutions that have
established operations in our principal market area. As a community bank, we
seek to provide our banking customers with the technological and staff support
that today's market requires, and make available a broad range of products
while providing personalized service. We are managed by individuals who have
lived and worked in our market for many years and believe that we can leverage
the experience of our management to grow our business. By combining support
with the products and services our customers require and our local management
and personalized service, we seek to foster a business that enables us to
effectively compete in our market with other financial banking institutions of
all sizes.
Our principal executive offices are located at 1650 Madison Avenue, Mankato,
Minnesota 56001, and our telephone number is (507) 387-2265.
Strategy
We believe that rewarding business opportunities exist in the community
banking business. The acquisition and consolidation of many community banks by
large national and regional banks has diminished or eliminated the presence of
community banks from many rural and suburban communities. We believe that there
is a need and support for locally operated and managed community banks in many
of these communities.
Our plan is to grow our community banking business through acquisition and
branching, and diversify our revenue sources by providing other traditional and
non-traditional financial services. We intend to diversify and grow our
community banking business by expanding our geographic presence in and outside
the State of Minnesota. In connection with our geographic expansion, we intend
to expand and diversify our balance sheet to be able to provide a greater level
of commercial and agricultural lending and other financial services.
We intend to grow our community banking business while maintaining the
critical components we believe support successful community banking. We intend
to operate each of our affiliated community banks using local management and
board of directors. We intend to rely on the local community bank's management
and board of
1
<PAGE>
directors to determine the best interests of each community bank within their
particular community and each bank will have authority to make all decisions
affecting credit, pricing and the marketing of bank services. We believe the
strength and success of a community bank rests, in large part, in the
customer's ability to put a human face and touch to their bank service
provider. As we increase our number of affiliated community banks, we intend to
develop and implement a technology integration strategy to integrate and
improve our and our affiliate banks' information management systems and enhance
customer service.
We intend to diversify and expand our business to provide traditional and
non-traditional banking services. The recent adoption of the Gramm-Leach-Bliley
Act, commonly referred to as the "New Financial Modernization Legislation" may
present new opportunities to us by allowing us to provide directly to our
customers non-traditional banking services such as insurance and securities
brokerage services. We intend to explore our expansion, through acquisition,
internal development and the use of strategic alliances with third parties,
into non-community banking services.
2
<PAGE>
The Offering
Common Stock Offered....
Minimum: 50,000
Maximum: 300,000
Offering Price.......... $10.50 per share.
Common Stock
Outstanding............ After the Minimum: 477,600 shares
After the Maximum: 727,600 shares
In addition, on June 30, 2000 we had options
outstanding to purchase 79,600 shares of our common
stock and warrants outstanding to purchase 10,000
shares of our common stock.
Use of Proceeds.........
We intend to use the net proceeds to provide
additional equity capital to our Bank to make
loans and to support our growth strategy.
Proposed Purchases of
Common Stock...........
Our directors and senior officers and certain of our
shareholders may purchase common stock in the
offering.
3
<PAGE>
Northern Star Financial Summary Financial Data
The following table summarizes certain historical financial data of Northern
Star Financial and its subsidiary on a consolidated basis as of and for the
fiscal years ending June 30, 1998, 1999 and 2000. You should read this table in
conjunction with our financial statements and related notes appearing elsewhere
in this prospectus. Northern Star Bank did not commence operation until January
25, 1999. Accordingly, a comparison of operating results for the twelve month
periods ending June 30, 1999 and June 30, 2000 may not be meaningful.
<TABLE>
<CAPTION>
June 30,
----------------------------------
2000 1999 1998
----------- ---------- -------
<S> <C> <C> <C>
Statement of Income:
Interest income........................... $ 1,179,388 $ 154,875 --
Interest expense.......................... 544,505 40,012 --
----------- ----------
Net interest income....................... 634,883 114,863 --
Provision for loan losses................. 125,250 56,250 --
Other non-interest income................. 62,500 42,449 --
Non-interest expense...................... 1,175,530 594,734 --
----------- ----------
Income (loss) before income tax expense... (603,397) (493,672) --
Income tax expense (benefit).............. -- -- --
----------- ---------- -------
Net income (loss)......................... $ (603,397) $ (493,672) $(3,959)
=========== ========== =======
Balance Sheet:
Assets.................................... $22,983,734 $9,635,608 $14,806
Allowance for loan losses................. 181,500 56,250 --
Deposits.................................. 18,193,931 6,164,569 --
Stockholders' equity...................... 2,788,404 3,423,702 (3,859)
Per Share Data:
Net income (loss)--basic.................. $ (1.42) $ (1.60) --
Net income (loss)--diluted................ (1.42) (1.60) --
Book value................................ 6.55 8.04 --
Other Data:
Average shares outstanding--basic......... 425,600 307,831 10
Average shares outstanding--diluted....... 425,600 307,831 --
Financial Ratios:
Return on average assets.................. (3.70)% (22.61)% --
Return on average stockholders' equity.... (19.43)% (69.87)% --
Net interest margin....................... 4.45 % 6.15 % --
Tier 1 leverage ratio..................... 12.30 % 36.50 % --
Tier 1 capital to risk-weighted assets.... 14.20 % 43.30 % --
Total capital to risk-weighted assets..... 15.30 % 44.20 % --
Asset Quality Ratios:
Nonperforming assets to total assets...... N/A N/A
Nonperforming assets to total loans and
other real estate owned.................. N/A N/A
Allowance for loan losses to total loans.. 1.06 % 1.00 % --
</TABLE>
4
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
invest only after carefully considering the risks described below and
elsewhere in this prospectus and only if you can afford to lose your entire
investment. An investment in our common stock is not a deposit or savings
account and is not insured or guaranteed by the FDIC or any other governmental
agency.
We have a limited operating history and have incurred and expect to incur
operating losses.
We just recently commenced banking operations in January 1999. Since that
time, we have incurred net losses of $493,672 and $603,397 for our fiscal
years ended June 30, 1999 and 2000, respectively. A primary contributor to our
loss in fiscal year 2000 was the expenses we incurred from our minority
investment in Homeland Mortgage. Homeland Mortgage's revenues have declined as
a result, in part, to an increase in mortgage rates. Homeland Mortgage closed
one of its offices and reduced its staff in an effort to reduce operating
expenses. On September 1, 2000, we sold our minority interest in Homeland to
First Federal Savings Bank for approximately $68,000. We cannot assure you
that we will attract deposits and develop a loan portfolio sufficient to
become profitable in 2000 or at any time in the future.
We may not be able to successfully implement our growth strategy.
In order to achieve and maintain profitability, we must aggressively grow
our business. We intend to use the proceeds from this offering to support
anticipated increases in our loan portfolio and investments and expansion. Our
ability to grow depends in part on our ability to successfully attract
deposits, identify loan and investment opportunities, and expand into new
markets either through acquisition or by opening new branch locations. In
order to successfully manage this growth, we must also maintain cost controls
and asset quality throughout our operations. If we are unable to effectively
implement our growth strategies, our business may be adversely affected.
Changes in interest rates may adversely impact our profitability.
Our net income depends principally upon our net interest income. Net
interest income is the difference between interest earned on loans,
investments and other interest-earning assets and the interest paid on
deposits and borrowed funds. Any change in general market interest rates,
whether a result of changes in monetary policies of the Federal Reserve Board
or otherwise, can have a significant effect on our net income.
We attempt to manage risks due to changes in market interest rates by
controlling the mix of interest rate sensitive assets and interest rate
sensitive liabilities. However, interest rate management techniques do not
always produce the financial results anticipated and a rapid increase or
decrease in interest rates could adversely effect our financial performance.
Our exposure to credit risk is increased because we focus on commercial
lending.
We make various types of loans, including commercial, consumer, residential
mortgage and construction loans. We incur risk in making our loans. These
risks include interest rate changes over the time period in which loans may be
repaid, risks resulting from changes in our regional economy, risks inherent
in dealing with individual borrowers, and in the case of a loan backed by
collateral, risks resulting from uncertainties about the future value of the
collateral.
Our loans to small and medium-sized businesses are generally riskier than
single-family mortgage loans. Typically, the success of a small or medium-
sized business depends on the management talents and efforts of one or two
persons or a small group of persons, and the death, disability or resignation
of one or more of these persons could have a material adverse impact on our
business. In addition, small and medium-sized businesses frequently have
smaller market shares than their competition, may be vulnerable to economic
downturns, often need substantial additional capital to expand or compete and
may experience substantial variations in operating
5
<PAGE>
results, any of which may impair a borrower's ability to repay a loan. Because
our loan portfolio contains a significant number of commercial loans, the
failure of these loans to perform as expected could result in a loss of
earnings from these loans, an increase in the provision for loan losses and an
increase in loan charge-offs.
Adverse economic conditions in our primary market may have an adverse impact
on us.
Approximately 70% of all our business is with customers located within
Mankato, Minnesota and the counties of Blue Earth and Nicollet. The businesses
to whom we make loans are small and medium-sized businesses and are dependent
upon the regional economy. Adverse economic and business conditions in our
market area could affect our borrowers, their ability to repay their loans and
consequently our financial condition and performance.
Our allowances for loan losses may be inadequate to absorb actual future loan
losses.
We believe that our allowance for loan losses is adequate to absorb any
inherent losses in our loan portfolio. Management's estimates are used to
determine the allowance that is considered adequate to absorb losses in our
loan portfolio. Management's estimates are based on historical loan loss
experience, specific problem loans, value of underlying collateral, economic
conditions and other relevant factors. These estimates are subjective and
their accuracy depends on the outcome of future events. Actual losses may
differ from current estimates. Depending on changes in economic, operating and
other conditions, including changes in interest rates that are generally
beyond our control, actual loan losses could increase significantly. As a
result, such loan losses could exceed current loan allowance estimates.
Because we have a short operating history, we do not have a seasoned loan
portfolio and the ratio of the loan allowance for loan losses to total loans,
will likely be increased as our loan portfolio matures. If it becomes
necessary to increase the ratio of the allowance for loan losses to total
loans, such increases would be accomplished through higher provisions for loan
losses, which will adversely impact net income or will increase operating
losses.
In addition, bank regulatory agencies, as an integral part of their
supervisory function, periodically review the adequacy of our allowance for
loan losses. Regulatory agencies may require us to increase our provision for
loan losses or to recognize further charge-offs based upon judgments different
from those of management. Any increase in the allowance required by regulatory
agencies could have a negative impact on our operating results. We cannot
assure you that charge-offs in future periods will not exceed the allowances
for loan losses or that additional increases in the allowance for loan losses
will not be required. Additions to the allowance for loan losses would result
in a decrease in our net income, or an increase in our operating losses, and
possibly a decrease in our capital.
Government regulations significantly affect our business.
As a bank holding company, we are primarily regulated by the Board of
Governors of the Federal Reserve System. Our Bank is regulated by the
Department of Commerce of the State of Minnesota and the FDIC.
Federal laws and the laws of the State of Minnesota govern numerous aspects
of our Bank's operation including:
. adequate capital and financial conditions;
. permissible types and amounts of extensions of credit and investments;
. permissible acquisitions;
. permissible non-banking activities; and
. restrictions on dividend payments.
Federal and the State of Minnesota regulatory agencies have extensive
discretion and power to prevent or remedy unsafe or unsound practices or
violations of law by our Bank and by us. We also undergo periodic
6
<PAGE>
examinations and inspections by one or more regulatory agencies. Following
such examinations, we may be required, among other things, to change our asset
valuations or the amounts of required loan loss allowance or to restrict our
operations. Those actions would result from the regulators' judgments based on
information available to them at the time of their examination. Furthermore,
the Federal Reserve System reviews and is required to approve our application
to acquire any financial institutions. In June 2000, the Federal Reserve
denied our application to merge with First Federal Holding Company of Morris,
Inc. There is no assurance the Federal Reserve will approve any future
application to grow our business through acquisition.
Our operation must comply with a variety of state and federal consumer
protection and similar laws and regulations. Federal and state regulatory
restrictions limit the manner in which we may conduct business and obtain
financing. These laws and regulations can and do change significantly from
time to time, and any such change could adversely affect us.
We are dependent upon our management.
Our future success depends, in large part, upon the continuing contributions
of our key management personnel, including our president, Thomas Stienessen.
Mr. Stienessen has been critical to our formation and operation and we believe
his leadership is critical to executing our business plan and growing our
business. Mr. Stienessen has an employment agreement with us.
We may not be able to successfully compete with other financial institutions.
We face substantial competition in originating loans and in attracting
deposits. The competition in originating loans comes principally from other
banks, savings institutions, mortgage banking companies and other lenders.
Many of our competitors have advantages including greater financial resources,
a wider geographic presence or more accessible branch office locations, the
ability to offer a wider array of services, or more favorable pricing
alternatives and lower origination and operating costs. This competition could
decrease the number and size of loans which we originate and the interest rate
which we receive on these loans.
In attracting deposits, we compete with other depository institutions,
including banks, savings institutions and credit unions, as well as
institutions offering uninsured investment alternatives, including money
market funds. These competitors may offer higher interest rates than we do,
which could decrease the deposits that we attract or require us to increase
our rates to attract new deposits. Increased deposit competition could
increase our cost of funds and adversely affect our ability to generate the
funds necessary for lending operations.
Forward-looking statements may prove inaccurate.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of us. We have made, and
may continue to make, various written or verbal forward-looking statements
with respect to business and financial matters, including statements contained
in this report, filings with the Securities and Exchange Commission, and
reports to stockholders. All statements which address our beliefs regarding
our market, strategy, events or developments that we expect or anticipate will
occur in the future, including those found under the Sections entitled "Our
Company," "Strategy," "Management's Discussion and Analysis of Financial
Condition of and Results of Operations," "Northern Star Financial, Inc.--
Business--Strategy and Competition," are forward-looking statements within the
meaning of the Act. The forward-looking statements are and will be based on
management's then current views and assumptions regarding future events and
operating performance. Certain factors that could affect financial performance
or cause actual results to vary significantly from estimates contained in or
underlying forward looking statements include:
. Interest rate fluctuations and other market conditions.
. Strength of the agricultural, consumer and commercial credit sectors, as
well as real estate markets.
. Changes in laws and regulations, including changes in accounting
standards and taxation requirements (including tax rate changes, new tax
laws, and revised tax law interpretation).
7
<PAGE>
. Competitive pricing and other pressures on loans and deposits and our
ability to maintain market shares in its trade areas.
. A downturn in local economic conditions in our primary markets.
. Those risks identified under the Section entitled "Risk Factors."
. Other risks and uncertainties as detailed from time to time in our
filings with the Securities and Exchange Commission.
8
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $318,250 upon completing the
sale of the minimum number of shares in this offering and $2,759,500 upon
completing the sale of the maximum number of shares, after deducting expenses
of the offering (estimated at $170,000) and the sales agent's commission
totaling $36,750 upon the sale of the minimum and $220,500 upon the sale of
the maximum.
The following table sets forth the anticipated use of the net proceeds
(after deducting the estimated offering expenses and sales agent's commission)
by Northern Star Financial based on the sale of the minimum and maximum number
of shares.
<TABLE>
<CAPTION>
Minimum(1) Maximum(2)
---------------------- ------------------------
Dollar Percentage of Dollar Percentage of
Amount Net Proceeds Amount Net Proceeds
-------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Northern Star Bank(3).......... $254,600 80% $2,207,600 80%
Northern Star Financial(4)..... $ 63,650 20% $ 551,900 20%
-------- --- ---------- ---
Total Net Proceeds........... $318,250 100% $2,759,500 100%
======== === ========== ===
</TABLE>
--------
(1) Assumes the sale of 50,000 shares at $10.50 per share.
(2) Assumes the sale of 300,000 shares of $10.50 per share.
(3) We intend to contribute from time to time as needed net proceeds to our
Bank to increase its regulatory capital to make loans, increase its
interest-earning assets and enhance its capital ratios.
(4) We intend to use proceeds to support our working capital needs and to fund
future internal growth or the geographic expansion of our business. See
"Prospectus Summary--Strategy."
Pending utilization of the net proceeds of this offering, we plan to invest
net proceeds in short-term money market investments, high grade commercial
paper and interest-bearing bank accounts.
DIVIDEND POLICY
Substantially all of the funds available for the payment of cash dividends
are derived from our Bank. Future cash dividends will depend primarily upon
our Bank's earnings, financial condition, need for funds, and government
policies and regulations that apply to our Bank and to us. We have not and do
not currently contemplate the payment of any dividends in the near future. We
intend to follow a policy of retaining any earnings to provide funds to
operate and expand our business.
9
<PAGE>
CAPITALIZATION
The following table summarizes our capitalization as of June 30, 2000, and
our pro forma capitalization as adjusted to reflect the sale of the minimum
and maximum number of shares in this offering at $10.50 per share and the
application of the estimated proceeds from such offerings as described in the
"Use of Proceeds" section of this prospectus. You should read this table in
conjunction with our consolidated financial statements (including the notes
thereto) included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------
As Adjusted
------------------------
Actual Minimum Maximum
----------- ----------- -----------
<S> <C> <C> <C>
Shareholders' equity:
Common stock, $0.01 par value;
20,000,000 shares authorized; 427,600
shares issued and outstanding
(477,600 shares as adjusted for the
Minimum and 727,600 shares as
adjusted for the Maximum)(1)......... $ 4,276 $ 4,776 $ 7,276
Paid-in capital....................... 3,939,557 4,257,307 6,696,057
Unearned stock compensation........... (20,000) (20,000) (20,000)
Accumulated deficit and comprehensive
loss(2).............................. (1,135,429) (1,135,429) (1,135,429)
----------- ----------- -----------
Total shareholders' equity............ $ 2,788,404 $ 3,106,654 $ 5,547,904
</TABLE>
--------
(1) Does not include: (i) 36,000 shares of common stock issuable upon exercise
of outstanding nonqualified stock options granted to our non-employee
directors pursuant to our 1998 Equity Incentive Plan; (ii) 30,800 shares
of common stock issuable upon exercise of other outstanding nonqualified
options; (iii) 12,800 shares of common stock issuable upon exercise of
outstanding incentive stock options; and (iv) 10,000 shares of common
stock reserved for issuance under outstanding warrants.
(2) The accumulated deficit and comprehensive loss as of June 30, 2000 is
comprised of operating expenses incurred since inception, less operating
revenues and unrealized loss, net of tax on securities available for sale.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"NSBK" since February 2, 1999. Quotations in the following table represent
inter-dealer prices, without retail markups, markdowns or commissions, and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
----------------
Fiscal Quarter Ended High Bid Low Bid
-------------------- -------- -------
<S> <C> <C>
March 31, 1999................................................ $10.00 $10.00
June 30, 1999................................................. 11.50 9.50
September 30, 1999............................................ 12.00 10.00
December 31, 1999............................................. 11.00 10.00
March 31, 2000................................................ 10.50 9.00
June 30, 2000................................................. 9.00 6.00
Through August , 2000........................................
</TABLE>
On September , 2000 the last sale price for our common stock was $ per
share. On June 30, 2000, there were issued and outstanding 427,600 shares of
our common stock held by 49 shareholders of record. Record ownership includes
ownership by nominees who may hold for multiple owners.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the related notes for the years ended
June 30, 1999 and 2000 included elsewhere this prospectus. Our consolidated
financial statements include Northern Star Financial, Inc. and Northern Star
Bank, our wholly-owned subsidiary and our minority investment in Homeland
Mortgage Company, LLC.
Business
Northern Star Financial, Inc. is a bank holding company. Our wholly owned
subsidiary, Northern Star Bank, is a Minnesota state-chartered commercial
bank. Our principal business is conducted through our Bank, which attracts
deposits from the general public and uses these deposits, together with
borrowings and other funds, to originate commercial, commercial real estate,
residential, agricultural, automobile and other consumer loans. The Bank also
originates construction loans and invests in securities.
Our results of operations are primarily dependent on the net interest income
earned from the interest rate spread on earning assets and interest bearing
liabilities. The interest rate spread is the difference ("spread") between the
average yield on interest-earning assets, such as loans, and investment
securities and short-term interest bearing deposits and the average rate paid
on interest-bearing liabilities, such as deposits and borrowings. The spread
is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. In addition to credit risk, we
are subject to interest rate risk to the degree that our interest-earning
assets mature or re-price at different times, or on a different basis, than
its interest-bearing liabilities.
Our results of operations also depend upon the level of non-interest income
earned and expenses, including bank fee income, gains or losses on the sale of
loans and other assets, provisions for possible loan losses, income derived
from subsidiary and investment activities, operating expenses and income
taxes. Our operating expenses principally consist of employee compensation and
benefits, occupancy expenses, federal deposit insurance premiums and other
general and administrative expenses.
Our business is affected by prevailing economic conditions, including
federal monetary and fiscal policies, as well as by federal regulation of
financial institutions. Our deposit balances are influenced by a number of
factors, including interest rates paid on competing personal investments and
the level of personal income and savings within the institutions market area.
In addition, our deposit balances are influenced by the perceptions of
customers regarding the stability of the financial markets and financial
services industry. We expect to retain a significant portion of existing
deposit balances by offering competitive rates on such deposits. We have
adopted a strategy of employing Federal Home Loan Bank (FHLB) advances to
supplement deposits. FHLB advances are expected to augment the liquidity
necessary to fund lending operations and investment opportunities. Our lending
activities are influenced by demand for commercial, consumer and housing loans
as well as competition from other lending institutions. The primary sources of
funds for lending activities include deposits, loan payments, borrowings, the
sale of loans and other assets and funds provided from operations
Our results of operation also reflect income and losses derived from our
minority investment in Homeland Mortgage Company, LLC, our joint venture with
First Federal Savings Bank of Morris, Minnesota. Homeland Mortgage makes and
brokers residential real estate loans and services these loans for a fee.
Results Of Operations
The Bank did not commence operations until January 25, 1999. Accordingly, a
comparison of our operating results for the fiscal year ended June 30, 2000
and June 30, 1999 may not be meaningful in evaluating our historical operating
results and anticipated future operating performance. Our results of
operations as of and for the fiscal year ended June 30, 1999 reflect
organizational activities and the results of five months of operations
following the opening of our Bank on January 25, 1999.
11
<PAGE>
Fiscal Year Ended June 30, 2000 Compared to June 30, 1999
We reported interest income of $1,179,388 for the fiscal year ended June 30,
2000. Loan interest income of $906,062 represented the largest portion of our
interest income since we had the largest portion of earning assets in our loan
portfolio. The weighted average yield earned on our average interest-bearing
assets of $14,205,941 was 8.30% for the year and the average rate paid on our
interest-bearing liabilities of $10,889,099 was 5.00% for the period. The net
interest spread, the difference between the average yield earned on interest
earning assets and the average rate paid on interest-bearing liabilities was
3.30%.
Net interest income (the difference between interest income and interest
expense) for the fiscal year ended June 30, 2000, increased $520,021 or 553%
to $634,883 from the $114,863 of net interest income earned during fiscal year
ended June 30, 1999. The increase in net interest income was due primarily to
additional interest earned on loans, as our loan balances increased 340% from
$4,882,000 at June 30, 1999, to $16,573,000 at June 30, 2000. Interest income
from loans during fiscal year 2000 was $906,062, an increase of $786,058 or
755% from fiscal year 1999. In addition, interest income received on
securities available for sale increased by $205,666. Our deposits increased
$12,029,362 to $18,193,931 at June 30, 2000 compared to deposits of $6,164,569
at June 30, 1999. Interest expense increased $504,493 to $544,505 during
fiscal year 2000.
Noninterest income, which includes fee income, exclusive of gains or losses
on securities transactions, increased $20,051 to $62,500 in fiscal year 2000
compared to $42,449 in fiscal year 1999.
Noninterest expenses nearly doubled during fiscal year 2000. Noninterest
expenses increased $580,796 to $1,175,530 during fiscal year 2000 compared to
$534,734 during fiscal year 1999. The primary reasons for the increase in non-
interest expenses is (i) the Bank was operational for the entire fiscal year
ending June 30, 2000 while it was operational for slightly less than six
months (156 days) during the fiscal year ended June 30, 1999; (ii) $86,799 of
expenses incurred in connection with our terminated acquisition of First
Federal Holding Company of Morris, Inc.; (iii) $120,291 of expenses and joint
venture loss associated with our investment in Homeland Mortgage, LLC. Absent
the extended period of operations and the nonrecurring expenses incurred in
(ii) and (iii) above, our monthly noninterest operating expenses have remained
approximately the same since opening the Bank. Our major expense is
compensation and employee benefits, which increased from $247,497 for a part
year to $420,352 for a full year. We incurred $55,691 of organizational
expenses in fiscal 1999, which was offset by the costs incurred in fiscal 2000
for being a public company.
We incurred a net loss of $603,397 or $1.42 per basic share for fiscal year
2000 compared to a net loss of $493,672 or $1.60 per basic share for fiscal
year 1999. Absent the non-recurring expenses associated with the terminated
merger with First Federal Holding Company and expenses incurred in connection
with our investment in Homeland Mortgage, LLC, we would have incurred a net
loss of $396,307 or ($0.94) per basic share for the fiscal year 2000.
Northern Star Financial, Inc. accounted for $297,845 or $ (0.70) per share
of the operating losses of the Company for fiscal year ended June 30, 2000.
Home Land Mortgage, LLC accounted for $113,428 or $ (0.27) per share while
Northern Star Bank accounted for $192,124 or $ (0.45) per share of the
operating losses.
Our total assets at June 30, 2000 were $22,984,734, an increase of
$13,348,126 from $9,636,608 at June 30, 1999. This increase is due to an
increase in securities available for sale at fair value and loans receivable.
Securities available for sale amounted to $4,212,387 at June 30, 2000, an
increase of $3,467,268 from $745,119 at June 30, 1999. The cost of the
securities available for sale was reduced by $57,335 as a result of a decrease
in the fair value of these securities. Loan receivables net of an allowance
for loan and lease losses increased by $11,691,066 or 340% to $16,572,568 at
June 30, 2000 compared to $4,881,502 at June 30, 1999.
Total liabilities were $20,195,330 at June 30, 2000; an increase of
$13,983,424 from $6,211,906 at June 30, 1999 and deposits of $18,193,931
increased $12,029,362 million, or 295%, from $6,164,569 at June 30, 1999. The
Company utilized $1,950,000 in borrowings from the FHLB in order to bridge the
gap between the increase in loan receivables and the increase in deposits.
12
<PAGE>
Total stockholders' equity decreased by $635,298 from $3,423,702 at June 30,
1999 to $2,788,404 at June 30, 2000.
Financial Condition at June 30, 2000
Assets
Our total assets grew by $13,348,126 or 139% for fiscal year 2000. The
growth in our total assets since the commencement of bank operations on
January 25, 1999 has been consistent and significant. We believe that our
overall growth to date is due in part to management's efforts in positioning
our Bank as a local community bank and in part to the continued consolidation
of the financial services industry. We believe that many of our customers
joined our Bank after they became dissatisfied with the character of their
previous bank after it was acquired by a larger national institution.
An increase in our interest earning assets in the form of loan receivables
and securities increased $15,158,000 during the fiscal year ended June 30,
2000 and accounted for all of the increase in assets on which the Bank earns
interest income. The Bank earned interest on 93% of its average assets during
the fiscal year ending June 30, 2000. Having more of its assets earning
interest helps the Bank improve its level of profitability. The Bank has
achieved this higher percentage by several means. Loans are structured to have
interest payable in most cases each month so that large amounts of accrued
interest receivables (which are non-earning assets) are not built up. In this
manner, the interest received can be invested to earn additional interest. We
lease our facilities under long-term contracts rather than owning them. This
strategy avoids tying up funds that could be earning interest. In addition, we
have not found it necessary to increase our investment in furniture, fixtures,
and equipment.
Asset Quality And The Allowance For Credit Losses
As part of its on-going operations, the Bank incurs an expense in the form
of an allowance for credit losses which is provided in recognition that not
all loans will be fully paid according to their contractual terms. The Bank is
required by regulation, generally accepted accounting principles, and safe and
sound banking practices to maintain an allowance that is adequate to absorb
losses that are inherent in the portfolio of loans and leases, including those
not yet identified.
A provision for loan and lease loss expense in the amount of $125,250 was
made for fiscal year ended June 30, 2000. This is an increase of $69,000 from
the $56,250 provided for fiscal year ended June 30, 1999. Our loan loss
reserves totaled $181,500 at June 30, 2000 compared to $56,250 at June 30,
1999. The primary reason for an increase in our loan loss reserve was a result
of the Bank's higher level of new loans originated during fiscal year 2000.
The allowance for loan loss was established by a charge to income based on
management's evaluation of the known and inherent risks in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of the underlying collateral, and current economic conditions.
The Bank has a lower ratio of non-performing loans to total loans than most of
its peers and, since its inception, has not incurred any charge-off or related
collection expense.
Management believes that the allowance for loan losses at June 30, 2000 was
adequate to cover the losses inherent in the loan and lease portfolios as of
that date.
Deposits
Funds held on deposit at the Bank in the form of checking, savings, and
money market accounts are available to customers on demand. As a result, and
because of our relatively small deposit base, total demand deposit account
balances are volatile and may vary substantially from period to period. While
there occasionally may be decreases in average deposits from one quarter to
the next, the overall trend is one of growth. Total deposits held by customers
at the Bank increased by $12,029,362 or 195% from $6,164,569 at June 30, 1999
to $18,193,931 at June 30, 2000.
13
<PAGE>
Increases in deposits have come by maintaining competitive deposit rates,
introducing new deposit products, and the successful encouragement of former
customers of merged financial institutions to become customers of the Bank.
Liquidity
Liquidity is the ability to raise funds on a timely basis at acceptable cost
in order to meet cash needs, such as might be caused by fluctuations in
deposit levels, customers' credit needs, and attractive investment
opportunities. The Bank's objective is to maintain adequate liquidity at all
times and has adopted a policy of maintaining a total liquidity position of
15% of total assets.
The Bank has defined and manages three types of liquidity: (1) "immediate
liquidity," which is the ability to raise funds today to meet today's cash
obligations, (2) "intermediate liquidity," which is the ability to raise funds
during the next few weeks to meet cash obligations over that time period, and
(3) "long term liquidity," which is the ability to raise funds over the entire
planning horizon to meet anticipated cash needs due to strategic balance sheet
changes. Adequate liquidity is achieved by (a) holding liquid assets, (b)
maintaining the ability to raise deposits or borrow funds, and (c) keeping
access open to capital markets. Immediate liquidity is provided by the prior
day's balance of Federal funds sold and repurchase agreements, any cash in
excess of that required to meet customer needs, and unused Federal funds lines
from other banks. As a result of the Bank's plan to aggressively grow the
amount of interest-earning assets, the Bank will periodically accumulate funds
in the form of "Federal funds" while waiting to re-deploy these funds into
loans. Federal funds are interest-earning funds that are sold to other banks
on an overnight basis and are available to meet current cash needs. The Bank
attempts to maintain total sources of immediate liquidity of not less than 5%
of total assets.
Sources of intermediate liquidity include maturities of securities in the
earnings portfolio maturing within three months, advances from the FHLB, and
deposit increases from special programs. The Bank projects intermediate
liquidity needs and sources over the next several weeks based on historical
trends, seasonal factors, and special transactions. Appropriate action is then
taken to cover any anticipated unmet needs. At fiscal year ended June 30,
2000, the Bank's intermediate liquidity was adequate to meet all projected
needs.
Long term liquidity is be provided by special programs to increase core
deposits, reducing the size of the investment portfolios, selling loans, and
accessing capital markets. The Company's policy is to address cash needs over
the entire planning horizon from actions and events such as market expansions,
acquisitions, increased competition for deposits, anticipated loan demand,
economic conditions and the regulatory outlook. At fiscal year ended June 30,
2000, the Company's long term liquidity was adequate to meet cash needs
anticipated over its planning horizon.
Fiscal Year Ended June 30, 1999
We reported interest income of $154,875 for the fiscal year ended June 30,
1999. Net interest income before the provision for loan losses of $114,863 was
earned for the period after incurring an interest expense of $40,012. Loan
interest income of $120,005 represented the largest portion of our interest
income, since we had the largest portion of earning assets in our loan
portfolio. The weighted average yield earned on our interest-bearing assets of
$1,866,661 was 8.30% for the period and the average rate paid on our interest
bearing liabilities of $901,088 was 4.44% for the period. The net interest
spread, the difference between the average yield earned on interest earning
assets and the average rate paid on interest-bearing liabilities was 3.86%.
The provision for loan losses was established at $56,250 at June 30, 1999,
reflecting our estimate of the amount necessary to adequately reflect possible
loan losses. Our allowance for loan losses as a percentage of our year-end
loans was 1.14%. Our judgment as to the adequacy of the allowance is based
upon an evaluation of the inherent risks in the loan portfolios, which we
believe to be reasonable, which may or may not prove to be accurate. Thus, we
cannot assure you that charge-offs in future periods will not exceed the
allowance for loan losses or that an additional increase in the loan loss
allowance will not be required. We had no charge-offs in 1999.
We earned non-interest income of $42,499 for the fiscal year ending June 30,
1999, representing service charges on deposit accounts and gains on the sale
of residential mortgage loans, partially offset by a loss on the
14
<PAGE>
sale of loans of $3,050. As a percentage of average assets, non-interest
income was 1.77% for our truncated year of operations ended June 30, 1999.
We incurred other non-interest expenses of $594,734 for fiscal year ended
June 30, 1999, inclusive of costs associated with setting up our Bank's
operations. We incurred nonrecurring pre-opening expenses of approximately
$304,000 in organizing our Bank's operations. The pre-opening expenses also
include $248,000 in organizational costs expensed due to a change in
accounting. Staffing at our Bank was at a full-service level beginning the
first part of December 1998 for training in preparation for our Bank's opening
on January 25, 1999, and other non-interest expenses were incurred in
operating our Bank. Non-interest expense included $40,364 in salaries and
employee benefits incurred during our initial start-up phase and approximately
$15,636 in opening expenses. As a percentage of average assets, non-interest
expenses were 24.8%.
Our net loss for the year ended June 30, 1999 was $493,672.
At June 30, 1999, we had total assets of $9,635,608, which consisted of cash
and due from the banks of $210,662, federal funds sold of $2,533,236,
securities and short-term investments of $745,119, FHLB stock of $16,400, net
loans of $5,563,095, accrued interest receivable of $59,527, property and
equipment of $486,685 and other assets of $20,884. At June 30, 1999, we had
liabilities of $6,164,569 in deposits and $47,337 in other liabilities.
Stockholders' equity at June 30, 1999 was $3,423,702.
Average Balances, Yields And Rates
The following tables summarize our weighted average yields earned, weighted
average rates paid, interest rate spread and net yield on earning assets and
interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 2000
---------------------------- -------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Rates Balance Interest Rates
---------- -------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal Funds Sold...... $ 544,083 $ 26,089 4.79% $ 1,168,898 $ 64,070 5.48%
Investment Securities... 60,531 3,590 5.93% 3,078,085 209,236 6.79%
Loans................... 1,098,410 120,005 10.93% 9,952,085 906,062 9.10%
Other Interest-Earning
Assets................. 163,637 5,191 3.17% 6,873 20 0.29%
---------- -------- ----- ----------- ---------- ----
Total Interest Earning
Assets............... 1,866,661 154,875 8.30% 14,205,941 1,179,388 8.30%
Non-Interest Earning
Assets................. 526,684 1,102,641
---------- -----------
Total Assets.......... $2,393,345 $15,308,582
========== ===========
Liabilities and
Stockholders' Equity
Interest Bearing
Deposits............... $ 901,088 $ 40,012 4.44% $10,463,689 $ 518,260 4.25%
Other Interest Bearing
Liabilities............ -- -- 0.00% 425,410 26,245 6.17%
---------- -------- ----- ----------- ---------- ----
Total Interest Bearing
Liabilities.......... 901,088 40,012 4.44% 10,889,099 544,505 5.00%
-------- ----------
Non Interest Bearing
Liabilities............ 327,003 1,326,696
---------- -----------
Total Liabilities..... 1,228,091 12,215,795
Stockholders' Equity.... 1,165,254 3,092,787
---------- -----------
Total Liability and
Stockholders' Equity... $2,393,345 $15,308,582
========== ===========
Net Interest Spread..... 3.86% 3.30%
Net Interest
Income/Margin.......... $114,863 6.15% $ 634,883 4.45%
======== ===== ========== ====
Ratio of Average
Interest-Earning Assets
to Average Interest-
Bearing Liabilities.... 2.07x 1.30x
</TABLE>
The average balances for the year ended June 30, 1999 were calculated on an
annualized basis, even though we did not have operations for the entire fiscal
year.
15
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in average
volume multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume); (iii) changes in rate-volume (changes in
rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended June 30,
2000 vs 1999
----------------------------
Increase (Decrease) Due
to
----------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable................................ $ 968 $(20) $(162) $ 786
Investment securities........................... 179 1 26 205
Federal funds sold.............................. 30 4 4 38
Other interest-earning assets................... (5) (5) 5 (5)
------ ---- ----- ------
Total interest-earning assets................. 1,172 (20) (127) 1,024
Interest expense:
Deposit Accounts................................ 425 5 49 478
Other Liabilities............................... -- -- 26 26
------ ---- ----- ------
Total interest-bearing liabilities............ 425 5 75 504
------ ---- ----- ------
Net change in net interest income................. $ 747 $(25) $(202) $ 520
====== ==== ===== ======
</TABLE>
Market Risk Management
Market risk is our risk of loss, arising from adverse changes in market
prices and rates, comprised primarily of interest rate risk. Most of our
earnings arise from functioning as a financial intermediary. As such, we take
in funds from depositors and then either lend the funds to borrowers or invest
the funds in securities and other instruments. We earn interest income on the
loans and securities and pay interest expense on deposits and other
borrowings.
Net interest income, the primary component of our net income, is determined
by the difference or "spread" between the yield earned on interest-earning
assets and the rates paid on interest-bearing liabilities and the relative
amounts of such assets and liabilities. Because interest-bearing liabilities
consist primarily of shorter-term deposit accounts, our interest rate spread
can be adversely affected by changes in general interest rates if interest-
earning assets are not sufficiently sensitive to changes in interest rates. We
have sought to reduce our exposure to changes in interest rates by more
closely matching the effective maturities and re-pricing periods of interest-
earning assets and interest-bearing liabilities through a variety of
strategies, including the origination and purchase of adjustable-rate loans,
and the sale of long-term fixed-rate loans.
With such large proportions of our balance sheet made up of interest-earning
assets and interest-bearing liabilities, and with such a large proportion of
our earnings dependent on the spread between interest earned and interest
paid, it is critical that we measure and manage our interest rate sensitivity.
Measurement is done by estimating the impact of changes in interest rates over
the next twelve months on net interest income and on net economic value. Net
economic value is the net present value of the cash flows arising from assets
and liabilities discounted at their acquired rate plus or minus assumed
changes.
We seek to manage interest rate risk by monitoring and controlling the
variation in re-pricing intervals between assets and liabilities. To a lesser
extent, we also monitor interest rate sensitivity by analyzing the estimated
changes in market value of assets and liabilities assuming various interest
rate scenarios.
16
<PAGE>
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring our interest rate sensitivity "gap." An asset or liability is
said to be interest rate-sensitive within a specific period if it will mature
or re-price within that period. The interest rate sensitivity gap is defined
as the difference between the amount of interest-earning assets maturing or
re-pricing within a specific period of time and the amount of interest-bearing
liabilities re-pricing within that same time period. A gap is considered
positive when the amount of rate-sensitive assets exceeds the amount of rate-
sensitive liabilities and is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of rate-sensitive assets.
We have adopted an Interest Rate Risk and Asset Management Policy that
limits the amount of maximum dollar amount of exposure in one-year rate-
sensitive assets and one-year rate-sensitive liabilities to 30% of total
assets at any calendar quarter end. Our interest rate risk exposure position
as of June 30, 2000 was in compliance with this policy.
Interest Rate Sensitivity Analysis
We continually evaluate the asset mix of our balance sheet in terms of
several variables: yields, credit quality, appropriate funding sources and
liquidity. To effectively manage the liability mix of the balance sheet, we
focus on expanding various funding sources. The interest rate sensitivity
position at June 30, 1999 and 2000 is summarized in the following tables. The
difference between rate sensitive assets and rate sensitive liabilities, or
the interest rate sensitivity gap, for each period is shown at the bottom of
each table. Since all interest rates and yields do not adjust at the same
velocity, the gap is only a general indicator of rate sensitivity. The tables
may not be indicative of our rate sensitivity position at other points in
time.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------------------------
Within After Three After One
Three but within but within After
Months Twelve Months Five Years Five Years Total
------ ------------- ---------- ---------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal Funds Sold...... $2,533 $ -- $ -- $ -- $2,533
Investment Securities... -- -- -- 745 745
Loans................... 2,877 241 1,488 1,014 5,620
------ ------- ------ ------ ------
Total Earning Assets.. $5,410 $ 241 $1,488 $1,759 $8,898
====== ======= ====== ====== ======
Interest Bearing
Liabilities
Money Market & Now...... $ 127 $ -- $ -- $ -- $ 127
Regular Savings......... 3,244 -- -- -- 3,244
Time Deposits........... 30 1,420 329 -- 1,779
------ ------- ------ ------ ------
Total Interest Bearing
Liabilities.......... $3,401 $ 1,420 $ 329 $ 0 $5,150
====== ======= ====== ====== ======
Interest Sensitivity Gap.. $2,009 $(1,179) $1,159 $1,759 $3,748
Cumulative Interest
Sensitivity Gap.......... $2,009 $ 830 $1,989 $3,748 $3,748
Ratio of Interest
Sensitivity Gap to total
earning assets........... 22.58% (13.25)% 13.03% 19.77% 42.13%
Ratio of Cumulative
Interest Sensitivity Gap
to total earning assets.. 22.58% 9.33 % 22.36% 42.13% 42.13%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------------------
Within After Three After One
Three but within but within After
Months Twelve Months Five Years Five Years Total
------ ------------- ---------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal Funds Sold..... $ 304 $ -- $ -- $ -- $ 304
Investment Securities.. -- -- 3,279 933 4,212
Loans.................. 7,596 820 4,832 3,891 17,139
------ ------- ------ ------ -------
Total Earning
Assets.............. $7,900 $ 820 $8,111 $4,824 $21,655
====== ======= ====== ====== =======
Interest Bearing
Liabilities
Money Market & Now..... $1,504 $ -- $ -- $ -- $ 1,504
Regular Savings........ 4,671 -- -- -- 4,671
Time Deposits.......... 808 6,589 3,126 -- 10,523
------ ------- ------ ------ -------
Total Interest
Bearing
Liabilities......... $6,983 $ 6,589 $3,126 $ -- $16,698
====== ======= ====== ====== =======
Interest Sensitivity
Gap..................... $ 917 $(5,769) $4,985 $4,824 $ 4,957
Cumulative Interest
Sensitivity Gap......... 917 (4,852) 133 4,957 4,957
Ratio of Interest
Sensitivity Gap to total
earning assets.......... 4.23% (26.64)% 23.02% 22.28% 22.89%
Ratio of Cumulative
Interest Sensitivity Gap
to total earning
assets.................. 4.23% (22.41)% 0.61% 22.89% 22.89%
</TABLE>
As evidenced by the tables above, we are cumulatively liability-sensitive at
one year and asset sensitive thereafter at June 30, 2000. In a rising interest
rate environment, an asset-sensitive position (a positive gap ratio) is
generally more advantageous since assets re-price sooner than liabilities.
Conversely, in a declining interest rate environment, a liability-sensitive
position (a negative gap ratio) is generally more advantageous as interest-
bearing liabilities re-price sooner than earning assets. In our case, an
increase in interest rates would result in increased earnings, while a decline
in interest rates would decrease income. This, however, assumes that all other
factors affecting income remain constant.
Loan Portfolio
Since loans typically provide higher interest yields than do other types of
earning assets, our intent is to channel a substantial percentage of our
earning assets into the loan category. Total gross loans outstanding,
including loans held for sale, were $5,619,345 as of June 30, 1999 and
$17,116,878 as of June 30, 2000.
The following table summarizes the composition of our loan portfolio:
<TABLE>
<CAPTION>
As of June 30, 1999 As of June 30, 2000
---------------------- -----------------------
Amount % of Total Amount % of Total
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial &
Agricultural............. $1,843,707 32.81% $ 2,985,277 17.44%
Real Estate--individual... 1,496,460 26.63 3,731,185 21.80
Real Estate--other........ 843,394 15.01 4,117,578 24.06
Consumer Loans............ 1,435,784 25.55 5,660,632 33.07
Lease Financing........... -- 0.00 622,205 3.64
---------- ------ ----------- ------
Total Loans............. $5,619,345 100.00% $17,116,878 100.00%
========== ====== =========== ======
Net Deferred Loan
fees/(costs)............. -- 22,239
Less: Allowance for Loan
Loss..................... (56,250) (181,500)
---------- -----------
Total Net Loans......... $5,563,095 $16,957,617
========== ===========
</TABLE>
18
<PAGE>
The principal components of our loan portfolio were mortgage loans and
commercial loans which represented 74% of the portfolio at June 30, 1999 and
63% at June 30, 2000. Due to the short time the portfolio has existed, the
current mix of loans may not be indicative of the ongoing portfolio mix. We
will attempt to maintain a relatively diversified loan portfolio to help
reduce the risk inherent in concentration of collateral.
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables is based on the contractual
maturities of individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of these loans is subject to
review and credit approval, as well as modification of terms upon their
maturity. Actual repayments of loans may differ from maturities reflected
below because borrowers have the right to prepay obligations with or without
prepayment penalties. The following tables summarize loan maturities, by type,
and related interest rate characteristics:
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------------------------
One Year After One but After
or Less within Five Years Five Years Total
---------- ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial &
Agricultural............. $ 916,272 $ 927,435 $ -- $ 1,843,707
Real Estate--individual... 812,173 334,318 349,969 1,496,460
Real Estate--other........ 448,020 297,574 97,800 843,394
Consumer Loans............ 1,144,982 290,802 -- 1,435,784
Lease Financing........... -- -- -- --
---------- ---------- ---------- -----------
Total................. $3,321,447 $1,850,129 $ 447,769 $ 5,619,345
========== ========== ========== ===========
Loans maturing after one
year with:
Fixed Interest Rates.... $ 903,715
Floating Interest
Rates.................. $1,394,183
<CAPTION>
As of June 30, 2000
---------------------------------------------------
One Year After One but After
or Less within Five Years Five Years Total
---------- ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial &
Agricultural............. $1,236,383 $ 966,626 $ 782,268 $ 2,985,277
Real Estate--individual... 65,000 1,050,204 2,615,981 3,731,185
Real Estate--other........ 1,189,093 2,384,195 544,291 4,117,578
Consumer Loans............ 4,369,053 1,032,415 259,165 5,660,633
Lease Financing........... 48,159 574,046 -- 622,205
---------- ---------- ---------- -----------
Total................. $6,907,688 $6,007,485 $4,201,705 $17,116,878
========== ========== ========== ===========
Loans maturing after one
year with:
Fixed Interest Rates.... $7,855,057
Floating Interest
Rates.................. $2,354,133
</TABLE>
Provision and Allowance for Loan Losses
We have developed policies and procedures for evaluating the overall quality
of our credit portfolio and the timely identification of potential credit
problems. Additions to the allowance for loan losses will be made periodically
to maintain the allowance at an appropriate level based on our analysis of the
potential risk in the loan portfolio.
On June 30, 1999, our allowance for loan losses was $56,250 or 1.14% of
$4,937,752 in loans receivable (net of loans held for sale). On June 30, 2000,
our allowance for loan losses was $181,500 or 1.08% of $16,754,068 in loans
receivable (net of loans held for sale). Our Bank has not charged off any
loans since commencing operations. The provision for loan losses was
established primarily as a result of our assessment of general loan loss risk
as our Bank recorded its first loans.
19
<PAGE>
The following tables summarize our Bank's loan loss experience and the
allowance for possible loan losses:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
June 30, 1999 June 30, 2000
------------------ ------------------
<S> <C> <C>
Balance at Beginning of Period........... $ -- $ 56,250
Charge-offs.............................. -- --
Recoveries............................... -- --
Net Charge Offs.......................... -- --
Additions charged to operations.......... 56,250 125,250
------- --------
Balance at End of Period................. $56,250 $181,500
======= ========
Ratio of net charge-offs during the
period to average loans outstanding
during the period....................... 0% 0%
</TABLE>
The allowance for loan losses was allocated as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
June 30, 1999 June 30, 2000
------------------------ -------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Amount to Total Loans Amount to Total Loans
------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Commercial & Agricultural... $13,310 32.81% $ 22,155 17.44%
Real Estate--individual..... 10,974 26.63% 27,611 21.80%
Real Estate--other.......... 5,288 15.01% 27,872 24.06%
Consumer Loans.............. 5,808 25.55% 24,744 33.07%
Lease Financing............. -- -- % 4,484 3.64%
Unallocated................. 20,870 0.00% 74,634 0.00%
------- ------ -------- ------
Total..................... $56,250 100.00% $181,500 100.00%
======= ====== ======== ======
</TABLE>
Investment Portfolio
At June 30, 1999, our investment securities portfolio represented
approximately 8.42% of our earning assets of $8,897,899. We held investments
in U.S. Government agency securities with a fair market value of $745,119 and
an amortized cost of $749,286, for an unrealized loss of $2,500, net of income
taxes. We also held investments in stock of the Federal Home Loan Bank in the
amount of $16,400.
At June 30, 2000, our investment securities portfolio represented
approximately 19% of our earning assets of $21,655,000. We held securities
available for sale with a fair market value of $4,212,387 and an amortized
cost of $4,269,722, for an unrealized loss of $57,335. We also held
investments in stock of the Federal Home Loan Bank in the amount of $97,500.
Contractual maturities and yields on our investments (all available for
sale) are summarized in the following table. Expected maturities may differ
from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Over one
Within But within Over Five
One Year Yield Five Years Yield Years Yield Total Yield
-------- ----- ---------- ----- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
US Government
Agencies.............. $-- 0.00% $ 549,286 6.12% $200,000 7.04% $ 749,286 6.36%
==== ==== ========== ==== ======== ==== ========== ====
As of June 30, 2000:
US Government
Agencies.............. $-- 0.00% $3,279,684 6.62% $923,703 7.37% $4,212,387 6.79%
==== ==== ========== ==== ======== ==== ========== ====
</TABLE>
20
<PAGE>
Short-term investments in the amount of $2,533,236 at June 30, 1999 and
comprised a significant portion of total earning assets. These funds were
invested in Federal funds sold on an overnight basis. As our Bank continued to
grow, we shifted from primarily overnight investments into the loan portfolio
and, to a lesser extent, into the investment securities portfolio.
Deposits and Other Interest-Bearing Liabilities
As of June 30, 2000, deposits were 84% of interest-bearing liabilities. The
following tables summarize deposits by category.
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------------------------------
Percentage
Percentage of Total
Ending of Total Average Average Effective
Balance Deposits Balance Deposits Cost
----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Demand Deposit.......... $ 998,017 16.19% $ 255,512 22.04% 0.00%
Now..................... 127,387 2.07% 52,395 4.52% 2.56%
Savings................. 3,244,444 52.63% 375,076 32.35% 3.89%
Time Accounts less than
$100,000............... 1,379,249 22.37% 336,573 29.03% 6.17%
Time Accounts of
$100,000 or more....... 400,000 6.49% 135,342 11.67% 6.24%
Accrued Interest
Payable................ 15,472 0.25% 4,541 0.39%
----------- ------ ----------- ------
Total Deposits........ $ 6,164,579 100.00% $ 1,159,439 100.00%
=========== ====== =========== ======
<CAPTION>
As of June 30, 2000
-------------------------------------------------------
Percentage
Percentage of Total
Ending of Total Average Average Effective
Balance Deposits Balance Deposits Cost
----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Demand Deposit.......... $ 1,491,958 8.20% $ 1,175,786 10.01% 0.00%
Now..................... 387,797 2.13% 290,036 2.47% 2.62%
Savings................. 5,786,894 31.81% 4,580,690 39.01% 4.03%
Time Accounts less than
$100,000............... $ 8,271,953 45.47% 3,637,155 30.98% 6.15%
Time Accounts of
$100,000 or more....... 2,129,895 11.71% 1,955,807 16.66% 6.02%
Accrued Interest
Payable................ 125,436 0.69% 102,385 0.87%
----------- ------ ----------- ------
Total Deposits........ $18,193,932 100.00% $11,741,860 100.00%
=========== ====== =========== ======
</TABLE>
Core deposits, which exclude time deposits of $100,000 or more, provide a
relatively stable funding source for our loan portfolio and other earning
assets. Our core deposits were $5,749,097 at June 30, 1999 and $16,064,037 at
June 30, 2000. Our loan to deposit ratio was 90% at June 30, 1999 and 91% at
June 30, 2000. The maturity distribution of our time deposits is as follows:
<TABLE>
<CAPTION>
Over 3
Months Over 6
3 Months to 6 Months to Over 12
or Less Months 12 Months Months Total
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
As of June 30, 1999:
Time Accounts less than
$100,000................... $30,000 $133,787 $ 866,625 $348,837 $1,379,249
Time Accounts of $100,000 or
more....................... -- -- 400,000 -- 400,000
------- -------- ---------- -------- ----------
Total..................... $30,000 $133,787 $1,266,625 $348,837 $1,779,249
======= ======== ========== ======== ==========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Over 3 Over 6
3 Months Months to Months to Over 12
or Less 6 Months 12 Months Months Total
-------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
As of June 30, 2000:
Time Accounts less than
$ 100,000 ........ $827,363 $1,703,477 $3,411,655 $2,329,459 $ 8,271,953
Time Accounts of
$100,000 or more...... -- 100,000 1,309,895 720,000 2,129,895
-------- ---------- ---------- ---------- -----------
Total................ $827,363 $1,803,477 $4,721,550 $3,049,459 $10,401,848
======== ========== ========== ========== ===========
</TABLE>
Return on Equity and Assets
The following table summarizes our return (loss) on average assets (net loss
divided by average total assets), return on average equity (net loss divided
by average equity), and equity to assets ratio (average equity divided by
average total assets). Since inception, we have not paid any cash dividends.
The payment of dividends by our Bank is subject to limitations imposed by law
and governmental regulations.
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Return (loss) on average assets..................... (22.61)% (3.70)%
Return (loss) on average equity..................... (69.87)% (19.43)%
Equity to assets ratio.............................. 35.53 % 19.04 %
</TABLE>
Short Term Borrowings
We had no short-term borrowings during fiscal year 1999. The following table
sets forth certain information as to the Bank's FHLB advances as of June 30,
2000. The advances have maturity dates extending from 10/18/00 through
6/25/01.
<TABLE>
<CAPTION>
As of and for
the Year Ended
June 3, 2000
--------------
<S> <C>
Maximum Balance................................................. $1,950,000
Average Balance................................................. 425,409
Balance at end of period........................................ 1,950,000
Weighted average rate:
at end of period.............................................. 6.66%
during the period............................................. 6.17%
</TABLE>
Capital Adequacy
There are now two primary measures of capital adequacy for banks and banking
holding companies: (i) risk-based capital guidelines and (ii) leverage ratio.
The risk based capital guidelines measure the amount of a bank's required
capital in relation to the degree of risk perceived in its assets and its off-
balance sheet items. Under the risk-based capital guidelines, capital is
divided into two "tiers." "Tier 1 capital" consists of common stockholders'
equity, qualifying preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, less certain items such as goodwill and
certain other intangible assets. Tier 2 capital consists of hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier 1
capital, and a limited amount of the allowance for credit losses. Banks are
required to maintain a minimum risk-based capital ratio of 8.0% with at least
4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio. The
Federal Deposit Insurance Corporation has established a 3.0% minimum leverage
ratio requirement. Note that the leverage ratio is computed by dividing Tier 1
capital into average assets. For all except the highest rated banks, the
minimum leverage ratio
22
<PAGE>
should be 3.0% plus an additional cushion of at least 1 to 2 percent,
depending upon risk profiles and other factors.
The Federal Reserve Board and the FDIC rules add a measure of interest rate
risk to the determination of supervisory capital adequacy. In connection with
this rule, the agencies have adopted a measurement process to measure interest
rate risk. Under this rule, all items reported on the balance sheet, as well
as off-balance sheet items, are reported according to maturity, re-pricing
dates and cash flow characteristics. A bank's weighted position is used in
assessing capital adequacy. The objective of this complex rule is to determine
the sensitivity of banks to various rising and declining interest rate
scenarios.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized,
and critically under capitalized. A depository institution's capital tier
depends on its capital levels in relation to various relevant capital measures
and certain other factors. Depository institutions that are not classified as
well capitalized are subject to various restrictions regarding capital
distributions, payment of management fees, acceptance of brokered deposits and
other operating activities.
The tables below illustrate our regulatory capital (in thousands) and
ratios:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provision
-------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Tier II Capital (to Risk
Weighted Assets)............... $2,785 44.20% $ 504 8.00% $ 630 10.00%
Tier I Capital (to Risk Weighted
Assets)........................ $2,729 43.30% $ 252 4.00% $ 378 6.00%
Tier I Capital (to Average
Assets)........................ $2,729 36.50% $ 299 4.00% $ 374 5.00%
As of June 30, 2000:
Total Capital (to Risk Weighted
Assets)........................ $2,717 15.3% $1,423 8.0% $1,779 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ $2,535 14.2% $ 712 4.0% $1,068 6.0%
Tier 1 Capital (to Average
Assets)........................ $2,535 12.3% $ 823 4.0% $1,028 5.0%
</TABLE>
At June 30, 2000, our Bank is classified as well-capitalized and is in
compliance with all regulatory capital requirements. Management anticipates
our Bank will continue to be classified as well-capitalized.
As of June 30, 2000, there were no significant commitments outstanding for
capital expenditures.
Impact of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not
been taken into effect in our financial statements. Rather, the statements
have been prepared on an historical cost basis in accordance with generally
accepted accounting principles.
Since most of the assets and liabilities of a financial institution are
monetary in nature, the effect of changes in interest rates will have a more
significant impact on our performance than will the effect of changing prices
and inflation in general. Interest rates may generally increase as the rate of
inflation increases, although not necessarily in the same magnitude.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Retroactive application to
23
<PAGE>
financial statements of prior periods is not required. We do not currently
have any derivative instruments nor are we involved in hedging activities.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Cost of Start-up Activities" ("SOP 98-5"),
which requires costs of start-up activities and organization costs to be
expenses as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. We elected to adopt
SOP 98-5 early for the year ended June 30, 1999 and as a result, recognized
approximately $248,000 in our 1999 consolidated statement of loss which under
previous accounting policies would have been amortized over 60 months.
Industry Developments
The recent adoption of the Gramm-Leach-Bliley Act, commonly referred to as
the "New Financial Modernization Legislation" may present new opportunities to
us by allowing us to provide non-traditional banking services such as
insurance and securities brokerage services. See "Supervision and Regulation."
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. We cannot
predict whether any of these proposals will be adopted or, if adopted, how
these proposals would affect us.
Terminated Merger
On September 30, 1999 the Company entered into an Agreement and Plan of
Reorganization to merge with First Federal Holding Company of Morris, Inc.
Completion of the merger was subject to regulatory approvals and approval by
the shareholders of both companies. On June 26, 2000 the Federal Reserve Board
announced that it had denied our application to merge with First Federal
Holding Company. As a result, our agreement to merge with First Federal
Holding has terminated.
Joint Venture In Homeland Mortgage, LLC.
In July 1999, we entered into a joint venture with First Federal Savings
Bank by acquiring a 49 percent joint interest in Homeland Mortgage Company,
LLC, in exchange for a total cash consideration of $196,000. The investment in
Homeland is being accounted for using the equity method. Homeland's primary
business is originating residential real estate loans that are secured by
first and second mortgages and sold into the secondary mortgage market.
On August 25, 1999 the Federal Reserve Board initiated a policy of
increasing interest rates in an effort to reduce the rate of inflation in the
economy. The action of the Federal Reserve Board resulted in a slow down in
activity associated with the purchase and refinancing of residential
properties thereby affecting the ability of Homeland to generate new loans and
the related income. For the year ended June 30, 2000, we have incurred a loss
from our investment in Homeland of $113,428. On September 1, 2000, we sold our
minority interest in Homeland to First Federal Savings Bank for approximately
$68,000.
Secondary Stock Offering
We filed a Registration Statement on Form SB-2 with the Securities and
Exchange Commission to register the sale of a maximum of 1,000,000 shares of
our common stock. We entered into a an agreement with Banc Stock Financial
Services, Inc. whereby Banc Stoc agreed to use its "best efforts" to sell the
shares to the public. In July 2000, we were notified by Banc Stock that it has
undergone an internal reorganization and will no longer be involved in the
underwriting or placement of securities.
We have entered into an agreement with Berthel Fisher & Company Financial
Services, Inc. who agreed to sell, on a "best efforts basis," a minimum of
50,000 shares and a maximum of 300,000 shares to the public. We intend to use
the proceeds from the offering as working capital and to provide our Bank with
additional capital to make loans and grow its business.
24
<PAGE>
Forward-Looking Information
This prospectus contains forward-looking statements with respect to the
financial conditions, results of operations and business of the Company. These
include statements about the Company's plans, objectives, expectations, belief
and intentions that are not historical facts. When used in this report, the
words "expects", "anticipates", "plans", "believes", "seeks", "estimates", and
similar expressions are generally intended to identify forward-looking
statements. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others,
the following possibilities: (1) competitive pressure among financial services
companies increases or decreases significantly; (2) changes in the interest
rate environment reduce interest margins; (3) general economic conditions,
internationally, nationally or in the State of Minnesota, are less favorable
than expected; and (4) legislation or regulatory requirements or changes
adversely affect the business in which the Company will be engaged.
Management believes that the major challenge that the Company faces today is
pressure on net interest margin, which for the industry as a whole has been
declining during the past five years. The cause of the decline has been
increased competition from non-bank competitors such as insurance companies
and brokerage firms. Management believes that the Company's competitive
strength lies in its knowledge of the market place and in providing long-term,
relationship orientated banking services by management and employees with
strong ties to the Mankato area.
25
<PAGE>
BUSINESS
Our operating subsidiary is a community bank providing a broad range of
commercial and retail banking services designed to meet the borrowing and
depository needs of small and medium sized businesses and consumers in the
communities we serve. We offer a full range of deposit accounts that are
typically available from most banks and savings associations, including
checking accounts, commercial accounts, savings accounts and other time
deposit accounts. We provide a range of lending services including commercial,
real estate and consumer loans to individuals, small or medium-sized
businesses and professional associations.
We believe that these businesses and individuals in our market area are
under-served by the larger regional and national lending institutions that
have acquired local banking and savings institutions. As a community bank, we
seek to provide our banking customers with the technological and staff support
that today's market requires, and make available a broad range of products
while providing personalized service. We are managed by individuals who have
lived and worked in our market for many years and believe that we can leverage
the experience of our management to grow our business. By combining support
with the products and services our customers require and our local management
and personalized service, we seek to foster a business that enables us to
effectively compete in our market with other financial institutions of all
sizes.
Strategy
We believe that rewarding business opportunities exist in the community
banking business. The acquisition and consolidation of many community banks by
large national and regional banks has diminished or eliminated the presence of
community banks from many rural and suburban communities. We believe that
there is a need and support for locally operated and managed community banks
in many of these communities.
Our plan is to grow our community banking business through acquisition and
branching, and diversify our revenue sources by providing other traditional
and non-traditional financial services. We intend to diversify and grow our
community banking business by expanding our geographic presence in and outside
the State of Minnesota. In connection with our geographic expansion, we intend
to expand and diversify our balance sheet to be able to provide a greater
level of commercial and agricultural lending and other financial services.
We intend to grow our community banking business while maintaining the
critical components we believe support successful community banking. We intend
to operate each of our affiliated community banks using local management and
board of directors. We intend to rely on each local community bank's
management and board of directors to determine the best interests of the
community bank within their particular community and each bank will have
authority to make all decisions affecting credit, pricing and the market of
bank service. We believe the strength and success of a community bank rests,
in large part, in the customer's ability to put a human face and touch to
their bank service provider. As we increase our number of affiliated community
banks, we intend to develop and implement a technology integration strategy to
integrate and improve our and our affiliate banks' information management
systems and enhance customer service.
We intend to diversify and expand our business to provide traditional and
non-traditional banking services. The recent adoption of the Gramm-Leach-
Bliley Act, commonly referred to as the "New Financial Modernization
Legislation" may present new opportunities to us by allowing us to provide
non-traditional banking services such as insurance and securities brokerage
services. See "Supervision and Regulation." We intend to explore our
expansion, through acquisition, internal development and the use of strategic
alliances with third parties, into non-community banking services.
Products and Services
We provide a wide variety of commercial and consumer lending and deposit
services. We offer these traditional banking products and services to our
customers through our loan representatives at our banking office.
26
<PAGE>
Deposits. Deposits are our principal source of funds. We offer a full range
of deposit products that are typically available in most banks and savings
associations, including checking accounts, commercial accounts, tiered money
market and savings accounts, and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit and
sweep accounts. We attempt to offer transaction accounts and time certificates
at rates competitive to those offered in the Mankato area. In addition, we
offer certain retirement account services and Individual Retirement Accounts
(IRAs).
Lending Activities. We emphasize a range of lending services, including
commercial, real estate, and consumer loans, to individuals and small to
medium-sized businesses and professional concerns that are located in or
conduct a substantial portion of their business in our market area.
We offer a variety of commercial, lease and agricultural loans. Equipment
loans are typically for a term of five years or less at fixed or variable
rates, with the loan fully amortized over the term and secured by the financed
equipment and with a loan-to-value ratio of 80% or less. Working capital loans
typically have terms not exceeding one year and will usually be secured by
accounts receivable, inventory, or personal guarantees of the principal owners
of the business. For loans secured by accounts receivable or inventory, the
principal amount of a loan will typically be repaid as the assets securing the
loan are converted into cash, and in other cases, the principal amount of a
loan will typically be due at maturity.
Our Bank also grants a variety of real estate loans secured by first or
second mortgages. These loans generally consist of commercial real estate
loans, construction and development loans, and residential real estate loans
(home equity loans are included as they are classified as consumer loans). The
underwriting criteria for home equity loans and lines of credit will generally
be the same as the criteria used when making a first mortgage loan. Home
equity lines of credit typically expire ten years or sooner after origination.
Loan terms generally are limited to five years or less, although payments may
be structured on a longer amortization basis. Interest rates may be fixed or
adjustable, and will more likely be fixed in the case of short-term loans. We
attempt to reduce our credit risk in our commercial real estate portfolio by
emphasizing loans on owner-occupied office and retail buildings where the
loan-to-value ratio, established by independent appraisals, does not exceed
80%. In addition, we often review the personal financial statements of the
principal owners and require personal guarantees of the principal owners of
the collateral property.
In addition we provide a variety of consumer loans to individuals for
personal and household purposes, including secured and unsecured installment
and term loans, home equity loans and lines of credit, and revolving lines of
credit such as credit cards. These consumer loans typically carry balances of
less than $25,000 and, in the case of non-revolving loans, are amortized over
a period not to exceed 60 months. Ninety-day term loans typically bear
interest at a fixed rate. The revolving loans typically bear interest at a
fixed rate and require monthly payments of interest and a portion of the
principal balance.
Our loan approval policies provide for various levels of officer lending
authority. When the amount of aggregate loans to a single borrower exceeds
that individual officer's lending authority, the loan request is considered
and approved, if appropriate, by one of our designated senior loan officers.
We have established a directors' loan committee that has lending limits, and
any loan in excess of this lending limit must be approved by the directors'
loan committee. We do not make any loans to any of our directors, officers, or
employees, unless the loan is approved by our Bank's board of directors and is
made on terms not more favorable to such person than would be available to a
person not affiliated with us.
Our lending activities are subject to a variety of lending limits imposed by
federal law. While differing lending limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including the
borrower's relationship to our Bank), in general, our Bank is subject to a
loan-to-one-borrower limit. Since the enactment of the FIRREA in 1989, we
generally may not make loans to one borrower and related entities in an amount
which exceeds 15% of our unimpaired capital and surplus, although loans in an
amount equal to an additional 10% of unimpaired capital and surplus may be
made to a borrower if the loans are fully secured by readily marketable
securities. Unless we are able to sell participations in our loans to other
financial institutions,
27
<PAGE>
we will not be able to meet all of the lending needs of loan customers
requiring aggregate extensions of credit above these limits.
Other Banking Services. We provide a variety of other services, including
cash management services, safe deposit boxes, traveler's checks, and direct
deposit of payroll and social security checks. We offer telephone banking and
we intend to provide in the future automatic drafts for various accounts. We
are associated with a shared network of automated teller machines that may be
used by our customers throughout Minnesota and other regions and permit
customers to access their funds 24 hours a day from locations outside our
primary market area. We also offer MasterCard and VISA credit card services
through a correspondent bank as an agent for our Bank.
We entered into a joint venture in July 1999 with First Federal Savings Bank
to form Homeland Mortgage Company, LLC. Homeland was established to serve as a
mortgage servicer and originator. Under the terms of the joint venture
agreement, we acquired a 49% equity interest in Homeland. On September 1,
2000, we sold our minority interest in Homeland to First Federal Savings Bank
for approximately $68,000.
Locations and Service Area
Our principal market area is the Minnesota counties of Blue Earth and
Nicollet, which includes the communities of Mankato, North Mankato, LeHiller,
Eagle Lake and Skyline, Minnesota, from which we expect to draw a significant
portion of our business. Approximately 85,000 people reside in our principal
market area. The 1997 median household income of residents living in our
principal market area was approximately $43,000.
Marketing Focus
Local bank branches of large regional banks and a limited number of small
community banks provide the majority of the banking services within our
principal market area. We believe there is a need for a locally operated and
managed community bank and that we can successfully fill this need. We focus
our marketing efforts on attracting and servicing small to medium-sized
businesses and individuals. We have utilized, or plan to utilize in the
future, newspaper, radio and billboard advertising in our principal market
area to promote our products and services and intend to continue to emphasize
the customer benefits of our local management and ownership, our community
focus, our commitment to providing personalized customer service and our
competitive products and services.
Competition
Our business is highly competitive. We compete with community and national
banks, credit unions, thrifts, and non-financial institutions such as
insurance companies and investment banks. Currently, our principal market
area, the two Minnesota counties of Blue Earth and Nicollet, are served by
approximately 40 offices of 21 different banks, two federal savings banks and
five credit unions. The Mankato and North Mankato communities are served by
four locally chartered commercial banks. During 1999 two of the four bank
charters were acquired and a savings bank charter was converted to a
commercial bank charter and relocated. Banks and credit unions located outside
of the counties of Blue Earth and Nicollet also compete with us. Most, if not
all, of our competitors have substantially greater financial resources than
us. We believe our competitive strength will lie in providing long-term,
relationship-oriented banking services by management and employees with strong
ties to the Mankato area. We attempt to target all residents of our principal
market area, especially local businesses and homeowners.
Employees
As of June 30, 2000, our Bank had eight full-time employees and two part-
time employee. Northern Star Financial has only one employee, Thomas
Stienessen, who is also the President and Chief Executive Officer of our Bank.
Our Bank's employees are not represented by a collective bargaining agreement.
28
<PAGE>
Properties
Our headquarters and our Bank's office is located at 1650 Madison Avenue,
Mankato, Minnesota. We have entered into a 10 year lease agreement to rent
approximately 5,000 square feet. Pursuant to the lease agreement, we pay
monthly rent of approximately $6,042 during the first three years of the
lease, $6,250 a month for the next three years, and $6,458 per month for the
last four years of the lease term. We have the option to extend the lease term
for two consecutive five year periods with a right of first refusal on any
additional space that becomes available. Our Bank's office includes a teller
line with three tellers, two platform positions, a drive-through window and
executive and administrative offices.
Legal Proceedings
There are no material litigation or other legal proceedings pending against
us or any of our property.
29
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table lists our directors and executive officers and the
senior officers of our Bank. Our directors also serve as directors of our
Bank.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas P. Stienessen.... 54 Chief Executive Officer, President and Class II Director
Robert H. Dittrich...... 62 Class II Director
Dean M. Doyscher(1)..... 55 Class III Director
Frank L. Gazzola(1)..... 72 Chief Financial Officer, Treasurer, Secretary and a Class II Director
Steven A. Loehr......... 51 Class I Director
Michael P. Reynolds(1).. 57 Class I Director
Thomas J. Reynolds(1)... 63 Chairman and a Class III Director
</TABLE>
--------
(1) Member of the Compensation and Audit Committees of the Board of Directors.
Thomas P. Stienessen has been Chief Executive Officer, President and a Class
II director since our formation. He also serves as Chief Executive Officer of
our Bank. Prior to forming Northern Star Financial, Mr. Stienessen served as
Chief Executive Officer and President of SGL, Inc., a holding company for the
Family Bank, where Mr. Stienessen served as Chairman, Chief Executive Officer,
President and a Director as well as a member of the Executive and Operating
Committees since January 1991. Mr. Stienessen has more than 25 years of
experience in banking and in mortgage banking, including consumer,
residential, construction, commercial and commercial real estate lending. Mr.
Stienessen's experience includes bank marketing, branch management, branch
operations, accounting, planning and budgeting, underwriting and correspondent
banking and lending. Previous banking experiences include positions as Senior
Vice President of TCF Mortgage Corporation and Vice President and Regional
Manager of TCF Bank.
Robert H. Dittrich has been a Class II director of Northern Star Financial
since March 1999. Mr. Dittrich has been involved in banking as an owner and
director since 1972. Mr. Dittrich is currently the owner and Chairman of
American Community Banks and Insurance Agencies in Sleepy Eye, Medford and
Chanhassen, Minnesota. Mr. Dittrich is also the owner of Dittrich Specialties
of New Ulm and Inver Grove Heights, Minnesota, and Midwest Commodities Brokers
and Traders, Inc. in New Ulm, Minnesota.
Dean M. Doyscher has been a Class III director of Northern Star Financial
since its formation. Mr. Doyscher has served as President of Security
Management and Realty, Inc. since 1978. Security Management and Realty, Inc.
owns and manages commercial property throughout all of rural Minnesota
including rural housing projects in over 55 Minnesota cities. Mr. Doyscher
attended Mankato State University where he earned both undergraduate and
graduate degrees in Urban and Regional Planning. Mr. Doyscher was employed as
the Deputy Director of the Model Cities Program for Lewiston, Maine before
becoming the Director of Planning for the City of Mankato and Blue Earth
County in 1972. During 1973-1976 Mr. Doyscher served as the first Executive
Director of the Region Nine Development Commission serving nine counties in
South Central Minnesota. Prior to forming his own management and realty
company in 1988, Mr. Doyscher served from 1976-1988 as a consultant with
Professional Planning and Development, providing rural Minnesota cities with
tax increment financing, economic development, zoning and housing plans.
Professional Planning and Development was named Minnesota's Economic Developer
of the Year in 1988. Mr. Doyscher's other relevant experience includes service
as President, Minnesota Planning Association; Director, Minnesota Council for
Affordable and Rural Housing; and past member of the Board of Directors, Mid-
America, Bank South.
Frank L. Gazzola has been Chief Financial Officer, Treasurer, Secretary and
a Class II director of Northern Star Financial since its formation. Mr.
Gazzola has served as President of Frank L. Gazzola, Chartered, Certified
Public Accountants since 1987. Mr. Gazzola has been engaged in public
accounting for over 25 years, for most
30
<PAGE>
of that time as the founder and managing partner of one of Southern
Minnesota's largest CPA firms. Mr. Gazzola was a founder of SGL, Inc., a
holding company for the Family Bank and served as an officer and director
until April 1998. He has served on the boards of numerous civic, commercial
and financial enterprises including Mankato District 77 School Board and as a
Director and Treasurer of American Western Corporation, a manufacturer of
extruded plastic products. Mr. Gazzola attended Columbia University, the
University of Minnesota, and Mankato State University from which he received a
B.S. in Business Administration.
Steven A. Loehr has been a Class I director of Northern Star Financial since
March 1999. Mr. Loehr had served as President of Homeland Mortgage, LLC, a
mortgage banker, from July 1999 through December 31, 1999. From February 1992
to September 1998 he served as Senior Vice President of Voyager Bank.
Michael P. Reynolds has been a Class I director of Northern Star Financial
since its formation. Mr. Reynolds has served as Vice-President of Reynolds
Welding Supply Company in Mankato, Minnesota and Welders Supply Company in
Wilmar, Minnesota since 1963. Reynolds Welding Supply Company is engaged in
the sale of industrial gases and welding supplies and operates in three
states. Mr. Reynolds has been involved in many fund raising efforts for the
Mankato State University Athletic Department. He previously served as
volunteer for the Mankato United Way and is a past president of the Mankato
Golf Club. Mr. Reynolds is the brother of Thomas Reynolds.
Thomas J. Reynolds has been Chairman and a Class III director of Northern
Star Financial since its formation. Mr. Reynolds is a Mankato native and has
served as President of Welders Supply Company and Reynolds Welding Supply
since 1952. Mr. Reynolds served on the Board of Directors for the National
Bank of Commerce, presently called Mid-America Bank, for six years from 1984
to 1990. Mr. Reynolds is the brother of Michael Reynolds.
The number of directors is determined by the shareholders at their annual
meeting, subject to the right of the shareholders to change such number
between annual meetings and the right of the Board to increase such number
between annual meetings. The Board of Directors consists of three classes of
directors: Class I who hold office until the 2002 Annual Shareholders Meeting,
Class II who hold office until the 2000 Annual Shareholders Meeting and Class
III who hold office until the 2001 Annual Shareholders Meeting, or in all
cases until their successors are elected. Executive officers are appointed by
and serve at the discretion of the Board of Directors. The Board of Directors
has a Compensation Committee which provides recommendations concerning
salaries and other compensation to be paid to executive officers and
administers our employee stock plans and an Audit Committee which is
responsible for reviewing our audit process.
31
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Director Compensation
Directors currently receive directors' fees in the amount of $1,000 per year
plus $500 for each Board or Committee meeting attended. In addition, under our
1998 Equity Incentive Plan, persons who were nonemployee directors at the time
of adoption of the Plan or who are subsequently elected to the Board of
Directors are automatically granted a nonqualified option to purchase 3,000
shares of common stock at fair market value. Each nonemployee director who is
re-elected as a director or whose term of office continues after a meeting at
which directors are elected is automatically granted an option to purchase
3,000 shares of common stock at fair market value. During fiscal 2000, each
current director except Mr. Stienessen received an option to purchase 3,000
shares at $10.50 per share pursuant to the Plan.
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid to the Chief Executive Officer since our formation. No other executive
officer received total salary and bonus compensation in excess of $100,000 for
fiscal 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------- -----------------------------------
Securities
Name and Principal Salary Bonus Restricted Stock Underlying Options
Position Year ($)(1) ($) Award ($) (# of shares)
------------------ ---- -------- ----- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Thomas P. Stienessen.... 2000 $102,250 -- $21,000(2) 3,000
Chief Executive Officer
and President of 1999 100,000 -- -- 9,400
Northern Star Financial
& Northern Star Bank 1998 -- -- -- --
</TABLE>
--------
(1) Compensation to Mr. Stienessen is paid by Northern Star Bank, our wholly-
owned subsidiary.
(2) Mr. Stienessen holds 2,000 shares of restricted stock having an aggregate
value of $12,000 on June 30, 2000. Dividends, if declared by the Company,
will be paid on the shares.
Employment Agreement
We have entered into a three-year employment agreement with Thomas P.
Stienessen pursuant to which Mr. Stienessen will serve as the President and
Chief Executive Officer of our Bank. During the term of the agreement, Mr.
Stienessen will be paid an annual salary determined by the Board and is
eligible to participate in discretionary bonuses that may be authorized by the
Board of Directors to senior management of our Bank. Mr. Stienessen will be
eligible to participate in any management incentive program of our Bank or any
long-term equity incentive program and will be eligible for grants of stock
options and other awards thereunder. Additionally, Mr. Stienessen will
participate in any retirement, welfare and other benefit programs established
by our Bank and is entitled to a life insurance policy and an accident
liability policy and reimbursement for automobile expenses, club dues, and
travel and business expenses. Furthermore, if in connection with a change of
control of our Bank, Mr. Stienessen is terminated without cause or voluntarily
quits because of certain specified reasons, he is entitled to a lump sum
payment of 2.99 times his annual base salary.
32
<PAGE>
Option/SAR Grants During 2000 Fiscal Year
The following table sets forth options we have granted to the Chief
Executive Officer during our last fiscal year ended June 30, 2000. We have not
granted any stock appreciation rights.
<TABLE>
<CAPTION>
Percent
Number of of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date
---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Thomas P. Stienessen........... 3,000(1) 44.1% $10.50 12/22/09
</TABLE>
--------
(1) Such option is exercisable in three equal annual installments of 1,000
shares each commencing December 31, 1999.
Aggregated Option/SAR Exercises During 2000 Fiscal Year and Fiscal Year End
Option/SAR Values
No options were exercised by the Chief Executive Officer during fiscal 2000.
The following table provides information related to the number and value of
options held at fiscal year end by the Chief Executive Officer:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
End at Fiscal Year End(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas P. Stienessen........ 9,400 3,000 -- --
</TABLE>
--------
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value of the common stock at fiscal
year end and the option exercise price per share multiplied by the number
of shares subject to options. The closing bid price as of June 30, 2000,
as quoted on the OTC Bulletin Board, was $6.00.
Interests of Management and Others in Certain Transactions
Our wholly-owned subsidiary, Northern Star Bank, has entered into a 10-year
lease agreement with Colonial Square Partners, Inc. to lease approximately
5,000 square feet of a 18,000 square foot single level, multi-tenant colonial
style office building. Dean Doyscher, one of our directors and principal
shareholders, is a partner of Colonial Square Partners, Inc. Our Bank invested
approximately $204,000 for leasehold improvements, including the construction
of walls, windows, and doors, paint, floor tile and carpet, electrical and a
drive-through canopy. We obtained an independent appraisal of market rents in
our Bank's proposed market. We believe that this transaction is on terms no
less favorable to our Bank than could be obtained from an unaffiliated third
party.
Mr. Thomas Stienessen, our President and Chief Executive Officer, paid the
organizational expenses of Northern Star Financial and Northern Star Bank
until December 31, 1998, when the closing occurred on the minimum amount of
our initial public offering. At that time we reimbursed Mr. Stienessen for
such expenses in the amount of $47,981 and paid Mr. Stienessen a consulting
fee in the amount of $25,000 from the proceeds of the offering.
We believe that all prior transactions between us and our officers,
directors or other affiliates were on terms no less favorable than could have
been obtained from unaffiliated third parties on an arm's-length basis. All
future transactions, loans and any forgiveness of loans, with directors,
officers or stockholders holding more than 5% of our outstanding common stock,
or affiliates of any such persons, will be made for bona fide business
purposes, will be on terms no less favorable than could be obtained from an
unaffiliated third party and will be approved by a majority of the independent
outside directors who do not have an interest in the transactions and who have
access, at our expense, to our independent legal counsel.
33
<PAGE>
SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table provides information as of June 30, 2000, and as
adjusted to reflect the sale of the minimum and maximum number of shares in
this offering, concerning the beneficial ownership of our common stock by each
person known by us to be the beneficial owner of more than 5% of our
outstanding common stock, by each executive officer named in the Summary
Compensation Table, by each director, and by all of our directors and
executive officers as a group. Unless otherwise indicated, the shareholders
listed in the table have sole voting and investment powers with respect to the
shares indicated.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Shares
Percentage of Beneficially
Number of Shares Outstanding Shares Owned After
Beneficially Owned Beneficially Owned Offering
Name and Address of Prior to the Prior to the ---------------
Beneficial Owned Offering(1) Offering Minimum Maximum
------------------- ------------------ ------------------ ------- -------
<S> <C> <C> <C> <C>
Frank L. Gazzola(2)(3).. 44,400 10.1% 9.1% 6.0%
Steven A. Loehr(2)(4)... 43,400 9.9% 8.9% 5.9%
Thomas P.
Stienessen(2)(5)....... 43,400 9.9% 8.9% 5.9%
Thomas J.
Reynolds(2)(6)......... 44,400 10.1% 9.1% 6.0%
Robert H.
Dittrich(2)(7)......... 37,000 8.6% 7.7% 5.1%
Dean M. Doyscher(2)(8).. 36,000 8.2% 7.4% 4.9%
Michael P.
Reynolds(2)(9)......... 7,200 1.7% 1.5% 1.0%
Joyce Larson(10)........ 50,000 11.7% 10.5% 6.9%
Melvin Larson(10)....... 50,000 11.7% 10.5% 6.9%
Mesirow Financial
Inc.(11)............... 33,950 8.0% 7.1% 4.7%
Catalytic Combustion
Corp. 401(k) Plan(12).. 30,000 7.0% 6.3% 4.1%
Susan L. Baker(13)...... 30,000 7.0% 6.3% 4.1%
All directors and
executive officers as a
group (7 persons)(14).. 255,800 51.8% 47.1% 32.2%
</TABLE>
--------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person to acquire them as of June 30, 2000, or within sixty
days of such date are treated as outstanding only when determining the
percent owned by such individual and when determining the percent owned
by a group.
(2) The address of each person is 1650 Madison Avenue, Mankato, Minnesota
55401.
(3) Includes 12,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000.
(4) Includes 11,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000.
(5) Includes 9,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000. Mr.
Stienessen shares voting and investment power over such shares with his
wife.
(6) Includes 12,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000. Mr. Reynolds
shares voting and investment power over such shares with his wife.
(7) Includes 5,000 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000.
(8) Includes 11,000 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000. Mr. Doyscher
shares voting and investment power over such shares with his wife.
(9) Includes 6,200 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000.
(10) Includes 25,000 shares held by Melvin Larson and 25,000 shares held by
Joyce Larson. The address of both Melvin and Joyce Larson is 5231 Agate
Road, Upsala, Minnesota 56384.
(11) The owner's address is 350 North Clark, Chicago, Illinois 60610.
(12) The owner's address is 909 21st Avenue, Bloomer, Wisconsin 54724.
(13) The owner's address is 455 Grove Street, Upper Montclair, New Jersey,
07043.
(14) Includes 67,800 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of June 30, 2000.
34
<PAGE>
SUPERVISION AND REGULATION
The following discussion of statutes and regulations affecting bank holding
companies and banks is a summary thereof and is qualified in its entirety by
reference to such statutes and regulations.
General
Commercial banking is highly regulated at both the federal and state level.
In addition to a variety of generally applicable state and federal laws
governing businesses and employers, we are extensively regulated by special
laws applicable only to financial institutions. Virtually all aspects of our
operations are subject to specific requirements or restrictions and general
regulatory oversight. Deposits, reserves, capital, investments, loans,
issuance of securities, payment of dividends, mergers and consolidations,
electronic funds transfers, management practices, the scope of activities and
other aspects of our operations are subject to regulation. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the financial
institution and the federal deposit insurance system or the protection of
consumers or classes of consumers, rather than the specific protection of our
shareholders.
The highly regulated environment in which we operate is subject to frequent
change. Significantly, on November 12, 1999, President Clinton signed the
Gramm-Leach-Bliley Act. This Act repeals portions of the Glass-Steagall Act,
amends The Bank Holding Company Act of 1956 ("BHC Act"), and modifies other
laws thereby broadening the permissible range of affiliations among banks,
securities firms, insurance companies, and other financial service providers.
We cannot fully predict the nature or the extent of any effects which this new
law or other possible regulatory changes may have on our business and
earnings. Such changes may have the effect of increasing or decreasing the
cost of doing business, modifying permissible activities, or enhancing the
competitive position of other financial institutions.
Bank Holding Company Regulation
As noted earlier, Northern Star Financial, Inc. is a bank holding company. A
bank holding company is a form of bank ownership and provides an alternative
to individuals directly owning a bank's stock. In general, a bank holding
company is any company, corporation, or business entity that controls the
operation of a bank, whether through stock ownership or other means.
Individual investors generally hold stock in the parent holding company
instead of directly owning bank stock.
In addition to serving as a means for holding and owning a bank stock, the
holding company structure can be used as a vehicle for acquiring additional
banks or for expanding into a wide range of activities. Holding companies also
offer a way of consolidating management and operations across these various
interests.
The BHC Act, as amended, is the primary federal law governing the ownership
and control of banks by companies. Under the BHC Act, a company considered to
be a bank holding company is subject to supervision by the Board of Governors
of the Federal Reserve System ("Board"). Further, the Board has responsibility
and authority to issue regulations governing bank holding companies. A primary
regulation issued by the Board under this authority is Regulation Y.
Supervision. As a bank holding company, we are subject to supervision by the
Board. This supervision generally consists of financial reporting and
inspections. With respect to financial reporting, we are required to file with
the Board quarterly and annual reports and such additional information as the
Board may require. Inspections can be conducted either off-site or on-site as
deemed necessary and appropriate by the Board. Further, the Board has
authority to take action against us for failing to comply with applicable laws
and regulations. Such action is commonly referred to as "enforcement action"
and can take several different forms. Examples include cease and desist
orders, civil money penalties, and the removal of management officials. The
Board may also require that we terminate an activity or terminate control of
or liquidate or divest certain nonbank subsidiaries or affiliates when the
Board believes the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness or stability
of any of our insured depository subsidiaries.
35
<PAGE>
Regulation. As indicated above, bank holding companies such as ours are
subject to the BHC Act and Regulation Y, as well as other state and federal
laws and regulations. Thus, the following types of activities are subject to
regulatory requirements:
Payment of Dividends. The Board has indicated that banking organizations
should generally pay cash dividends out of current operating earnings and the
current rate of earnings retention should be consistent with the
organization's capital needs, asset quality and overall financial condition.
Board policy states that it is inappropriate for a banking organization that
is experiencing serious financial problems or that has inadequate capital to
borrow to pay dividends. Similarly, the payment of dividends based solely or
largely on gains resulting from unusual or nonrecurring events may not be
prudent or warranted. Further, the Board believes that a bank holding company
should not maintain a level of cash dividends to its shareholders that places
undue pressure on the capital of depository institution subsidiaries or are
funded from borrowings or other arrangements that undermine the bank holding
company's ability to serve as a source of strength to the subsidiaries. The
Board may, and in certain circumstances must, prohibit a bank holding company
from making any capital distributions without prior approval of the Board, if
the subsidiary depository institution is undercapitalized. The Board also may
impose limitations on the payment of dividends as a condition to its approval
of certain applications, including applications for approval of mergers or
acquisitions.
In addition to the restrictions on dividends imposed by the Board, under the
Minnesota Business Corporation Act, the discretion of our board of directors
is constrained by Minnesota Statutes, section 302A.551. Under that section,
the board may authorize a dividend only if the directors in good faith, in a
manner they reasonably believe to be in the best interests of the corporation,
and with the care an ordinarily prudent person in a like position would
exercise under similar circumstances, determine that we will be able to pay
our debts in the ordinary course of business after making a distribution.
Regulatory Capital Requirements. The Board's capital guidelines establish
minimum regulatory capital requirements for bank holding companies for the
following categories: (i) a capital leverage measure expressed as a percentage
of total assets, (ii) a risk-based measure expressed as a percentage of total
risk-weighted assets, and (iii) a Tier 1 leverage measure expressed as a
percentage of average total consolidated assets. Tier 1 capital consists of
common stockholders' equity, qualifying preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries. The failure of
a bank holding company to meet its capital requirements may result in
supervisory action, as well as an inability to obtain approval of any
regulatory applications and, potentially, increased frequency of examinations
and inspections. The federal bank regulators have previously indicated a
desire to raise minimum capital requirements for banking organizations and
have suggested that revisions to the capital requirements should be made. The
effect of any future change in our required capital ratios cannot be
determined at this time.
Activity Limitations. Under the BHC Act, we must obtain Board approval
before we acquire direct or indirect ownership or control of any voting
securities of a bank or bank holding company if the acquisition results in our
control of more than 5% of the outstanding shares of any class of voting
securities of the entity, unless we already own a majority of the voting
securities of the entity. We also must obtain prior Federal Reserve approval
before we acquire all or substantially all of the assets of a bank or merge or
consolidate with another bank holding company. The BHC Act also, in general,
limits the activities that we and our subsidiaries may engage in to those so
closely related to banking or managing or controlling banks and activities
that are so closely related to banking as to be a proper incident thereto. The
Board, in making such determinations, considers whether performance of the
activities can reasonably be expected to produce benefits to the public
without any adverse effects such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Under Regulation Y, we may engage, subject to Board guidelines and
approvals, in such closely-related activities as: (1) extending credit and
servicing loans; (2) activities related to extending credit including real
estate and personal property appraising, arranging commercial real estate
equity financing, check-guaranty services, collection agency services, credit
bureau services, asset management, servicing, and collection activities, and
acquiring debt in default; (3) leasing personal or real property; (4)
operating nonbank depository institutions; (5) trust company functions; (6)
financial and investment advisory activities; (7) agency transactional
36
<PAGE>
services for customer investments including securities brokerage, riskless
principal transactions, private-placement services, futures commission
merchant, and other transactional services; (8) investment transactions as
principal including underwriting and dealing in government obligations and
money market instruments, investing and trading activities, buying and selling
bullion and related activities; (9) management consulting and counseling
activities; (10) support services including courier services and printing and
selling MICR-encoded items; (11) insurance agency and underwriting; (12)
community development activities; (13) retail sale of money orders, savings
bonds, and traveler's checks; and (14) data processing.
Under the Gramm-Leach-Bliley Act enacted on November 12, 1999, bank holding
companies that decide to become "financial holding companies" and that meet
the qualifying criteria will be able to engage in additional activities.
Specifically, financial holding companies will be able to engage in activities
that are financial in nature or incidental to such financial activities and
activities that are complementary to financial activities. The Act identifies
a number of activities as financial in nature, including insurance,
underwriting, dealing in, or making a market in securities, and merchant
banking. These identified activities are in addition to the closely related
activities just enumerated. To qualify as a financial holding company, all of
the company's subsidiary depository institutions must be well capitalized and
well managed and have a satisfactory rating under the Community Reinvestment
Act.
Bank Regulation
The continued earnings and growth of our Bank will be influenced by general
economic conditions, the monetary and fiscal policies of the federal
government, and the policies of regulatory agencies, particularly the Board.
The Board implements national monetary policies by its open-market operations
in United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirement and by
varying the discount rate applicable to borrowings by banks from the Federal
Reserve System. The actions of the Board in these areas influence the growth
of bank loans, investments and deposits and also affect interest rates charged
on loans and deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
Supervision. Our Bank, as a state chartered banking corporation, is subject
to primary supervision, examination and regulation by the Minnesota Department
of Commerce ("DOC") and the Federal Deposit Insurance Corporation ("FDIC").
Various requirements and restrictions under the laws of the State of Minnesota
and the United States also affect the operation of our Bank. These statutes
and regulations relate to many aspects of the operations of our Bank,
including reserves against deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and locations of branch offices. Some of
these statutes and regulations and their effect on our Bank are discussed
below. Moreover, from time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between banks and
other financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made. The likelihood of any
major changes and the impact of such changes are impossible to predict.
Deposit Insurance. As an FDIC-insured institution, our Bank will be required
to pay deposit insurance premium assessments to the FDIC. The amount each
insured depository institution pays for FDIC deposit insurance coverage is
determined in accordance with a risk-based assessment system under which all
insured depository institutions are placed into one of nine categories and
assessed insurance premiums based upon their level of capital and supervisory
evaluation. BIF-member institutions classified as well capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium (currently 0% of
deposits) while BIF-member institutions that are under capitalized (as defined
by the FDIC) and considered of substantial supervisory concern pay the highest
premium (currently up to 0.27% of deposits).
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged in or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any
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condition imposed in writing by, or under agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for
a permanent termination of insurance if the institution has no tangible
capital. We are not aware of any activity or condition that could result in
termination of our Bank's deposit insurance.
Payment of Dividends by our Bank. There are state and federal statutory and
regulatory requirements limiting the amount of dividends which may be paid to
us by our Bank. Generally, a bank may pay cash dividends out of current
operating earnings to the extent that the current rate of earnings retention
is consistent with our Bank's capital needs, asset quality and overall
financial condition. The governing regulatory agency has the authority to
prohibit our Bank from engaging in business practices which the governing
regulatory agency considers to be unsafe or unsound. It is possible, depending
upon the financial condition of our Bank, that the governing regulatory agency
may determine that the payment of dividends to us by our Bank might, under
some circumstances, be such an unsafe and unsound practice.
For example, as a prerequisite to the payment of dividends, Minnesota
Statutes, section 48.09, subd. 1, requires our Bank to set aside all of its
net profits to a surplus fund until the surplus fund is equal to 20% of our
Bank's capital stock, and 10% of its net profits while the surplus fund is
equal to between 20% and 50% of our Bank's capital stock. Even when the
surplus fund requirements are met, all bank decisions regarding dividends are
subject to the approval of the Department of Commerce.
Common Liability. Under federal law, a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly controlled
FDIC-insured depository institution or any assistance provided by the FDIC to
a commonly controlled FDIC-insured institution in danger of default.
Affiliate Transaction Limitations. Our Bank is subject to certain
restrictions imposed by federal law on "covered transactions" between our Bank
and its affiliates. These covered transactions are (i) loans or extensions of
credit by our Bank to an affiliate, (ii) a purchase of or investment in
securities issued by an affiliate, (iii) a purchase of assets from an
affiliate (subject to certain exemptions the Board may allow), (iv) the
acceptance by our Bank of securities issued by the affiliate as security for a
loan to any person or company, and (v) the issuance by our Bank of any
guaranty, acceptance, or letter of credit on behalf of an affiliate. In
general, (i) covered transactions with any one affiliate cannot exceed 10% of
our Bank's capital and transactions with all affiliates cannot exceed 20% of
our Bank's capital; (ii) extensions of credit to an affiliate must be
collateralized; (iii) low quality assets cannot be purchased from an
affiliate; and (iv) all transactions must be on safe and sound terms.
All covered transactions, and certain other transactions between our bank
and our affiliates, must be on terms and under circumstances, including credit
standards, that are substantially the same, or at least as favorable to our
Bank as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, the terms
and circumstances for the affiliate transaction must be those that in good
faith would be offered to nonaffiliated companies.
Regulatory Capital Requirements. Our Bank is required to comply with capital
adequacy standards set by the FDIC. The FDIC may establish higher minimum
requirements if, for example, a bank has previously received special attention
or has a high susceptibility to interest rate risk. Banks with capital ratios
below the required minimum are subject to certain administrative actions. More
than one capital adequacy standard applies, and all applicable standards must
be satisfied for an institution to be considered to be in compliance. There
are three basic measures of capital adequacy: a total risk-based capital
measure, a Tier 1 risk-based capital ratio, and a leverage ratio.
The risk-based capital measure was adopted to assist in the assessment of
capital adequacy of financial institutions by, (i) making regulatory capital
requirements more sensitive to differences in risk profiles among
organizations; (ii) introducing off-balance-sheet items into the assessment of
capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk
assets; and (iv) achieving greater consistency in evaluation of capital
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adequacy of major banking organizations throughout the world. The risk-based
guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning assets and off-balance-sheet
items to broad risk categories. An institution's risk-based capital ratios are
calculated by dividing its qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: "core
capital elements" ("Tier 1" capital) and "supplementary capital elements"
("Tier 2" capital). Tier 1 capital is generally defined as the sum of core
capital elements less goodwill and other intangibles. Core capital elements
consist of (i) common shareholders' equity, (ii) noncumulative perpetual
preferred stock, subject to certain limitations, and (iii) minority interest
in the equity accounts of consolidated subsidiaries. Supplementary capital
("Tier 2" capital) consists of elements such as (i) allowance for loan and
lease losses (subject to limitations); (ii) perpetual preferred stock which
does not qualify as Tier 1 capital (subject to certain conditions); (iii)
hybrid capital instruments and mandatory convertible debt securities; and (iv)
term subordinated debt and intermediate-term preferred stock (subject to
limitations). The maximum amount of Tier 2 capital that may be included in
qualifying total capital is limited to 100% of Tier 1 capital (net of goodwill
and certain other intangible assets).
Under current capital adequacy standards, our Bank must meet a minimum ratio
of qualifying total capital to risk-weighted assets of 8%. Of that ratio, at
least half, or 4%, must be in the form of Tier 1 capital.
Banks must also meet a leverage capital requirement. In general the minimum
leverage capital requirement is not less than 3 percent Tier 1 capital to
total assets if the bank has the highest regulatory rating and is not
anticipating or experiencing any significant growth. All other banks should
have a minimum of 100 to 200 basis points higher and thus a minimum leverage
capital standard of not less than 4 percent. Thus, banks normally are out of
compliance with regulatory capital requirements if they have a Tier 1 leverage
capital ratio of less than 4 percent.
As a result of the FDIC Improvement Act of 1991, the federal bank regulatory
agencies adopted regulations defining banks as "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the law, depending upon a bank's
classification, a bank may be directed to prepare and implement a capital
restoration plan, to be guaranteed by its parent bank holding company.
Further, banks are subject to increased restrictions upon activities and
heightened regulatory management as capital classifications decline.
Generally, under regulations adopted by all of the bank federal regulatory
agencies, "well capitalized" has been defined as an institution with a total
capital to risk-based asset ratio of 10%, a Tier 1 capital to risk-based asset
ratio of 6% and a Tier 1 leverage ratio of 5%. The regulations further provide
that an "adequately capitalized" institution must have a total capital to
risk-based asset ratio of at least 8%, a Tier 1 capital to risk-based asset
ratio of 4% and a Tier 1 leverage ratio of 4%. An institution will be deemed
"undercapitalized" if it has total risk-based capital ratio that is less than
8% or has a leverage ratio that is less than 4% (or less than 3% if rated
CAMEL 1). Institutions with a total risk-based capital ratio of less than 6%,
a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio that is
less than 3% will be deemed "significantly undercapitalized." Finally, the
regulations provide that an institution that has a ratio of tangible equity to
total assets that is equal to or less than 2% will be deemed "critically
undercapitalized." Federal bank regulatory agencies, including the FDIC, are
authorized to down-grade a financial institution from one capital category to
the next if an examination reveals that the asset quality, management,
earnings or liquidity of that institution are less than satisfactory. Under
the regulations, as of September 30, 1999 our Bank is classified as "well
capitalized."
Acquisitions and Branching. Banks, including our Bank, have the authority
under Minnesota law to establish branches (referred to under Minnesota law as
"detached facilities") in any municipality in the state of Minnesota, subject
to receipt of all required regulatory approvals, except a municipality having
a population of 10,000 or less, unless all the banks having a principal office
in the municipality have consented in writing to the establishment of the
branch (this rule is often called the "home town protection rule.")
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Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") allows the responsible Federal banking
agency to approve applications for mergers of depository institutions across
state lines without regard to whether such activity is contrary to state law.
Any state could, however, by adoption of a non-discriminatory law after
September 29, 1994 and before June 1, 1997, either elect to have this
provision take effect before June 1, 1997 or opt-out of the provision. The
effect of opting out is to prevent banks chartered by, or having their main
office located in, such state from participating in any interstate branch
merger. Each state is permitted to retain a minimum age requirement of up to
five years, a non-discriminatory deposit cap, and non-discriminatory notice or
filing requirements. Only Texas opted-out of the interstate merger provision.
The Minnesota legislature has taken action to opt in and has authorized
interstate branching effective June 1, 1997. It exercised its discretion,
however, to retain a minimum age requirement (or "seasoning requirement") of 5
years. Therefore, our Bank may not be acquired by an out-of-state bank nor may
our Bank merge into an out-of-state bank for 5 years after its creation.
Nevertheless, the RNA could present acquisition and branching opportunities to
the Company, and could allow out-of-state banks easy access to markets
currently served by the Company thereby increasing competition.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
requires a financial institution to help meet the credit needs of its entire
community, including low-income and moderate-income areas. Federal banking
agencies may take CRA compliance into account when regulating and supervising
bank and holding company activities; for example, CRA performance may be
considered in approving proposed bank acquisitions. The banks are also subject
to a variety of consumer protection laws and fair lending laws. Violations of
these laws may cause regulators to impose substantial penalties or take other
administrative action.
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DESCRIPTION OF OUR CAPITAL STOCK
General
Our Amended and Restated Articles of Incorporation (the "Articles")
authorize the issuance of 20,000,000 shares of capital stock having a par
value of $0.01 per share, of which 15,000,000 shares are common stock and
5,000,000 shares are undesignated.
Common Stock
General. As of June 30, 2000, 427,600 shares of common stock were issued and
outstanding. No share of common stock is entitled to preference over any other
share and each such share is equal to other shares of common stock in all
respects. In any distribution of capital assets, whether voluntary or
involuntary, holders of common stock are entitled to receive pro rata the
assets remaining after creditors and holders, if any, of stock with a
liquidation preference have been paid in full.
Voting. Common shareholders are entitled to one vote for each share held of
record on each matter submitted to a vote of the common shareholders.
Dividends, Distributions and Redemptions. Subject to the preferential
dividend rights of any subsequent classes or series of stock with such rights
and preferences superior to the common stock as our board of directors may
designate, the common stock shareholders are entitled to receive dividends as
and when declared by our board of directors. However, dividends on our common
stock are not contemplated in the foreseeable future. Under the Minnesota
Business Corporation Act (the "MBCA"), we may declare and pay dividends on the
common stock only if we will be able to pay its debts in the ordinary course
of business after making the distribution. In addition, our primary source of
cash to make dividend payments is dividends that we receive from our Bank,
which may be unable to make payments to us under various applicable
regulations. See "--Dividend Policy" and "Supervision and Regulation."
Federal and state banking laws regulate our ability to pay dividends and
redeem our equity securities. No redemptions of any equity securities are
permitted without the approval of the Federal Reserve Board if the aggregate
amount of such redemptions exceeds 10% of our net worth over a 12-month
period. In addition, no redemption of or dividend on the common stock is
permitted if it would constitute an unsafe or unsound practice according to
the Federal Reserve Board.
If we were liquidated, our common stockholders would be entitled to receive,
pro rata, all assets available for distribution to them after satisfaction of
our liabilities and any payment applicable to any preferred stock then
outstanding.
No Cumulative Voting. Our Articles provide that our shareholders will not
have cumulative voting rights in the electing of directors. Under cumulative
voting, a shareholder could cast that number of votes equal to such
shareholder's shares multiplied by the number of directors to be elected in
favor of one candidate or among several candidates. Cumulative voting makes it
possible for less than a majority of the shareholders to elect one or more
members of the board of directors. Under non-cumulative voting, a majority of
the voting power of the shareholders entitled to vote can elect the entire
board of directors.
No Preemptive Rights. Our Articles provide that our shareholders will not
have any preemptive rights to subscribe for or purchase additional shares of
our capital stock. This means that our shareholders will not be entitled to
acquire a certain fraction of the unissued securities or rights to purchase
our securities before we may offer them to other persons. Preemptive rights
enable a shareholder to maintain the shareholder's proportional voting power
and proportional rights to receive and other distributions by the company.
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Undesignated Stock
Under governing Minnesota law and our Articles, no action by our
shareholders is necessary, and only action of the board of Directors is
required, to authorize the issuance of any of the undesignated stock. The
board of directors is empowered to establish and to designate each class or
series of the undesignated shares and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences).
Accordingly, the board of directors, without shareholder approval, may issue
such undesignated shares in one or more series of preferred stock having
rights, preferences, privileges or restrictions, including voting rights, that
may be greater than the rights of holders of common stock, provided, however,
that the issuance of preferred stock is approved by a majority of our
independent directors who do not have an interest in the transaction and who
have access, at our expense, to our or independent legal counsel.
It is not possible to state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of the common stock until the
board of directors determines the specific rights of the holders of such
preferred stock. However, the effects might include, among other things,
restricting dividends on the common stock, diluting the voting power of the
common stock, impairing the liquidation rights of the common stock and
delaying or preventing a change in control of Northern Star Financial without
further action by the shareholders. We have no present plans to issue any
shares of preferred stock.
Limitation of Director Liability, Indemnification
The Minnesota Business Corporations Act ("MBCA") permits Minnesota
corporations, in their Articles of Incorporation or Bylaws, to limit or
eliminate the personal liability of directors to corporations and their
shareholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of a corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
the MBCA, directors are accountable to corporations and their shareholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Although the MBCA provision does not change directors'
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. Our Bylaws state that our directors
will not be personally liable for monetary damages for breach of their
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) corporate distributions which are in
contravention of restrictions in the MBCA, our Articles of Incorporation or
Bylaws, or any agreement to which we are a party, or (iv) any transaction from
which the director derives an improper personal benefit. Our Bylaws also
provide that if the MBCA is later amended, then the liability of our directors
will be eliminated or limited to the fullest extent permitted by the MBCA, as
so amended. The inclusion of this provision in our Bylaws may have the effect
of reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited us and our shareholders.
Minnesota Statutes Section 302A.521 provides that our officers and directors
have the right to indemnification from us for liability arising out of certain
actions. We have included in our Bylaws a provision to indemnify our directors
and officers for expenses and liabilities to the fullest extent permitted by
Minnesota law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable.
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Anti-Takeover Provisions
Certain provisions of Minnesota law and our Articles described below could
have an anti-takeover effect. These provisions are intended to provide
management flexibility to enhance shareholder value, the likelihood of
continuity and stability in the composition of our board of directors and in
the policies formulated by the board and to discourage an unsolicited
takeover, if the board determines that such a takeover is not in our best
interests and the best interests of our shareholders. However, these
provisions could have the effect of discouraging certain acquisition attempts,
which could deprive our shareholders of opportunities to sell their shares of
common stock at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisitions of our voting stock (from a person other than us, and
other than in connection with certain mergers and exchanges to which we are a
party) resulting in the beneficial ownership of 20% or more of the voting
stock then outstanding. Section 302A.671 requires approval of the granting of
voting rights for the shares received pursuant to any such acquisition by a
majority vote of our shareholders. In general, shares acquired without such
approval are denied voting rights and are redeemable by us at the then fair
market value within 30 days after the acquiring person has failed to deliver a
timely information statement to us or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by us, or any of our subsidiaries, with any shareholder who
purchases 10% or more of our voting shares (an "interested shareholder")
within four years following such interested shareholder's share acquisition
date, unless the business combination is approved by a committee of all of the
disinterested members of our board of directors before the interested
shareholder's share acquisition date.
Our board of directors may authorize the issuance of additional shares of
common stock or, from the 5,000,000 shares of undesignated stock, preferred
stock without further action by our shareholders, unless such action is
required in a particular case by applicable laws or regulation. The authority
to issue additional common stock or preferred stock provides us with the
flexibility necessary to meet our future needs without the delay resulting
from seeking shareholder approval. The unissued common stock or preferred
stock may be issued from time to time for any corporate purposes, including
without limitation, stock splits, stock dividends, employee benefit and
compensation plans, acquisitions and public and private sales for cash as a
means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of us. In addition, the sale of
a substantial number of shares of common stock or preferred stock to persons
who have an understanding with us concerning the voting of such shares, or the
distribution or dividend of common stock or preferred stock (or right to
receive such shares) to our shareholders, may have the effect of discouraging
or otherwise increasing the cost of unsolicited attempts to acquire control of
us. Further, because our board has the power to determine the voting,
conversion or other rights of the preferred stock, the issuance of a series of
preferred stock to persons friendly to management could effectively discourage
or preclude consummation of a change in control transaction or have the effect
of maintaining the position of our incumbent management. We do not currently
have any plans or commitments to use our authority to effect any such
issuance, but we reserve the right to take any action that the board of
directors deems to be in the best interests of Northern Star Financial and its
shareholders. Furthermore, as a Minnesota corporation, we are subject to
provisions of the Minnesota Business Corporations Act ("MBCA") that could have
an anti-takeover effect.
In addition, certain provisions of our Bylaws will impede changes in
majority control of our board of directors. Our Bylaws provide that the board
of directors will be divided into three classes, with directors in each class
elected for three-year staggered terms. Thus assuming five directors, as
currently is the case, it would take two annual meetings for the election of
directors to replace a majority of the board.
Transfer Agent and Registrar
Our Stock Transfer Agent and Registrar is Continental Stock Transfer and
Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been only a limited public market for our
common stock. Future sales of substantial amounts of common stock in the open
market may adversely affect the price of the common stock offered hereby and
our ability to raise equity capital in the future.
Upon completion of this offering, we will have a minimum of 477,600 and a
maximum of 727,600 shares of common stock outstanding, assuming no exercise of
outstanding warrants and options. Of the aggregate amount outstanding, 121,000
shares of common stock are "restricted securities" as that term is defined in
Rule 144 under the Securities Act, and may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 or otherwise.
The shares sold in this offering will be freely tradable, without resale
restrictions or further registration under the Securities Act, unless
purchased by an "Affiliate" of Northern Star Financial, whose sales would be
subject to certain volume limitations and other restrictions described below.
An affiliate of the issuer is defined in Rule 144 under the Securities Act as
a person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the issuer. Rule
405 under the Securities Act defines the term "control" to mean the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of the person whether through the ownership of
voting securities, by contract or otherwise. Our directors and directors of
our Bank would likely be deemed to be affiliates.
In general, under Rule 144, an affiliate or a person holding restricted
shares may sell, within any three-month period, a number of shares not greater
than 1% of the then outstanding shares of the common stock or the average
weekly trading volume of the common stock during the four calendar weeks
preceding the sale, whichever is greater. Rule 144 also requires that the
securities must be sold in "brokers' transactions," as defined in the
Securities Act, and the person selling the securities may not solicit orders
or make any payment in connection with the offer or sale of securities to any
person other than the broker who executes the order to sell the securities.
This requirement may make the sale of the common stock by our affiliates
pursuant to Rule 144 difficult if no trading market develops in the common
stock. Rule 144 also requires persons holding restricted securities to hold
the shares for at least one year prior to sale.
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UNDERWRITING
We have entered into an underwriting agreement with Berthel Fisher & Company
Financial Services, Inc. Berthel Fisher has agreed, subject to the terms and
conditions of the underwriting agreement, to purchase and underwrite the sale
of the shares to the public on a "best efforts basis." Berthel Fisher will act
as the Company's exclusive underwriter for a period of six months from the
date of this Prospectus.
We will offer for sale a minimum of 50,000 shares, approximately $525,000,
(the "Minimum Amount") and a maximum of 300,000 shares, approximately
$3,150,000, (the "Maximum Amount") of the shares to Berthel Fisher for sale by
Berthel Fisher to the public. Berthel Fisher is not obligated to purchase any
of the shares, but if it does purchase any shares, it must purchase at least
the Minimum Amount. If Berthel Fisher does purchase the Minimum Amount, it is
not obligated to purchase any additional shares. In the event that the Minimum
Amount is not sold, the underwriting agreement shall terminate within 90 days
from the date of this Prospectus.
Berthel Fisher will offer, on a best-efforts basis, the shares to the public
at the Price to Public set forth on the cover page of this Prospectus and to
selected dealers at such price less a concession of $ per share. The
maximum purchase is 4.9% of the offering unless we, in our sole discretion,
accept a sale for a greater number of shares. Berthel Fisher does not intend
to confirm sales to any account over which it has discretionary authority.
We have granted Berthel Fisher an option, exercisable at any time prior to
the Termination Date, to increase the Maximum Amount by up to 30,000 shares,
approximately $315,000 (the "Optional Maximum"). The option may be exercised
for fewer than all of the shares subject to the option. If the option is
exercised, the additional shares will be offered by Berthel Fisher on the same
terms as those on which the shares are being offered.
We have agreed to sell the shares to Berthel Fisher, including the Optional
Maximum, at the Price to Public less a 7% underwriting discount and
commission. We have agreed to pay Berthel Fisher an investment banking fee
equal to $10,000 and a non-accountable expense allowance equal to $25,000.
In addition, we agreed to issue Berthel Fisher a warrant to purchase a
number of shares of our common stock equal to 10% of the number of shares sold
by it. The warrant is exercisable commencing one year after the date issued
and for a period of four years thereafter, at an exercise price of $12.60 per
share. The warrant may not be transferred for a period of one year from the
date issued other than by will or pursuant to operation of law, except to
persons who are officers and shareholders of Berthel Fisher. The warrant
contains anti-dilution provisions providing for appropriate adjustments on the
occurrence of certain events.
Berthel Fisher and us have agreed to indemnify each other against certain
liabilities under the Securities Act of 1933, or to contribute to payments
which Berthel Fisher may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to such
indemnification provisions, we have been advised that the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
We will use our best efforts to qualify or register the shares for sale in
"non-issuer" transactions, or obtain exemptions from the application of the
securities laws of those states designated by Berthel Fisher, to permit
marketmaking transactions and secondary trading of the shares in the
designated states. We will use our best efforts to comply with the applicable
state securities laws and to continue such qualification, registration or
exemption for so long as the shares remain outstanding.
Until the distribution of the shares is complete, the rules of the
Securities and Exchange Commission may limit the ability of Berthel Fisher to
bid for and purchase the shares. As an exception to these rules, Berthel
Fisher is permitted to engage in certain transactions that stabilize the price
of the shares. Such transactions consist of stating a bid price for the shares
for the purpose of maintaining the price of the shares.
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In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither we or Berthel Fisher make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above
might have on the price of the shares. In addition, neither we or Berthel
Fisher make any representations that Berthel Fisher will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The obligations of Berthel Fisher to act as underwriter in connection with
the purchase and sale of the shares contemplated by this Prospectus and to
purchase the shares against payment therefor, are subject to certain typical
conditions precedent within our control contained in Underwriting Agreement,
as of the date of this Prospectus and as of each closing, including: (i) the
accuracy of our representations and warranties contained in the Underwriting
Agreement; (ii) the performance of our obligations thereunder; (iii) the
delivery by us of certain certificates; (iv) the delivery to Berthel Fisher of
an opinion of our legal counsel and related bring-down certificates; and (v)
the delivery to Berthel Fisher of a letter from our independent accountants
and related bring-down certificates.
The foregoing is a summary of the material provisions of the Underwriting
Agreement. Copies of such documents have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be passed
upon for us by Fredrikson & Byron, P.A., whose business address is 900 Second
Avenue South, Minneapolis, Minnesota 55402.
EXPERTS
The audited financial statements of Northern Star Financial, Inc. as of June
30, 2000, included in this prospectus and elsewhere in the registration
statement, have been audited by Bertram Cooper & Co., LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act
with the SEC in connection with the common stock offered by this prospectus.
This prospectus omits certain information, exhibits and undertakings set forth
in the registration statement which we have filed with the SEC. You may
inspect and copy those materials upon payment of prescribed rates, at the
Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional office of the SEC at the following locations: Seven
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
This information is also available on the Internet at the SEC's website. The
address for the web site is: http://www.sec.gov. For further information about
us, reference is hereby made to the registration statement and the exhibits
thereto. Statements contained in this prospectus concerning the provisions of
any contract, agreement or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the registration statement for a full
statement of the provisions thereof. Each such statement in this prospectus is
qualified in all respects by such reference.
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NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Statements of Financial Condition as of June 30, 2000 and
1999..................................................................... F-3
Consolidated Statements of Operations for the Year Ended June 30, 2000 and
1999..................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Year Ended June
30, 2000 and 1999........................................................ F-5
Consolidated Statements of Cash Flows for the Year Ended June 30, 2000 and
1999..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Northern Star Financial, Inc. and Subsidiary
Mankato, Minnesota 56001
We have audited the accompanying consolidated statements of financial
condition of Northern Star Financial, Inc. and Subsidiary (the Company) as of
June 30, 2000 and 1999, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Northern Star Financial, Inc. and Subsidiary as of June 30, 2000 and 1999,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Bertram Cooper & Co., LLP
Waseca, Minnesota
August 10, 2000
F-2
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30,
-----------------------
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks............................. $ 385,098 $ 210,662
Federal funds sold.................................. 304,106 2,533,236
----------- ----------
Total cash and cash equivalents................... 689,204 2,743,898
Securities available for sale, at fair value.......... 4,212,387 745,119
FHLB stock, at cost................................... 97,500 16,400
Loans held for sale................................... 385,050 681,593
Loans receivable, net of allowance for loan losses of
$181,500 in 2000 and $56,250 in 1999................. 16,572,568 4,881,502
Accrued interest receivable........................... 295,303 59,527
Premises and equipment................................ 431,932 486,685
Other assets.......................................... 299,790 20,884
----------- ----------
Total Assets...................................... $22,983,734 $9,635,608
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits..................................... $ 1,880,209 $1,121,450
Savings deposits.................................... 5,786,894 3,244,444
Time deposits....................................... 10,526,828 1,798,675
----------- ----------
Total deposits.................................... 18,193,931 6,164,569
Advances from borrowers for taxes and insurance....... 17,311 23,941
Other borrowings...................................... 1,950,000 --
Other liabilities..................................... 34,088 23,396
----------- ----------
Total Liabilities................................. 20,195,330 6,211,906
----------- ----------
Shareholders' equity:
Common stock, par value $0.01 per share, 15,000,000
shares authorized, 427,600 and 425,600 shares
issued............................................. 4,276 4,256
Undesignated stock, par value $0.01 per share,
5,000,000 shares authorized, no shares issued...... -- --
Paid in capital..................................... 3,939,557 3,919,577
Accumulated deficit................................. (1,101,028) (497,631)
Unearned stock compensation (2,000 shares).......... (20,000) --
Accumulated comprehensive income (loss)............. (34,401) (2,500)
----------- ----------
Total shareholders' equity........................ 2,788,404 3,423,702
----------- ----------
Total liabilities and shareholders' equity........ $22,983,734 $9,635,608
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended June 30,
-----------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Interest income:
Loans receivable.............................. $ 906,062 $ 120,005
Securities available for sale................. 209,256 3,590
Due from banks................................ -- 5,191
Federal funds sold............................ 64,070 26,089
-------------- -------------
Total interest income....................... 1,179,388 154,875
Interest expense:
Deposits...................................... 518,260 40,012
Other borrowings.............................. 26,245 --
-------------- -------------
Total interest expense...................... 544,505 40,012
Net interest income............................. 634,883 114,863
Provision for loan losses....................... 125,250 56,250
-------------- -------------
Net interest income after provision for loan
losses..................................... 509,633 58,613
-------------- -------------
Noninterest income:
Other fees and service charges................ 16,918 45,499
Gain (loss) on sale of loans.................. 43,520 (3,050)
Other......................................... 2,062 --
-------------- -------------
Total noninterest income.................... 62,500 42,449
-------------- -------------
Noninterest expenses:
Compensation and employee benefits............ 420,352 247,497
Board fees.................................... 86,500 70,429
Occupancy..................................... 82,669 39,556
Legal and accounting.......................... 68,058 35,806
Printing and supplies......................... 23,535 22,261
Furniture, fixtures and equipment
depreciation................................. 56,719 19,453
Data processing............................... 51,295 16,758
Organizational expenditures................... -- 55,691
Merger expenditures........................... 86,800 --
Subsidiary loss............................... 113,428 --
Other......................................... 186,174 87,283
-------------- -------------
Total noninterest expense................... 1,175,530 594,734
-------------- -------------
Net loss before income tax benefit.............. (603,397) (493,672)
Income tax benefit.............................. -- --
Net loss........................................ $ (603,397) $ (493,672)
============== =============
Basic (loss) per share of common stock.......... $ (1.42) $ (1.60)
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulative
Unearned Other
Common Paid-in Accumulated Stock Comprehensive
Stock Surplus Deficit Compensation Income Total
------ ---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998.. $ -- $ 100 $ (3,959) $ -- $ -- $ (3,859)
Comprehensive income:
Net loss for the year
ended June 30, 1999.. -- -- (493,672) -- --
Unrealized loss on
available-for-sale
securities net of tax
of $1,667............ -- -- -- -- (2,500)
Comprehensive income.. (496,172)
Issuance of common
stock................. 4,256 4,251,744 -- -- -- 4,256,000
Offering costs......... -- (332,267) -- -- -- (332,267)
------ ---------- ----------- -------- -------- ----------
Balance, June 30, 1999.. 4,256 3,919,577 (497,631) -- (2,500) 3,423,702
Comprehensive income:
Net loss for the year
ended June 30, 2000.. -- -- (603,397) -- --
Unrealized loss on
available-for-sale
securities net of tax
of $22,934........... -- -- -- -- (31,901)
Comprehensive income.. (635,298)
Restricted stock
award................. 20 19,980 -- (20,000) -- --
------ ---------- ----------- -------- -------- ----------
Balance, June 30, 2000.. $4,276 $3,939,557 $(1,101,028) $(20,000) $(34,401) $2,788,404
====== ========== =========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended June
30,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Interest received on loans and investments......... $ 938,453 $ 95,343
Interest paid...................................... (438,658) (20,391)
Other fees, commissions, and income received....... 16,918 42,449
Cash paid to suppliers, employees and others....... (1,169,057) (552,833)
Contributions to charities......................... (3,730) (185)
Loans originated for sale.......................... (3,246,235) (1,863,592)
Proceeds from sale of loans........................ 3,586,298 1,185,050
------------ -----------
Net cash used in operating activities............ (316,011) (1,114,159)
------------ -----------
Cash flows from investing activities:
Purchases of available-for-sale securities......... (4,358,183) (749,281)
Proceeds from maturities of available-for-sale
securities........................................ 844,968 --
Purchase of FHLB stock............................. (81,100) (16,400)
Loan originations and principal payments on loans,
net............................................... (11,794,077) (4,940,802)
Investment in subsidiary........................... (196,000) --
Purchase of property and equipment................. (12,181) (509,419)
------------ -----------
Net cash used in investing activities............ (15,596,573) (6,215,902)
------------ -----------
Cash flows from financing activities:
Net increase in non-interest bearing demand and
savings deposit accounts.......................... 3,591,832 4,365,700
Net increase in time deposits...................... 8,322,688 1,779,250
Net (decrease) increase in mortgage escrow funds... (6,630) 23,941
Proceeds from FHLB borrowings...................... 1,950,000 --
(Payment of) advances from organizers.............. -- (18,665)
Proceeds from sale of common stock net of offering
costs............................................. -- 3,923,733
------------ -----------
Net cash provided by financing activities........ 13,857,890 10,073,959
------------ -----------
Net (decrease) increase in cash and cash
equivalents....................................... (2,054,694) 2,743,898
Cash and cash equivalents at beginning of year..... 2,743,898 --
------------ -----------
Cash and cash equivalents at end of year........... $ 689,204 $ 2,743,898
============ ===========
Non-cash investing and financing activities:
Deferred organization costs expensed............... $ -- $ 9,226
============ ===========
Undistributed equity loss in subsidiary............ $ 113,428 $ --
============ ===========
Common stock issued under restricted stock
agreement......................................... $ 20,000 $ --
============ ===========
Reconciliation of net income to net cash provided
by operating activities
Net loss........................................... (603,397) (493,672)
Adjustments:
Depreciation...................................... 66,934 22,732
Equity loss of subsidiary......................... 113,428 --
Provision for loan losses......................... 125,250 56,250
Accretion and (amortization) of premiums and
discounts, net................................... (7,221) (5)
Loss on sale of loans............................. -- 3,050
(Increase) decrease in:
Loans held for sale............................... 296,543 (681,593)
Accrued interest receivable....................... (235,776) (59,527)
Prepaid income tax................................ -- --
Other assets...................................... (197,306) (4,411)
Increase (decrease) in:
Accrued interest payable.......................... 105,847 19,621
Other liabilities................................. 19,687 23,396
------------ -----------
Net cash used in operating activities............ $ (316,011) $(1,114,159)
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
Note 1. Summary of Significant Accounting Policies
The following summarizes the significant accounting policies Northern Star
Financial, Inc. (the Company) follows in presenting its financial statements.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary Northern Star Bank
(the Bank). All significant intercompany transactions and balances are
eliminated in consolidation.
Organization of the Business--The Company was incorporated under the laws of
the State of Minnesota on January 22, 1998, for the purpose of becoming a bank
holding company for a state chartered commercial bank. On October 9, 1998, the
Company commenced an initial public offering of its Common Stock at $10.00 per
share. The Company accepted subscriptions to purchase an aggregate of 425,600
shares of its Common Stock. The proceeds from the stock subscriptions amounted
to $3,923,733, net of selling expenses. The Bank's charter became effective
January 25, 1999 and the Company invested $3,000,500 in the Bank's capital
accounts.
Nature of Business--The Company is a bank holding company whose subsidiary
provides financial services. The Bank's business is that of a financial
intermediary and consists primarily of attracting deposits from the general
public and using such deposits, together with borrowings and other funds, to
make secured and unsecured loans to business and professional concerns and
mortgage loans secured by residential real estate and other consumer loans. At
June 30, 2000, the Bank operated one retail banking office in Mankato,
Minnesota. The Bank is subject to significant competition from other financial
institutions, and is also subject to regulation by certain federal and state
agencies and undergoes periodic examinations by those regulatory authorities.
Use of Estimates--In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheets, and income and expenses for the period. Actual results could differ
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 allowance for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed assets, future additions to the allowances may be necessary based
on changes in local economic conditions. In addition, regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowance for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.
Cash Equivalents--For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
Investment Securities--Investment securities available for sale are reported
at fair market value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of the related tax effect.
Premiums and discounts on all investment securities are accreted (deducted)
and amortized (added), respectively, to interest income on the straight-line
and interest methods over the period to the maturity of the related security.
F-7
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 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 Des
Moines. Because no ready market exists for this stock, and it has no quoted
market value, the Bank's investment in this stock is carried at cost.
Effective July 1, 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income". The statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. The statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be disclosed in the financial statements. Comprehensive
income is defined as the change in equity during a period from transactions
and other events from non-owner sources. Comprehensive income is the total of
net income and other comprehensive income, which for the Company is comprised
entirely of unrealized gains and losses on securities available for sale.
Loans Held for Sale--Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. Gains or losses on the sale of loans are
recorded in noninterest income, based on the net proceeds received and the
recorded investment in the loan.
Loans Receivable--Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal balance adjusted for any charge-off,
the allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Discounts and
premiums on purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on purchased
consumer loans are recognized over the expected lives of the loans using the
level yield method.
The allowance for loan losses was established by a charge to income based on
management's evaluation of the known and inherent risks in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
Uncollectible interest on loans contractually past due for three months is
charged off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and income is subsequently recognized only
to the extent cash payments are received or until, in management's judgment,
the borrower's ability to make periodic interest and principal payments
returns to normal, in which case the loan is returned to accrual status.
Loan origination fees and certain direct origination costs are capitalized
with the net fee or cost recognized as an adjustment to interest income using
the interest method.
Mortgage Loan-Servicing Rights--The Bank has established accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on the consistent application of the
financial-components approach. This approach requires the recognition of
financial assets and servicing assets that are controlled by the Bank, and the
derecognition of financial assets and liabilities when control is
extinguished. Liabilities and derivatives incurred or obtained in conjunction
with the transfer of financial assets are measured at fair value, if
practicable. Servicing assets and other retained interest in transferred
assets are measured by allocating the carrying amount between the assets sold
and the interest retained, based on their relative fair value. The Bank had
servicing assets of $303 and $-0- June 30, 2000 and 1999, respectively.
F-8
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Premises and Equipment--Leasehold improvements, furniture and equipment are
carried at cost less accumulated depreciation. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years.
Income Taxes--Deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized. The effect of a change in
the beginning-of-the-year balance of a valuation allowance that results from a
change in judgment about the realizability of deferred tax assets, is included
in income.
The Company files consolidated income tax returns with the Bank and they
have entered into a tax sharing agreement which provides that the Bank will
pay to the Company, or receive a refund from the Company, as if the Bank
portion of income tax liability or benefit was separately determined based on
the Bank's taxable income or loss.
Organizational Costs--The Company has elected early adoption of Statement of
Position 98-5 ("Reporting on the Costs of Start-up Activities" issued April 3,
1998 by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants) and has expensed its cumulative organization
and start-up costs. Costs deferred in the period ended June 30, 1998 of $9,226
were expensed in fiscal year ended June 30, 1999.
Reclassifications--Certain amounts in the financial statements for the prior
year have been reclassified to conform to current financial statement
presentation.
Earnings Per Share--Basic earnings per share (EPS) is based on the weighted
average outstanding common shares. Diluted EPS is based on the weighted
average outstanding shares reduced by the effect of stock options and
warrants. The stock subscriptions described in Organization of the Business
were contingently issuable subject to the Bank charter approval which occurred
January 25, 1999 and included in the denominator of EPS as of the date of the
Company's Registration Statement, resulting in 425,600 and 307,831 weighted
average shares outstanding as of June 30, 2000 and 1999, respectively.
Diluted EPS is the same as basic EPS because the option and warrant shares
were granted at a price greater than the current operating period market price
and those shares are not "in the money".
Nonvested restricted stock compensation is to be considered outstanding as
of its issuance date for computing diluted EPS even though it is contingent
upon future time-related vesting and is not included in basic EPS until the
time-based vesting restriction has lapsed.
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 estimated 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 assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
F-9
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures, presented in Note 13,for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statements
of financial condition for cash and cash equivalents equal their fair values.
Debt and equity securities: Fair values for debt and equity 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.
FHLB stock: The carrying amount of FHLB stock approximates fair value.
Loans: For variable-rate loans that reprice frequently 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, rental
property mortgage loans, and commercial and industrial loans) are estimated
using discounted cash flow analyses, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality
giving consideration to estimated prepayment and credit loss factors. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). Fair values for time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently offered
on certificates to a schedule of aggregated expected monthly maturities on
time deposits. The carrying amount of accrued interest payable approximates
fair value.
Advance payments by borrowers for taxes and insurance (escrow accounts): The
carrying amount of escrow accounts approximate fair value.
Loan commitments: Commitments to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The carrying value and fair value
of commitments to extend credit are not considered material for disclosure.
Note 2. Debt and Equity Securities
The amortized costs and approximate fair values of debt and equity
securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 2000:
Debt securities available for
sale:
U.S. Government and agency
obligations................. $4,269,722 $-- $(57,335) $4,212,387
========== ==== ======== ==========
June 30, 1999:
Debt securities available for
sale:
U.S. Government and agency
obligations................. $ 749,286 $-- $ (4,167) $ 745,119
========== ==== ======== ==========
</TABLE>
F-10
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There were no sales of securities during the year ended June 30, 2000.
The amortized cost and estimated market value of debt securities at June 30,
2000, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available for Sale
---------------------
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
Due from one to five years............................ $3,319,782 $3,279,684
Due from five to ten years............................ 949,940 932,703
---------- ----------
Total............................................... $4,269,722 $4,212,387
========== ==========
</TABLE>
Note 3. Loans Receivable
Loans receivable at June 30, consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Commercial.......................................... $ 2,913,782 $1,843,707
Real Estate......................................... 7,415,562 1,658,261
Consumer............................................ 6,402,485 1,435,784
----------- ----------
Total loans receivable.......................... 16,731,829 4,937,752
Add:
Deferred loan costs............................... 29,799 --
Less:
Allowance for loan losses......................... (181,500) (56,250)
Deferred loan fees................................ (7,560) --
----------- ----------
Loans receivable, net........................... $16,572,568 $4,881,502
=========== ==========
</TABLE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Balance, beginning of period............................... $ 56,250 $ 0
Provision for losses....................................... 125,250 56,250
-------- -------
Balance, end of period..................................... $181,500 $56,250
======== =======
</TABLE>
In the ordinary course of business, the Bank has granted loans to certain
executive officers, directors and their related interests. Related party loans
are made on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility. Loan activity in these accounts for the
year ended June 30, is as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Beginning balance................................... $ 957,542 $ 0
New loans........................................... 2,996,101 2,380,520
Participations sold................................. (1,772,748) (985,000)
Less: Repayments.................................... (1,245,394) (437,978)
----------- ----------
Ending balance...................................... $ 935,501 $ 957,542
=========== ==========
</TABLE>
F-11
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Accrued Interest Receivable
Accrued interest receivable at June 30, is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Investment securities....................................... $ 64,286 $12,191
Loans receivable............................................ 231,017 47,336
-------- -------
Total..................................................... $295,303 $59,527
======== =======
</TABLE>
Note 5. Premises and Equipment
Premises and equipment at June 30, consists of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Leasehold improvements................................... $205,144 $200,035
Furniture and equipment.................................. 316,454 309,382
-------- --------
Total.................................................. 521,598 509,417
Less accumulated depreciation............................ (89,666) (22,732)
-------- --------
Premises and equipment, net............................ $431,932 $486,685
======== ========
</TABLE>
Note 6. Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $2,100,000 and $400,000 as of June 30, 2000 and
1999, respectively. Deposited amounts in excess of $100,000 are not insured by
the Federal Deposit Insurance Company.
At June 30, 2000, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2001............................................................. $ 9,600,627
2002............................................................. 452,000
2003............................................................. 389,701
2004............................................................. 84,500
-----------
Total.......................................................... $10,526,828
===========
</TABLE>
Interest expense by category follows:
<TABLE>
<CAPTION>
For the Year
Ended
June 30,
----------------
2000 1999
-------- -------
<S> <C> <C>
Demand deposits............................................ $ 7,625 $ 1,430
Savings deposits........................................... 169,794 13,363
Time deposits.............................................. 340,841 25,219
-------- -------
Total interest expense................................... $518,260 $40,012
======== =======
</TABLE>
Deposits by related parties were approximately $4,082,000 and $658,000 as of
June 30, 2000 and 1999, respectively. In addition, as of June 30, 2000
approximately $3,200,000 of deposits were from one related party and his
corresponding business.
F-12
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Other Borrowed Funds
Borrowed funds consisted of advances from Federal Home Loan Bank (FHLB) in
the amount of $1,950,000 as of June 30, 2000. The advances mature as follows:
<TABLE>
<CAPTION>
Amount Rate
---------- -----
<S> <C> <C>
Date of Maturity
September 18, 2000, fixed rate............................ $ 300,000 6.33%
October 18, 2000, fixed rate.............................. 425,000 5.85%
February 20, 2001, fixed rate............................. 475,000 7.15%
June 25, 2001, fixed rate................................. 750,000 6.94%
---------- -----
$1,950,000 6.85%
========== =====
</TABLE>
These borrowings are collateralized by the FHLB stock, first and second
mortgage loans of approximately $1,900,000 and mortgage back securities of
approximately $1,000,000.
Note 8. Income Taxes
The Company incurred no current tax expense because of its operating loss
and its deferred tax benefit was reduced by a valuation allowance to zero. A
reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes is as follows:
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Pretax loss.......................................... $(603,397) $(493,672)
--------- ---------
Income tax (benefit) computed at federal statutory
tax rate............................................ $(205,155) $(167,848)
Increase (decrease) resulting from:
Nondeductible expenses............................. 6,830 718
State income tax benefit, net of federal tax
benefit........................................... (42,494) (28,751)
Valuation allowance................................ 240,819 195,881
--------- ---------
Total tax benefit................................ $ -- $ --
========= =========
</TABLE>
Temporary differences between financial statement carrying amounts and the
tax basis of assets and liabilities that create deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover......................... $ 316,000 $ 86,052
Deferred organization expenses....................... 70,709 90,867
Allowance for loan losses............................ 72,600 22,500
Securities unrealized losses......................... 22,934 1,667
Less valuation allowance............................. (436,700) (197,465)
--------- ---------
Subtotal........................................... 45,543 3,621
--------- ---------
Deferred tax liabilities:
Deferred loan fees/costs, net........................ 9,203 --
Depreciation and basis adjustment.................... 13,406 1,954
--------- ---------
Subtotal........................................... 22,609 1,954
--------- ---------
Net deferred tax assets............................ $ 22,934 $ 1,667
========= =========
</TABLE>
F-13
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 2000 the Company has a cumulative net operating loss carryover
for tax purposes of approximately $800,000 subject to a 20 year limitation.
Note 9. Stock Options
In August 1998 the Company adopted the 1998 Equity Incentive Plan (the
"Plan") and reserved 41,700 shares of common stock for issuance pursuant to
the Plan to certain employees and directors of the Company and its subsidiary.
In addition, the Company granted to its organizing directors options to
purchase an aggregate 30,800 shares outside the Plan. These plans provide for
the granting of incentive stock options as defined in Section 422 of the
Internal Revenue Service Code as well as nonqualified stock options
(collectively stock options).
In October 1999 the Company amended the Plan and reserved an additional
75,000 shares of its common stock for issuance. The options vest over a period
ranging from immediate to 3 years and must be exercised within 10 years of
grant date
The following summarizes the stock option activity:
<TABLE>
<CAPTION>
Weighted Avg.
Shares Available Options Shares Exercise
for Grant Outstanding Price
---------------- -------------- -------------
<S> <C> <C> <C>
At June 30, 1998............... -- -- --
Organizers shares.............. 30,800 -- --
1998 Plan Created.............. 41,700 -- --
Granted........................ (54,800) 54,800 10.00
Exercised...................... -- -- --
------- ------ ------
At June 30, 1999............... 17,700 54,800 10.00
1998 Plan Amended.............. 75,000 -- --
Granted........................ (24,800) 24,800 10.50
Exercised...................... -- -- --
------- ------ ------
At June 30, 2000............... 67,900 79,600 $10.16
======= ====== ======
</TABLE>
A summary of the status of the stock options as of and for the year ended
June 30, 2000 is presented below:
<TABLE>
<CAPTION>
Weighted Avg.
Exercise
Shares Price
------ -------------
<S> <C> <C>
Granted................................................. 79,600 $10.16
Outstanding............................................. 79,600 $10.16
Exercisable............................................. 44,800 $10.00
</TABLE>
<TABLE>
<CAPTION>
Stock options Weighted average Weighed average contractual
Issued fair value life of options outstanding
------------- ---------------- ---------------------------
<S> <C> <C>
1999 $4.33 8.7
2000 $3.06 9.4
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), provides for companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based on the fair value of the award on the date of
grant. However, SFAS 123 allows companies to continue to measure compensation
costs prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25").
F-14
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company elected to follow APB 25 and related Interpretations in
accounting for its employee stock options. Under APB 25, the exercise price of
the Company's employee stock options equal the market price of the underlying
stock on the date of grant and, therefore, no compensation expense is
recognized.
Proforma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock option under the fair value method of that statement.
Proforma net income/(loss) and earnings/(loss) per share for fiscal year end
2000 follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net loss
As reported......................................... $(603,397) $(493,672)
Pro forma........................................... $(650,684) $(661,620)
Earnings per common share and common share equivalent
As reported......................................... (1.42) (1.60)
Pro forma........................................... (1.53) (2.15)
</TABLE>
The above disclosed pro forma effects of applying SFAS No. 123 to
compensation costs may not be representative of the effects on reported pro
forma net income for future years.
The fair value for each option grant is estimated on the date of the grant
using the Black Scholes Model. The model incorporates the following
assumptions:
<TABLE>
<CAPTION>
Options Issued
-----------------------
Fiscal 2000 Fiscal 1999
----------- -----------
<S> <C> <C>
Risk-free interest rate............................ 5.129% 5.129%
Expected life...................................... 5 Yrs. 5 Yrs.
Expected volatility................................ 49.00% 26.00%
Expected dividends................................. None None
</TABLE>
Note 10. Employee Benefits
In December 1999 the Bank adopted a salary reduction plan (Simple IRA) which
covers substantially all full time employees. The cost to the Bank for this
plan was approximately $3,100 for the year ended June 30, 2000.
On December 22, 1999 the Company granted its Chief Executive Officer a
restricted stock award of 2000 shares of the Company's common stock. The
shares are subject to a vesting period ranging from three to to five years.
The unearned compensation, measured by the quoted price of the stock on the
award date ($10 per share), is shown as a separate reduction of stockholders'
equity. The unearned compensation will be accounted for as expense over the
vesting period.
Note 11. Commitments
At June 30, 2000, the Bank was obligated under operating leases for office
space and equipment. Net rental expense under these operating leases, included
in occupancy and other, was $85,846 and $33,945 for the year ended June 30,
2000 and 1999, respectively. The office space is leased from a lessor entity
in which a Company stockholder has a significant interest. Minimum lease
payments under the operating leases are as follows:
F-15
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Office Equipment
For the Year Ended lease lease
------------------ -------- ---------
<S> <C> <C>
2001...................................................... $ 77,907 $ 7,956
2002...................................................... 78,560 5,934
2003...................................................... 79,212 2,934
2004...................................................... 79,212 --
2005...................................................... 79,212 --
2006 and thereafter....................................... 283,722 --
-------- -------
Total................................................... $677,825 $16,824
======== =======
</TABLE>
The Bank has an option to renew the office lease for two additional five
year terms.
The Bank has an available line of credit available in the amount of $250,000
at a corresponding bank.
Note 12. Stock Warrants
On October 9, 1998 the Company entered into an agency agreement for services
to sell the Company's common stock. The Agent was compensated, in part, with
warrants to acquire 10,000 shares of the Company's stock at $12.00 per share
at any time prior to October 9, 2003.
Note 13. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are commitments to extend credit and involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheet. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments as
it does for on-balance sheet instruments. The Bank had outstanding commitments
for additional borrowings as follows:
<TABLE>
<CAPTION>
At June 30,
-------------------
2000 1999
---------- --------
<S> <C> <C>
Revolving, open-end lines secured by 1-4 family
residential........................................... $ 610,000 $ 80,000
Commercial real estate, construction and land
development........................................... 256,000 --
Other, agricultural real estate, unsecured & check
credit................................................ 1,322,000 881,000
---------- --------
Total outstanding commitments and additional
borrowings.......................................... $2,188,000 $961,000
========== ========
</TABLE>
Commitments to extend credit which represent credit risk at variable and
fixed rates were $256,000 and $1,932,000, at June 30, 2000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitments amounts do not
necessarily represent future cash requirements. The Bank examines each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
varies and is based on management's credit evaluation of the counterparty.
Commitments to sell loans amounted to $385,050 at June 30, 2000.
F-16
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
----------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.. $ 689,204 $ 689,204 $2,743,898 $2,743,898
Available for sale
securities................ 4,212,387 4,212,387 745,199 745,119
FHLB stock................. 97,500 97,500 16,400 16,400
Loans receivable........... 16,754,067 16,702,710 4,881,502 4,881,502
Loans held for sale........ 385,050 385,050 681,593 681,593
Accrued interest
receivable................ 295,303 295,303 59,527 59,527
Financial liabilities:
Deposits................... 18,193,931 18,190,858 6,164,570 6,164,570
Advance payments by
borrowers................. 17,311 17,311 23,941 23,941
Other Borrowings........... 1,950,000 1,948,809 -- --
</TABLE>
The market rates on loans and deposits at June 30, 1999 did not change
materially from their contractual rates resulting in fair value being equal to
the carrying amount.
Note 14. Significant Concentration of Credit Risk
A significant portion of the Bank's loans receivable are to borrowers
located in Mankato, Minnesota, and the surrounding counties. This geographic
concentration amounted to approximately 70% of the total loans receivable
balance for the years ended June 30, 2000.
The Bank maintains its cash in bank deposit accounts which at time, may
exceed federal deposit insurance limits. The Bank has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash.
Note 15. Stockholders' Equity and Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table below) of total and Tier 1 capital (as defined in the
regulation), to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of June 30,
2000, that the Bank meets all of capital adequacy requirements to which it is
subject.
As of June 30, 2000 and 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios
as set forth in the
F-17
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts, and ratios are also presented in the
table below (in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provision
-------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Total Capital (to Risk Weighted
Assets)........................ $2,717 15.3% $1,423 8.0% $1,779 10.0%
Tier 1 Capital (to Risk Weighted
Assets)........................ $2,535 14.2% $ 712 4.0% $1,068 6.0%
Tier 1 Capital (to Average
Assets)........................ $2,535 12.3% $ 823 4.0% $1,028 5.0%
As of June 30, 1999
Total Capital (to Risk Weighted
Assets)........................ $2,785 44.2% $ 504 8.0% $ 630 10.0%
Tier 1 Capital (to Risk Weighted
Assets)........................ $2,729 43.3% $ 252 4.0% $ 378 6.0%
Tier 1 Capital (to Average
Assets)........................ $2,729 36.5% $ 299 4.0% $ 374 5.0%
</TABLE>
The Bank may not declare or pay cash dividends to the Company if the effect
would be to reduce capital below applicable regulatory requirements or if such
declaration and payment would otherwise violate regulatory requirements.
Note 16. Effects of New Financial Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities"--issued June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the fiscal year
beginning July 1, 2000 and management believes adoption will not have a
material effect.
Note 17. Joint Venture
In July 1999, the Company acquired a 49 percent joint venture interest in
Homeland Mortgage Company, LLC (Homeland Mortgage), a limited liability
company, in exchange for a total cash consideration of $196,000. The
investment in Homeland Mortgage is being accounted for using the equity
method. Homeland Mortgage's primary business is originating residential real
estate loans that are secured by first and second mortgages and sold into the
secondary mortgage market and mortgage loan servicing.
F-18
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed financial information of Homeland Mortgage is as follows:
<TABLE>
<CAPTION>
June 30,
2000
---------
<S> <C>
Balance Sheet
Cash and cash equivalents........................................ $ 99,220
Other current assets............................................. 34,837
Property and equipment, net...................................... 33,900
Other............................................................ 3,500
---------
Total assets................................................... $ 136,620
=========
Current liabilities.............................................. $ 2,943
Equity........................................................... 168,514
---------
Total liabilities and equity................................... $ 171,457
=========
<CAPTION>
For the
Year
Ended
June 30,
2000
---------
<S> <C>
Income Statement
Income
Interest....................................................... $ 8,538
Gain on sale of loans.......................................... 41,781
Fees and service charges....................................... 140,977
---------
Total income................................................. 191,296
Expenses
Operating...................................................... 416,675
Interest....................................................... 6,107
---------
422,782
---------
Net loss..................................................... $(231,486)
=========
</TABLE>
The Company's 49% investment in Homeland is included in other assets on the
consolidated statement of condition in the amount of $82,572 as of June 30,
2000 and its 49% share of the net loss is included with non-interest expenses
in the consolidated statement of operations as subsidiary loss.
Note 18. Merger Expense
On September 30, 1999 the Company and First Federal Holding Company of
Morris, Inc. "Morris" entered into an agreement for the merger of Morris with
and into the Company. The merger was not consummated because regulatory
approval was denied and all expenses incurred that pertain to the merger
attempt are included in non-interest expenses as merger expenditures.
Note 19. Secondary Stock Offering Initiated
The Company expects to file a post-effective Registration Statement on Form
SB-2 with the Securities and Exchange Commission to register the sale of up to
300,000 shares of its common stock. The shares will be offered and sold to the
public on a best efforts basis by its sales agent and they must sell a minimum
of 50,000 shares in order to sell any shares.
F-19
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20. Parent Only Condensed Financial Information
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements. On January 25, 1999 the Company issued $4.3
million of common stock and contributed $3,000,500 of the net proceeds to the
Bank as equity capital.
Statement of Financial Condition
<TABLE>
<CAPTION>
June 30,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Assets
Cash (1).............................................. $ 72,768 $ 704,700
Investment in Bank subsidiary......................... 2,500,446 2,726,471
Prepaid assets........................................ 161,625 --
Investment in Homeland Mortgage....................... 82,572 --
---------- ----------
Total............................................... $2,817,411 $3,431,171
========== ==========
Liabilities and Shareholders Equity
Other liabilities..................................... $ 29,007 $ 7,469
Shareholders' equity.................................. 2,788,404 3,423,702
---------- ----------
Total............................................... $2,817,411 $3,431,171
========== ==========
</TABLE>
--------
(1) The parent company cash is deposited in the Bank and eliminated on the
consolidated statement of financial condition.
Statement of Income
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Interest from:
Deposits in subsidiary............................. $ 15,052 $ 7,565
Nonaffiliated bank................................. -- 5,191
--------- ---------
Total income..................................... 15,052 12,756
Expenses:
Non-interest expenses.............................. 310,897 234,899
Undistributed equity loss in subsidiary............ 113,428 --
Income tax (refund) expense........................ -- --
--------- ---------
Total expenses................................... 424,325 234,899
--------- ---------
Loss before equity in undistributed net loss of Bank
subsidiary.......................................... (409,273) (222,143)
Equity reduction from undistributed net comprehensive
loss of Bank subsidiary............................. (226,025) (274,029)
--------- ---------
Net comprehensive loss............................... $(635,298) $(496,172)
========= =========
</TABLE>
F-20
<PAGE>
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended
June 30,
----------------------
2000 1999
--------- -----------
<S> <C> <C>
Net loss............................................ $(635,298) $ (496,172)
Adjustments:
Loss on equity investment......................... 113,428 --
Bank operating loss............................... 226,025 274,029
Decrease (Increase) in other assets............... (161,625) 5,580
Increase in other liabilities..................... 21,538 7,469
--------- -----------
Net cash (used in) operations................... (435,932) (209,094)
--------- -----------
Cash flows from investing activities:
Investment in Bank subsidiary..................... -- (3,000,500)
Investment in mortgage company.................... (196,000) --
--------- -----------
Net cash (used in) investing activities......... (196,000) (3,000,500)
--------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock................ -- 4,256,000
Payments for stock issuance costs................. -- (332,267)
Decrease in prepaid organizational costs.......... -- 9226
(Refunds to) Advances from organizers............. -- (18,665)
--------- -----------
Net cash provided by financing activities....... -- 3,914,294
--------- -----------
(Decrease) increase in cash and cash equivalents.... (631,932) 704,700
Cash and cash equivalents
Beginning of year................................. 704,700 --
--------- -----------
End of year....................................... $ 72,768 $ 704,700
========= ===========
</TABLE>
F-21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
You should rely only on the information contained in this document. We have
not authorized anyone to provide any different or additional information. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is illegal.
The information in this prospectus is complete and accurate as of the date on
the cover, but the information may change in the future.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 9
Dividend Policy........................................................... 9
Capitalization............................................................ 10
Price Range of Common Stock............................................... 10
Northern Star Financial Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 11
Northern Star Financial Business.......................................... 26
Northern Star Financial Management........................................ 30
Northern Star Financial Compensation of Executive Officers and Directors.. 32
Northern Star Financial Principal Shareholders and Management............. 34
Supervision and Regulation................................................ 35
Description of Our Capital Stock.......................................... 41
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Where You Can Get More Information........................................ 46
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[Northern Star Financial, Inc. LOGO]
Common Stock
--------------
PROSPECTUS
--------------
Berthel Fisher & Company
Financial Services, Inc.
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect
to the Company, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with
the proceeding with respect to the same acts or omissions if such person (1)
has not been indemnified by another organization or employee benefit plan for
the same judgments, penalties or fines: (2) acted in good faith; (3) received
no improper personal benefit and statutory procedure has been followed in the
case of any conflict of interest by director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the person's official
capacity as a director, officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the Company,
or, in the case of acts or omissions occurring in the person's official
capacity as a director, officer or employee of the Company involving service
as a director, officer, partner, trustee, employee or agent of another
organization or employee benefit plan, reasonably believed that the conduct
was not opposed to the best interests of the Company. In addition, Section
302A.521, subd. 3, requires payment by the Company, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain circumstances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
The Company's Bylaws provide for indemnification to the full extent
permitted by the laws of the state of Minnesota, pursuant to Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended, against and
with respect to threatened, pending or completed actions, suits or proceedings
arising from, or alleged to arise from, a party's actions or omissions as a
director, officer, employee or agent of the Company or any subsidiary of the
Company or of any other corporation, partnership, joint venture, trust or
other enterprise which has served in such capacity at the request of the
Company if such acts or omissions occurred or were or are alleged to have
occurred, while said party was a director or officer of the Company.
Generally, under Minnesota law, indemnification will only be available where
an officer or director can establish that he/she acted in good faith and in a
manner he/she reasonably believed to be in or not opposed to the best
interests of the Company.
Item 25. Other Expenses of Issuance and Distribution.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Sales Agent. All of such expenses,
except for the SEC registration fee and NASD fee, are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 3,168
NASD Fee........................................................... 1,700
Sales Agent Expenses............................................... 35,000
Legal Fees......................................................... 70,000
Accountants' Fees and Expenses..................................... 18,750
Printing Expenses.................................................. 22,000
Blue Sky Fees and Expenses......................................... 10,000
Miscellaneous...................................................... 9,382
--------
Total............................................................ $170,000
========
</TABLE>
II-1
<PAGE>
Item 26. Unregistered Securities Issued or Sold Within Three Years.
During the past three years, we have sold the following securities pursuant
to exemptions from registration under the Securities Act. All such sales were
made in reliance upon exemptions from registration provided under Section 4(2)
and Regulation D of the Securities Act for transactions not involving a public
offering and related state securities laws. Unless otherwise stated, all
securities were issued directly by us, no underwriters were involved and,
except as otherwise noted below, no discount, commission or other transaction-
related remuneration was paid. The purchasers of securities acquired them for
their own account and not with a view to any distribution thereof to the
public. The certificates evidencing the securities bear legends stating that
the shares are not to be offered, sold or transferred other than pursuant to
an effective registration statement under the Securities Act, or an exemption
from such registration requirements.
1. In June 1998, we issued and sold 10 shares of common stock to our
President and CEO, an accredited investor, at $10.00 per share.
2. In June 1998, we accepted binding subscription agreements for the
purchase of an aggregate of 121,000 shares of common stock at a price of
$10.00 per share by five of our directors who are all accredited investors.
3. In June 1999, we issued warrants to purchase 10,000 shares of common
stock at an exercise price of $12.00 per share to Banc Stock Financial
Services, Inc. in connection with our prior public offering.
4. On December 22, 1999 we awarded 2,000 shares of restricted stock to
Mr. Thomas Stienessen as compensation for his services. Mr. Stienessen is
an accredited investor.
Item 27. Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Underwriting Agreement dated September 9, 2000 between Registrant and
Berthel Fisher & Company Financial Services, Inc.
1.2 Form of Selected Dealer Agreement
3.1 Amended and Restated Articles of Incorporation, as amended to date
(Incorporated by reference to Exhibit 2.1 to the Company's Registration
Statement on Form SB-1, Reg. No. 333-61655)*
3.2 Bylaws, as amended to date. (Incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form SB-1, Reg. No. 333-
61655)*
4.1 Form of Underwriter's Warrant
5 Opinion and Consent of Fredrikson & Byron, P.A.**
10.1 Lease Agreement between Northern Star Bank and Colonial Square Partners
relating to the space located at 1650 Madison Avenue, Mankato,
Minnesota (Incorporated by reference to Exhibit 6.1 to the Company's
Registration Statement on Form SB-1, Reg. No. 333-61655)*
10.2 Employment Agreement between Northern Star Bank and Thomas P.
Stienessen (Incorporated by reference to Exhibit 6.2 to the Company's
Registration Statement on Form SB-1,
Reg. No. 333-61655)*
10.3 1998 Equity Incentive Plan, including specimen of Incentive Stock
Option Agreement and Nonqualified Stock Option Agreement. (Incorporated
by reference to Exhibit 6.5 to the Company's Registration Statement on
Form SB-1, Reg. No. 333-61655)*
10.4 Form of Nonqualified Stock Option Agreement governing options granted
to Organizers. (Incorporated by reference to Exhibit 6.6 to the
Company's Registration Statement on Form SB-1, Reg. No. 333-61655)*
11 Statement re: Computation of Earnings Per Share (included in Notes to
Financial Statements)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
21 Subsidiaries of the Registrant:
</TABLE>
<TABLE>
<CAPTION>
Name State of Organization
---- ---------------------
<S> <C>
Northern Star Bank, Minnesota
Inc.
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
23.1 Consent of Fredrikson & Byron, P.A. (see Exhibit 5)
23.2 Consent of Bertram Cooper & Co., LLP
24 Power of Attorney from Certain Directors**
</TABLE>
--------
* Incorporated by reference--Commission File No. 000-25231 unless otherwise
indicated.
** Filed previously.
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication of
such issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Mankato, State of Minnesota, on September 13, 2000.
Northern Star Financial, Inc.
/s/ Thomas P. Stienessen
By: _________________________________
Thomas P. Stienessen,
President and Chief Executive
Officer
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to this Registration Statement was signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas P. Stienessen President and Chief September 13, 2000
______________________________________ Executive Officer,
Thomas P. Stienessen Chairman of the Board and
Director (principal
executive officer)
Director
______________________________________
Robert H. Dittrich
Director
______________________________________
Dean M. Doyscher
* Chief Financial Officer, September 13, 2000
______________________________________ Treasurer, Secretary and
Frank L. Gazzola Director (principal
accounting and financial
officer)
* Director September 13, 2000
______________________________________
Steven A. Loehr
Director
______________________________________
Michael P. Reynolds
* Director September 13, 2000
______________________________________
Thomas J. Reynolds
/s/ Thomas P. Stienessen
*By: _________________________________
Thomas P. Stienessen,
Attorney-In-Fact
</TABLE>
II-4
<PAGE>
NORTHERN STAR FINANCIAL, INC.
EXHIBIT INDEX TO FORM SB-2 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Underwriting Agreement dated September 9, 2000 between Registrant and
Berthel Fisher & Company Financial Services, Inc.
1.2 Form of Selected Dealer Agreement
3.1 Amended and Restated Articles of Incorporation, as amended To date
(Incorporated by reference to Exhibit 2.1 to the Company's Registration
Statement on Form SB-1, Reg. No. 333-61655)*
3.2 Bylaws, as amended to date. (Incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form SB-1, Reg. No. 333-
61655)*
4.1 Form of Underwriter's Warrant
5 Opinion and Consent of Fredrikson & Byron, P.A.**
10.1 Lease Agreement between Northern Star Bank and Colonial Square Partners
relating to the space located at 1650 Madison Avenue, Mankato,
Minnesota (Incorporated by Reference to Exhibit 6.1 to the Company's
Registration Statement on Form SB-1, Reg. No. 333-61655)*
10.2 Employment Agreement between Northern Star Bank and Thomas P.
Stienessen (Incorporated by reference to Exhibit 6.2 to The Company's
Registration Statement on Form SB-1, Reg. No. 333-61655)*
10.3 1998 Equity Incentive Plan, including specimen of Incentive Stock
Option Agreement and Nonqualified Stock Option Agreement. (Incorporated
by reference to Exhibit 6.5 to the Company's Registration Statement on
Form SB-1, Reg. No. 333-61655)*
10.4 Form of Nonqualified Stock Option Agreement governing Options granted
to Organizers. (Incorporated by reference to Exhibit 6.6 to the
Company's Registration Statement on Form SB-1, Reg. No. 333-61655)*
11 Statement re: Computation of Earnings Per Share (included in Notes to
Financial Statements)
21 Subsidiaries of the Registrant:
</TABLE>
Name State of Organization
Northern Star Bank, Inc. Minnesota
<TABLE>
<C> <S>
23.1 Consent of Fredrikson & Byron, P.A. (see Exhibit 5)
23.2 Consent of Bertram Cooper & Co., LLP
24 Power of Attorney from Certain Directors**
</TABLE>
--------
* Incorporated by reference--Commission File No. 000-25231 unless otherwise
indicated.
** Filed previously.
