<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
REGISTRATION NO: 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NORTHERN STAR FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA 6021 41-1912467
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number Identification Number)
</TABLE>
1650 MADISON AVENUE
MANKATO, MINNESOTA 56001
(507) 387-2265
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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THOMAS STIENESSEN, CHIEF EXECUTIVE OFFICER
NORTHERN STAR FINANCIAL, INC.
1650 MADISON AVENUE
MANKATO, MINNESOTA 56001
(507) 387-2265
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
DANIEL A. YARANO, ESQ. STEVEN J. JOHNSON, ESQ.
JAMES H. SNELSON, ESQ. Lindquist & Vennum P.L.L.P.
Fredrikson & Byron, P.A. 4200 IDS Center
900 Second Avenue South, Suite 1100 80 South Eighth Street
Minneapolis, Minnesota 55402-3397 Minneapolis, MN 55402
(612) 347-7000 (612) 371-3548
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: UPON CONSUMMATION OF THE MERGER, AS DESCRIBED IN THIS REGISTRATION
STATEMENT.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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 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. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE(1) REGISTRATION FEE (2)
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Common stock, par value $.01 per share 891,397 shares Not Applicable $3,698,750 $976.47
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) The registration fee was calculated pursuant to Section 6 of the
Securities Act of 1933 (the "Securities Act") and Rule 457(f)(2)
thereunder, as 0.000264 multiplied by $3,698,750, the aggregate book
value as of April 30, 2000 of the shares of First Federal Holding
Company of Morris, Inc. which will be cancelled pursuant to the merger.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act 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> 2
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROXY STATEMENT/PROSPECTUS, SUBJECT TO COMPLETION
[NORTHERN STAR LOGO] [FIRST FEDERAL LOGO]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of Northern Star Financial, Inc. and First
Federal Holding Company of Morris, Inc. have unanimously approved a merger of
the two corporations with Northern Star Financial, Inc. as the surviving
corporation. As a result of the proposed merger, First Federal's shareholders
will become shareholders of Northern Star. Both boards of directors have
determined that the merger is fair and in the best interests of their
shareholders.
Northern Star shareholders are invited to attend Northern Star's
special meeting of shareholders to vote on a proposal to approve the merger and
the merger agreement. The date, time, and place of Northern Star's special
meeting are:
, 2000
, local time
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, Minnesota 56001
First Federal shareholders are invited to attend First Federal's special meeting
of shareholders to vote on a proposal to approve the merger and the merger
agreement. The date, time, and place of First Federal's special meeting are:
, 2000
, local time
First Federal Holding Company of Morris, Inc.
532 Atlantic Avenue
Morris, Minnesota 56267-0656
We cannot complete the merger without the approval of holders of a majority of
the outstanding shares of Northern Star common stock and the approval of holders
of a majority of the outstanding shares of First Federal common stock.
If the merger is completed, First Federal shareholders will receive
shares of Northern Star common stock for each share of First Federal
common stock held.
Northern Star's common stock is quoted on the OTC Bulletin Board under
the symbol "NSBK."
Your vote at the special meeting, in person or by proxy, is
very important. Even if you plan to attend the meeting, please mark, sign, and
return the enclosed proxy card promptly, so that your shares of common stock are
voted at the special meeting. If you do not return your proxy card, the effect
will be a vote against the merger unless you attend the meeting and vote for the
merger. To change your vote, send in a later-dated, signed proxy card to the
address on the proxy card. If you do attend the meeting, you can of course vote
your shares in person.
THIS PROXY STATEMENT/PROSPECTUS GIVES YOU DETAILED INFORMATION
ABOUT THE MERGER. YOU CAN ALSO OBTAIN INFORMATION ABOUT NORTHERN STAR FROM
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. PLEASE READ THIS
ENTIRE DOCUMENT CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 9.
We enthusiastically support the merger and urge you to vote
"FOR" the merger and the merger agreement.
THOMAS P. STIENESSEN
Chief Executive Officer and President
Northern Star Financial, Inc.
ALLAN R. THOREN
Chairman, Chief Executive Officer and President
First Federal Holding Company of Morris, Inc.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NORTHERN STAR SECURITIES TO BE
ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Proxy Statement/Prospectus dated , 2000, and first mailed to
shareholders on or about , 2000.
<PAGE> 3
NORTHERN STAR FINANCIAL, INC.
1650 MADISON AVENUE
MANKATO, MINNESOTA 56001
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2000
To the Shareholders of Northern Star Financial, Inc.:
A Special Meeting of the shareholders of Northern Star Financial, Inc.,
a Minnesota corporation ("Northern Star"), will be held at Northern Star's
corporate headquarters, located at 1650 Madison Avenue, Mankato, Minnesota, on
, , 2000, at , local time, for the following
purposes:
1. To consider and vote upon a proposal to approve (i) a Plan of
Merger and an Agreement and Plan of Reorganization dated as of
September 30, 1999 (the "Merger Agreement"), between Northern
Star and First Federal Holding Company of Morris, Inc. ("First
Federal"), and (ii) the merger of First Federal into Northern
Star, pursuant to which holders of First Federal common stock
will receive shares of Northern Star common stock based upon
the conversion ratio described in the accompanying Proxy
Statement/Prospectus.
2. To transact such other business as may properly come before
the Special Meeting or any adjournment or postponement,
including a proposal to adjourn or postpone the Special
Meeting.
The record date for the Special Meeting is the close of business on
, 2000. Only Northern Star shareholders of record at that time are
entitled to notice of and to vote at the Special Meeting or any adjournment or
postponement of it. To approve the merger, the holders of a majority of the
outstanding shares of Northern Star common stock must vote in favor of the
merger.
With respect to the proposal to approve the merger and the Merger
Agreement, Northern Star shareholders have a right to dissent and obtain payment
in cash for their shares by complying with the terms and procedures of Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act, copies of which
are included as Annex B to the Proxy Statement/Prospectus accompanying this
Notice.
The attached Proxy Statement/Prospectus contains more detailed
information regarding the merger and the Merger Agreement and includes a copy of
the Merger Agreement.
Your vote is important. Even if you expect to attend the Special
Meeting, please complete, sign, and date the enclosed proxy and return it
promptly in the enclosed postage-paid envelope. If no instructions are indicated
on your signed proxy, your shares will be voted "FOR" the merger. If you do not
return your proxy or vote in person, the effect is a vote against the merger.
You can revoke your proxy at any time before it is exercised by giving written
notice to the Secretary of Northern Star, or filing another proxy, or attending
the Special Meeting and voting in person.
The Northern Star board of directors unanimously recommends that you
vote FOR the merger.
BY ORDER OF THE BOARD OF DIRECTORS
FRANK L. GAZZOLA
Secretary
, 2000
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FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
532 ATLANTIC AVENUE, P.O. BOX 656
MORRIS, MINNESOTA 56267-0656
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2000
To the Shareholders of First Federal Holding Company of Morris, Inc.:
A Special Meeting of the shareholders of First Federal Holding Company
of Morris, Inc., a Minnesota corporation ("First Federal"), will be held at
First Federal's corporate headquarters, located at 532 Atlantic Avenue, Morris,
Minnesota, on , , 2000, at , local time, for the
following purposes:
1. To consider and vote upon a proposal to approve (i) a Plan of
Merger and an Agreement and Plan of Reorganization dated as of
September 30, 1999 (the "Merger Agreement"), between Northern
Star Financial, Inc. ("Northern Star") and First Federal, and
(ii) the merger of First Federal into Northern Star, pursuant
to which holders of First Federal common stock will receive
shares of Northern Star common stock based upon the conversion
ratio described in the accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before
the Special Meeting or any adjournment or postponement,
including a proposal to adjourn or postpone the Special
Meeting.
The record date for the Special Meeting is the close of business on
, 2000. Only First Federal shareholders of record at that time are
entitled to notice of and to vote at the Special Meeting or any adjournment or
postponement of it. To approve the merger, the holders of a majority of the
outstanding shares of First Federal common stock must vote in favor of the
merger.
With respect to the proposal to approve the merger and the Merger
Agreement, First Federal shareholders have a right to dissent and obtain payment
in cash for their shares by complying with the terms and procedures of Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act, copies of which
are included as Annex B to the Proxy Statement/Prospectus accompanying this
Notice.
The attached Proxy Statement/Prospectus contains more detailed
information regarding the merger and the Merger Agreement and includes a copy of
the Merger Agreement.
Your vote is important. Even if you expect to attend the Special
Meeting, please complete, sign, and date the enclosed proxy and return it
promptly in the enclosed postage-paid envelope. If no instructions are indicated
on your signed proxy, your shares will be voted "FOR" the merger. If you do not
return your proxy or vote in person, the effect is a vote against the merger.
You can revoke your proxy at any time before it is exercised by giving written
notice to the Secretary of First Federal, or filing another proxy, or attending
the Special Meeting and voting in person.
If the Merger Agreement is approved and the Merger is consummated, you
will be sent a letter of transmittal with instructions for surrendering your
certificates representing shares of First Federal common stock. Please do not
send your share certificates until you receive these materials.
The First Federal board of directors unanimously recommends that you
vote FOR the merger.
BY ORDER OF THE BOARD OF DIRECTORS
NEIL SCHMIDGALL
Secretary
, 2000
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TABLE OF CONTENTS
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Page
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................................................................................... 1
SUMMARY..................................................................................................................... 2
RISK FACTORS................................................................................................................ 9
FIRST FEDERAL SPECIAL MEETING...............................................................................................14
Date, Place, and Time....................................................................................................14
Purpose..................................................................................................................14
Record Date; Voting Rights; Quorum; Required Vote........................................................................14
Recommendation of the Board of Directors of First Federal................................................................15
Proxies, Revocation......................................................................................................15
NORTHERN STAR SPECIAL MEETING...............................................................................................16
Date, Place, and Time....................................................................................................16
Purpose..................................................................................................................16
Record Date; Voting Rights; Quorum; Required Vote........................................................................16
Recommendation of the Board of Directors of Northern Star................................................................17
Proxies, Revocation......................................................................................................17
Solicitation of Proxies..................................................................................................17
THE MERGER..................................................................................................................18
General..................................................................................................................18
Effective Time of the Merger.............................................................................................18
Background of the Merger.................................................................................................18
First Federal's Reasons for the Merger...................................................................................20
Northern Star's Reasons for the Merger...................................................................................20
Conversion of First Federal Common Stock in the Merger...................................................................23
Representations and Warranties...........................................................................................24
Certain Covenants by First Federal.......................................................................................25
Certain Covenants by Northern Star.......................................................................................25
Interests of First Federal's Officers and Directors in the Merger........................................................26
Conditions to Completing the Merger; Waiver..............................................................................26
Amendment and Termination of the Merger Agreement; Effects of Termination................................................27
Expenses and Fees........................................................................................................27
Restrictions on Resale of Northern Star Common Stock.....................................................................27
Accounting Treatment of the Merger.......................................................................................28
Certain Federal Income Tax Consequences..................................................................................28
Regulatory Requirements..................................................................................................29
Rights of Dissenting Shareholders........................................................................................29
MARKET FOR NORTHERN STAR COMMON STOCK.......................................................................................33
NORTHERN STAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................34
Overview.................................................................................................................34
Results of Operations....................................................................................................34
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NORTHERN STAR BUSINESS......................................................................................................45
Strategy.................................................................................................................45
Products and Services....................................................................................................46
Locations and Service Area...............................................................................................47
Marketing Focus..........................................................................................................47
Competition..............................................................................................................47
Employees................................................................................................................48
Properties...............................................................................................................48
Legal Proceedings........................................................................................................48
NORTHERN STAR MANAGEMENT....................................................................................................49
NORTHERN STAR EXECUTIVE COMPENSATION........................................................................................51
NORTHERN STAR SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT........................................................53
FIRST FEDERAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................54
Overview.................................................................................................................54
Results of Operations....................................................................................................54
FIRST FEDERAL BUSINESS......................................................................................................71
General..................................................................................................................71
Savings Bank Products and Services.......................................................................................71
Location and Service Area................................................................................................73
Competition..............................................................................................................73
Employees................................................................................................................73
Properties...............................................................................................................73
Legal Proceedings........................................................................................................73
FIRST FEDERAL MANAGEMENT....................................................................................................74
FIRST FEDERAL SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT........................................................75
FIRST FEDERAL EXECUTIVE COMPENSATION........................................................................................76
UNAUDITED PRO FORMA FINANCIAL INFORMATION...................................................................................77
PRO FORMA SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT............................................................81
</TABLE>
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SUPERVISION AND REGULATION..................................................................................................82
DESCRIPTION OF NORTHERN STAR CAPITAL STOCK..................................................................................88
COMPARISON OF RIGHTS OF NORTHERN STAR AND FIRST FEDERAL SHAREHOLDERS........................................................90
Classification, Removal, and Nomination of Directors.....................................................................90
Preferred Stock..........................................................................................................90
Special Meetings of Shareholders.........................................................................................91
Voting Rights; Shareholder Approvals.....................................................................................91
Cumulative Voting........................................................................................................91
Preemptive Rights........................................................................................................91
Amendment of the Articles of Incorporation...............................................................................91
Business Combinations and Control Share Acquisitions.....................................................................91
CERTAIN TRANSACTIONS AND RELATIONSHIPS BETWEEN NORTHERN STAR AND FIRST FEDERAL..............................................92
RECENT DEVELOPMENTS.........................................................................................................92
LEGAL MATTERS...............................................................................................................92
EXPERTS.....................................................................................................................92
WHERE YOU CAN FIND MORE INFORMATION.........................................................................................92
FINANCIAL STATEMENTS........................................................................................................F-1
LIST OF ANNEXES
ANNEX A - Agreement and Plan of Reorganization and Plan of Merger
ANNEX B - Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act, Regarding Rights of Dissenting Shareholders
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<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. PLEASE DESCRIBE THE MERGER.
A. In the merger, First Federal will merge into Northern Star and Northern
Star will be the surviving company.
Q. WHAT WILL FIRST FEDERAL SHAREHOLDERS RECEIVE IN THE MERGER?
A. If the merger is completed, First Federal shareholders will receive
[876.5] shares of Northern Star common stock for each share of First Federal
common stock owned. This amount was calculated by dividing the value of First
Federal as of [April 30, 2000], as determined by the parties, by an assumed
price of Northern Star common stock. For purposes of the merger, First Federal
and Northern Star assigned a value of [$9,360,039] to First Federal and a per
share price of [$10.50] to Northern Star's common stock. First Federal
shareholders will receive cash instead of any fractional Northern Star shares
that they would otherwise receive, based on the assumed [$10.50] per share price
of Northern Star's common stock.
If the merger is completed, former First Federal shareholders will own a total
of [891,397] shares of Northern Star common stock, representing [49%] of the
shares outstanding, assuming the sale of the minimum number of shares in
Northern Star's pending public offering, and [47%] of the shares outstanding
plus shares subject to outstanding options and warrants.
Q. WHAT WILL HAPPEN TO NORTHERN STAR'S STOCK IN THE MERGER?
A. Northern Star common stock will remain outstanding. The total number of
shares of Northern Star common stock outstanding will increase by [891,397] as a
result of the issuance of shares to First Federal's shareholders in the merger.
Q. WHAT DO I NEED TO DO NOW?
A. Please sign, date, and mail your proxy card in the enclosed return
envelope as soon as possible. You can also attend your respective Special
Meeting in person and vote, even though you may have previously returned your
proxy card. If you do not return your proxy or vote in person, it will have the
effect of a vote against the merger.
Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A. Just send in a later-dated, signed proxy card before your Special
Meeting to the address on the proxy card or attend the meeting in person and
vote.
Q. WILL I HAVE THE RIGHT TO HAVE MY SHARES APPRAISED IF I DISSENT FROM THE
MERGER?
A. Yes, you will have dissenter's rights. If you wish to exercise your
dissenter's rights you must not vote in favor of the merger and you must
strictly follow the requirements of Minnesota law, which are described in this
proxy statement under the caption "THE MERGER - Rights of Dissenting
Shareholders" on pages through .
Q. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A. Your broker will vote your shares only if you provide instructions on
how to vote. You should instruct your broker to vote your shares, following the
procedure your broker gives you. Without instructions, your broker will not vote
your shares.
Q. SHOULD FIRST FEDERAL SHAREHOLDERS SEND IN THEIR FIRST FEDERAL STOCK
CERTIFICATES NOW?
A. No. After the merger is completed, Northern Star will send you written
instructions that describe how to exchange your First Federal stock certificates
for Northern Star stock certificates.
Q. WILL FIRST FEDERAL SHAREHOLDERS OWE FEDERAL INCOME TAX ON WHAT THEY
RECEIVE IN THE MERGER?
A. Northern Star and First Federal expect that your exchange of First
Federal stock for Northern Star stock in the merger will be tax free for U.S.
federal tax purposes, except to the extent you receive cash for fractional
Northern Star shares. The tax consequences of the merger to you will depend on
your own situation. You should talk to your tax advisor.
Q. WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A. Northern Star and First Federal are working toward completing the merger
as quickly as possible. Approval for the merger is required from Northern Star
shareholders, First Federal shareholders and regulatory agencies. Northern Star
and First Federal hope to complete the merger shortly after the Special
Meetings, if regulatory approvals and other required matters are completed by
that time.
Q. WHOM SHOULD I CALL WITH QUESTIONS?
A. If you have any questions about the merger, please call Tom Stienessen
at (507) 344-3501.
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<PAGE> 9
SUMMARY
This summary highlights selected information from this Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should carefully read this
entire document and the documents to which you are referred. See "Where You Can
Find More Information" on page . Page references appear in parentheses to
direct you to a more complete description of some of the topics presented in
this summary.
THE COMPANIES
FIRST FEDERAL HOLDING COMPANY OF MORRIS, Inc.
532 Atlantic Avenue
Morris, Minnesota 56267-0656
First Federal Holding Company of Morris, Inc. is a savings and loan holding
company that was incorporated in Minnesota on December 16, 1991. First Federal
owns 90.29% of the common stock of First Federal Savings Bank, which provides
various financial services to communities of Morris, Benson, Breckenridge, and,
beginning in June 2000, Big Lake, Minnesota and the surrounding areas. These
financial services include mortgage, commercial and consumer lending, and
various deposit and savings plans. First Federal Savings Bank is the sole
shareholder of West Central Investments, Inc. ("Investments"), which provides
investment and brokerage services through the First Federal Savings Bank
locations. First Federal Savings Bank also holds 51% ownership interest in
Homeland Mortgage, LLC, which originates and services one to four family real
estate mortgage loans through offices in Morris, Minnesota.
NORTHERN STAR FINANCIAL, INC.
1650 Madison Avenue
Mankato, Minnesota 56001
Northern Star is a one-bank holding company providing commercial and retail
banking services through its operating subsidiary, Northern Star Bank. Northern
Star formed Northern Star Bank as a Minnesota start-up bank in January 1999.
Northern Star Bank serves customers and borrowers located primarily in Mankato,
Minnesota and the counties of Blue Earth and Nicollet. On July 15, 1999,
Northern Star acquired 49% of Homeland Mortgage, LLC, a loan servicer and
originator. Northern Star jointly operates Homeland with First Federal Savings
Bank, a majority-owned subsidiary of First Federal.
FIRST FEDERAL'S SPECIAL MEETING (PAGE )
The Special Meeting of First Federal's shareholders will be held on
, 2000, at , local time, at First Federal's corporate
headquarters, located at 532 Atlantic Avenue, Morris, Minnesota. At First
Federal's Special Meeting, First Federal's shareholders will be asked to approve
the merger and the merger agreement.
You can vote at First Federal's Special Meeting only if you owned shares of
First Federal common stock at the close of business on , 2000, which
was the record date.
The merger requires the approval of the holders of a majority of the outstanding
shares of First Federal common stock. If you do not return your proxy or vote in
person, it will have the effect of a vote against the merger.
On the record date, 1,017 shares of First Federal common stock were outstanding.
All of these shares were beneficially owned by directors and executive officers
of First Federal. Each share of First Federal common stock entitles the holder
to one vote.
NORTHERN STAR'S SPECIAL MEETING (PAGE )
The Special Meeting of Northern Star's shareholders will be held on
, 2000, at , local time, at Northern Star's corporate
headquarters, located at 1650 Madison Avenue, Mankato, Minnesota. At Northern
Star's Special Meeting, Northern Star's shareholders will be asked to approve
the merger and the merger agreement.
You can vote at Northern Star's Special Meeting only if you owned shares of
Northern Star common stock at the close of business on , 2000, which
was the record date.
The merger requires the approval of the holders of a majority of the outstanding
shares of Northern Star common stock. If you do not return your proxy or vote in
person, it will have the effect of a vote against the merger. Brokers who hold
your shares of Northern Star common stock as nominees cannot vote those shares
unless you instruct them to, following the procedure they give you.
On the record date, 425,600 shares of Northern Star common stock were
outstanding. Of these, 188,000 shares (approximately 44% of the shares entitled
to vote) were beneficially owned by directors and executive officers of
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<PAGE> 10
Northern Star (not including options held by such persons). Each share of
Northern Star common stock entitles the holder to one vote.
REVOKING PROXIES (PAGE )
First Federal shareholders can revoke a proxy previously given by giving written
notice to First Federal at the address on the proxy card, by filing another
proxy, or by attending First Federal's Special Meeting and voting in person.
Northern Star shareholders can revoke a proxy previously given by giving written
notice to Northern Star at the address on the proxy card, by filing another
proxy, or by attending Northern Star's Special Meeting and voting in person.
SUMMARY OF THE MERGER
The merger agreement (Annex A) is attached at the back of this Proxy
Statement/Prospectus. You are encouraged to read the merger agreement, as it is
the legal document that governs the merger.
In the proposed merger, First Federal will merge into Northern Star, and
Northern Star will be the surviving company. First Federal shareholders will
receive shares of Northern Star common stock in exchange for their shares of
First Federal common stock.
EFFECTIVE TIME OF THE MERGER (PAGE )
Northern Star and First Federal hope to complete the merger shortly after the
Special Meetings, if regulatory approvals and other required matters are
completed by that time.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE )
If the merger is completed, First Federal shareholders will receive [876.5]
shares of Northern Star common stock for each share of First Federal common
stock owned. This amount was calculated by dividing the value of First Federal
as of [April 30, 2000], as determined by the parties, by an assumed price of
Northern Star common stock. For purposes of the merger, First Federal and
Northern Star assigned a value of [$9,360,039] to First Federal and a per share
price of [$10.50] to Northern Star's common stock. Northern Star shareholders
will not receive any shares as a result of the merger.
Northern Star will not issue any fractional shares. Instead, First Federal
shareholders will receive cash for any fractional share of Northern Star common
stock owed, based on the assumed price of Northern Star common stock as
described above.
If the merger is completed, former First Federal shareholders will own a total
of [891,397] shares of Northern Star common stock, representing [49%] of the
shares outstanding, assuming the sale of the minimum number of shares in
Northern Star's pending public offering, and [47%] of the shares outstanding
plus shares subject to outstanding options and warrants.
Please do not send in your First Federal stock certificates until you receive
written instructions to do so, after the merger.
FEDERAL INCOME TAX CONSEQUENCES (PAGE )
Northern Star and First Federal expect that First Federal shareholders will not
recognize gain or loss for U.S. federal income tax purposes as a result of the
merger, except for any taxes payable by First Federal shareholders on their
receipt of cash instead of fractional Northern Star shares. As a condition to
completing the Merger, First Federal must receive a legal opinion from its
counsel regarding these tax consequences.
TAX MATTERS ARE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL
DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONTACT YOUR OWN TAX
ADVISOR TO UNDERSTAND FULLY HOW THE MERGER WILL AFFECT YOU, INCLUDING HOW ANY
STATE, LOCAL, OR FOREIGN TAX LAWS MAY APPLY TO YOU.
FIRST FEDERAL'S REASONS FOR THE MERGER (PAGE )
The First Federal board of directors endorsed the merger with Northern Star,
because the financial terms of the transaction compared favorably with other
recent transactions, the transaction would provide First Federal Savings Bank
with greater access to capital to fund growth and expansion, and the exchange of
shares provided First Federal's shareholders with the prospect of greater
liquidity and opportunity for capital appreciation.
INTERESTS OF FIRST FEDERAL'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE )
When considering the recommendation by First Federal's board to vote "for" the
merger, you should be aware that certain directors and executive officers of
First Federal have interests in the merger that are different from, and may
conflict with, your interests. First Federal's board was aware of these
interests and considered them in approving the merger.
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<PAGE> 11
After the merger, the following individuals will be elected to Northern Star's
board of directors: Lloyd Fehr, Kenneth Johnson, Neil Schmidgall, and Allan
Thoren. In addition, Northern Star will enter into an employment agreement with
Allan Thoren, who will be an officer of Northern Star after the merger.
REGULATORY APPROVALS (PAGE )
In order to complete the merger with First Federal, Northern Star must obtain
approval from the Federal Reserve Board. Northern Star has submitted an
application for the Federal Reserve Board's approval. While Northern Star
believes that the application will be approved, Northern Star cannot predict
whether it will obtain all required regulatory approvals for the merger, or
whether any approvals will include conditions that may be detrimental to
Northern Star or First Federal.
CONDITIONS TO THE MERGER (PAGE )
The merger will be completed only if certain conditions, including the
following, are met or waived:
- Each of the parties must perform in all material respects its obligations
under the merger agreement;
- Each of the parties' representations and warranties contained in the
merger agreement must continue to be true and correct in all material
respects;
- Northern Star's shareholders must approve the merger;
- First Federal's shareholders must approve the merger;
- All required governmental agencies must approve the merger;
- First Federal's counsel must provide a legal opinion that the merger will
be a tax-free reorganization for federal income tax purposes;
- Our and First Federal's independent accountants must provide opinions
that "pooling of interests" accounting treatment will be appropriate for
the merger;
- No material adverse change has occurred since June 30, 1999 (other than
changes in banking laws or regulations that affect the banking industry
generally or changes in the general level of interest rates);
- An employment agreement between First Federal's Chief Executive Officer
and Northern Star must be in effect; and
- Northern Star must complete the sale of at least 350,000 shares of its
common stock at a price not less than $10 per share in its pending public
offering.
TERMINATION OF THE MERGER AGREEMENT (PAGE )
Even if the shareholders approve the merger, Northern Star and First Federal can
agree at any time to terminate the merger agreement without completing the
merger. The merger agreement can also be terminated if:
- the merger is not completed by June 30, 2000;
- a court or other governmental authority prohibits the merger; or
- a material adverse change occurs in the business of Northern Star or
First Federal.
Northern Star can also terminate the merger agreement if First Federal receives
a more favorable acquisition proposal and Northern Star does not match the
proposal.
TERMINATION FEES AND EXPENSES (PAGE )
First Federal must pay Northern Star a termination fee equal to Northern Star's
reasonable expenses and fees incurred in connection with the merger plus
$200,000 in cash if First Federal receives a more favorable acquisition proposal
and Northern Star does not match the proposal.
FIRST FEDERAL CANNOT SOLICIT OTHER OFFERS (PAGE )
First Federal has agreed not to solicit or discuss with anyone (other than
Northern Star) an offer or possible offer to acquire all or a portion of First
Federal's assets or stock or to merge with First Federal.
RIGHTS OF DISSENTING SHAREHOLDERS (PAGE )
Under Minnesota law, Northern Star's and First Federal's shareholders have the
right to dissent from the merger and demand payment for the "fair value" of
their shares.
ACCOUNTING TREATMENT (PAGE )
Northern Star and First Federal expect the merger to qualify as a "pooling of
interests," which means that they
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<PAGE> 12
will treat the two companies as if they had always been combined for accounting
and financial reporting purposes.
PRICES OF NORTHERN STAR COMMON STOCK (PAGE )
Northern Star common stock is quoted on the OTC Bulletin Board. On September 29,
1999, the last trading day before the public announcement of the proposed
merger, the closing price of Northern Star common stock was $ . On
, 2000, Northern Star common stock closed at $ .
FLUCTUATIONS IN MARKET PRICE (PAGE )
The market value of Northern Star common stock is likely to change, both before
and after the Special Meetings and the merger. No one can accurately predict
what the market value will be at any particular time.
DIFFERENCES IN RIGHTS OF NORTHERN STAR's and First Federal's Shareholders
(Page )
First Federal and Northern Star were both incorporated under the laws of
Minnesota. The rights of First Federal's shareholders are governed by the
Articles of Incorporation and Bylaws of First Federal. After the merger, First
Federal's shareholders will become shareholders of Northern Star, and their
rights will be governed by Northern Star's Articles of Incorporation and Bylaws.
RECENT DEVELOPMENTS (PAGE )
Northern Star has commenced a public offering of a minimum of 500,000 and a
maximum of 1,000,000 shares of its common stock at a price of $10.50 per share.
Northern Star has filed a registration statement relating to the offering with
the Securities and Exchange Commission. The registration statement was declared
effective on March 28, 2000, and the offering is scheduled to terminate on June
26, 2000. Northern Star may in its discretion extend the offering for up to 90
days.
FORWARD-LOOKING STATEMENTS (PAGE )
This document (and documents referred to in this document) includes various
forward-looking statements about Northern Star, First Federal, and the combined
company that are subject to risks and uncertainties. Forward-looking statements
include information concerning future results of operations of Northern Star,
First Federal, and the combined company. Also, statements that use the words
"anticipates," "believes," "estimates," "expects," "intends," "plans," "should,"
"will," or similar expressions are forward-looking statements. Many factors,
some of which are discussed elsewhere in this document and in documents to which
you are referred, could affect the future financial results of Northern Star,
First Federal, and the combined company. These factors could cause actual
results to differ materially from those expressed in forward-looking statements
contained in this document or related documents. These factors include adverse
changes in economic conditions and in the markets served by Northern Star and
First Federal and a significant delay in the completion of the merger.
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<PAGE> 13
NORTHERN STAR SUMMARY FINANCIAL DATA
The following table summarizes certain historical financial data of Northern
Star and its subsidiary on a consolidated basis as of and for the six months
ending December 31, 1999 and as of and for the fiscal years ending June 30, 1998
and 1999. You should read this table in conjunction with Northern Star's
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------------
1999 1999 1998
-------------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF INCOME:
Interest income............................ $ 420,510 $ 154,875 --
Interest expense........................... 155,728 40,012 --
------------ -----------
Net interest income........................ 264,782 114,863 --
Provision for loan losses.................. 67,500 56,250 --
Other non-interest income.................. 39,860 42,449 --
Non-interest expense....................... 605,285 594,734 --
------------ -----------
Income (loss) before income tax expense.... (368,143) (493,672) --
Income tax expense (benefit)............... -- -- --
------------ ----------- -------
Net income (loss).......................... $ (368,143) $ (493,672) $(3,959)
============ =========== =======
BALANCE SHEET:
Assets..................................... $ 16,668,493 $ 9,635,608 $14,806
Allowance for loan losses.................. 123,750 56,250 --
Deposits................................... 13,138,387 6,164,569 --
Stockholders' equity....................... 3,070,079 3,423,702 (3,859)
PER SHARE DATA:
Net income (loss)-- basic.................. $ (0.86) $ (1.60) --
Net income (loss)-- diluted................ (0.86) (1.60) --
Book value................................. 7.12 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................... (6.36)% (22.61)% --
Return on average stockholders' equity..... (22.82)% (69.87)% --
Net interest margin........................ 5.01% 6.15% --
Tier 1 leverage ratio...................... 19.60% 36.50% --
Tier 1 capital to risk-weighted assets..... 22.90% 43.30% --
Total capital to risk-weighted assets...... 24.02% 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... 1.37% 1.00% --
</TABLE>
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<PAGE> 14
FIRST FEDERAL SUMMARY FINANCIAL DATA
The following table summarizes certain historical financial data of First
Federal and its subsidiaries on a consolidated basis as of and for the quarter
ending December 31, 1999 and as of and for the fiscal years ending September 30,
1998 and 1999. You should read this table in conjunction with First Federal's
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------
1999 1999 1998
------------- ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME:
Interest income............................. $ 1,080 $ 4,337 $ 4,422
Interest expense............................ 559 2,203 2,260
--------- ---------- ----------
Net interest income......................... 521 2,134 2,162
Provision for credit losses................. -- 2 12
Non-interest income......................... 181 536 513
Non-interest expense........................ 707 2,078 1,771
--------- ---------- ----------
Income (loss) before income tax & minority
interest.................................... (5) 590 892
Income tax expense.......................... 9 220 301
--------- ---------- ----------
Net income (loss) before minority interest.. (14) 370 591
Minority interest........................... (35) 1 54
--------- ---------- ----------
Net income (loss)........................... $ 21 $ 369 $ 537
========= ========== ==========
BALANCE SHEET:
Assets...................................... $ 61,060 $ 57,566 $ 57,364
Loans Receivable, net....................... 45,943 45,163 40,421
Savings deposits............................ 52,528 48,484 49,928
Stockholders' equity........................ 3,674 3,666 3,320
PER SHARE DATA:
Net income-- basic.......................... $ 20.47 $ 362.68 $ 522.98
Net income-- diluted........................ 20.47 362.68 522.98
Book value.................................. 3,612.81 3,604.93 3,264.68
OTHER DATA:
Average shares outstanding-- basic.......... 1,017 1,017 1,026
Average shares outstanding-- diluted........ 1,017 1,017 1,026
FINANCIAL RATIOS:
Return on average assets.................... 0.14% 0.64% 0.95%
Return on average equity.................... 2.12% 10.56% 17.13%
Equity to asset ratio....................... 6.73% 6.07% 5.59%
Net interest rate spread.................... 3.80% 3.91% 3.73%
Net yield on average interest-bearing
assets...................................... 3.83% 4.01% 3.98%
Tier 1 leverage ratio....................... 8.43 8.70 8.15
Tier 1 capital to risk-weighted assets...... 10.49 10.46 10.77
Total capital to risk-weighted assets....... 11.53 11.53 11.89
ASSET QUALITY RATIOS:
Non-performing loans to total assets........ 0.05% 0.29% 0.64%
Non-performing loans to total loans......... 0.06% 0.36% 0.85%
Allowance for loan losses to total loans.... 1.10% 1.12% 1.10%
Allowance for loan losses to nonperforming
loans....................................... 1,750.00% 315.57% 129.86%
</TABLE>
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<PAGE> 15
SUMMARY PRO FORMA FINANCIAL DATA
The following table summarizes certain unaudited pro forma condensed
combined financial information to show you what Northern Star and First Federal
would have looked like had they been combined as of and for the six months ended
December 31, 1999, as well as for the year ended June 30, 1999. Because Northern
Star had no operations before 1999 and its activities were limited solely to
organizational matters, comparative pro forma condensed combined financial
information for prior periods is not material and is not presented below.
Please note that Northern Star and First Federal may be unable to complete
the proposed merger. The merger is subject to various conditions, any of which
may fail to be satisfied.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
DECEMBER 31, YEAR ENDED
STATEMENT OF INCOME: 1999 JUNE 30, 1999
----------------- ------------------
<S> <C> <C>
Interest income.............................. $ 2,507,768 $4,570,286
Interest expense............................. 1,248,788 2,276,066
----------- ----------
Net interest income.......................... 1,258,980 2,294,220
Provision for loan losses.................... 67,500 61,250
Non-interest income.......................... 401,597 549,767
Non-interest expense......................... 1,772,643 2,242,490
----------- ----------
Income (loss) before income tax & minority
interest..................................... (179,566) 540,247
Income tax expense (benefit)................. -- 194,485
----------- ----------
Net income (loss) before minority interest... (179,566) 345,762
Minority interest............................ 15,913 45,115
----------- ----------
Net income (loss)............................ $ 195,479 $ 300,647
BALANCE SHEET:
Assets....................................... $77,516,790 --
Loans Receivable, Net........................ 54,797,701 --
Deposits..................................... 65,666,587 --
Stockholders' equity......................... 6,704,311 --
PER SHARE DATA:
Net income (loss)-- basic.................... $ (0.15) $ 0.26
Net income (loss)-- diluted.................. (0.15) 0.26
Book value................................... 5.17 --
OTHER DATA:
Average shares outstanding-- basic........... 1,296,159 1,178,390
Average shares outstanding-- diluted......... 1,296,159 1,178,390
</TABLE>
-8-
<PAGE> 16
RISK FACTORS
An investment in Northern Star 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 Northern Star common stock is not a deposit or
savings account and is not insured or guaranteed by the FDIC or any other
governmental agency.
NORTHERN STAR HAS A LIMITED OPERATING HISTORY AND HAS INCURRED AND EXPECTS TO
INCUR OPERATING LOSSES.
Northern Star just recently commenced banking operations in January 1999.
Since that time, Northern Star has incurred a net loss of $493,672 for fiscal
year ended June 30, 1999 and a net loss of $368,143 for the six months ended
December 31, 1999. Northern Star believes that it will continue to incur losses
at least through its third quarter ending March 31, 2000. Northern Star cannot
assure you that it will attract deposits and develop a loan portfolio sufficient
to become profitable in 2000 or at any time in the future.
NORTHERN STAR MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT ITS GROWTH STRATEGY.
In order to achieve and maintain profitability, Northern Star must
aggressively grow its business. Northern Star intends to use a portion of the
proceeds from its pending offering to support anticipated increases in its loan
portfolio and investments and expansion. Northern Star's ability to grow depends
in part on its 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,
Northern Star must also maintain cost controls and asset quality throughout its
operations. If Northern Star is unable to effectively implement its growth
strategies, its business may be adversely affected.
CHANGES IN INTEREST RATES MAY ADVERSELY IMPACT NORTHERN STAR'S PROFITABILITY.
Northern Star's net income depends principally upon its 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 Northern Star's net income.
Northern Star attempts 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 Northern Star's financial
performance.
First Federal is subject to similar risks relating to changes in interest
rates, and if the proposed merger with First Federal is completed, Northern
Star's combined financial performance will continue to be sensitive to rapid
interest rate changes.
NORTHERN STAR'S EXPOSURE TO CREDIT RISK IS INCREASED DUE TO ITS FOCUS ON
COMMERCIAL LENDING.
Northern Star Bank makes various types of loans, including commercial,
consumer, residential mortgage and construction loans, and incurs risk in making
these loans. These risks include interest rate changes over the time period in
which loans may be repaid, risks resulting from changes in the 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.
Northern Star Bank's 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
9
<PAGE> 17
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 Northern Star's 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 results, any of
which may impair a borrower's ability to repay a loan. Because Northern Star
Bank's 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 NORTHERN STAR'S PRIMARY MARKET MAY HAVE AN
ADVERSE IMPACT.
Substantially all Northern Star's business is with customers located within
Mankato, Minnesota and the counties of Blue Earth and Nicollet. The businesses
to whom Northern Star Bank makes loans are small and medium-sized businesses and
are dependent upon the regional economy. Adverse economic and business
conditions in the region could affect Northern Star Bank's borrowers, their
ability to repay their loans and consequently Northern Star's financial
condition and performance.
A WEAK AGRICULTURAL ECONOMY MAY HAVE AN ADVERSE EFFECT ON FIRST FEDERAL.
Substantially all First Federal Savings Bank's business is with customers
located in the Minnesota counties of Stevens, Swift and Wilkin, a predominantly
rural area of west central Minnesota heavily dependent upon the agricultural
economy. A weakness in the local agricultural economy, including a weakness
caused by low commodities prices, could affect borrowers, their ability to repay
their loans and consequently First Federal Savings Bank's financial condition
and performance.
ALLOWANCES FOR LOAN LOSSES MAY BE INADEQUATE TO ABSORB ACTUAL FUTURE LOAN
LOSSES.
Northern Star believes that its allowance for loan losses is adequate to
absorb any inherent losses in Northern Star Bank's loan portfolio. Management's
estimates are used to determine the allowance that is considered adequate to
absorb losses in the 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 Northern Star's control, actual loan losses could increase
significantly. As a result, such loan losses could exceed current loan allowance
estimates.
First Federal is subject to similar risks related to its allowance for loan
losses, and if the proposed merger with First Federal is completed, the combined
financial performance of Northern Star and First Federal could be adversely
affected if loan losses exceed current loan allowance estimates.
Because Northern Star has a short operating history, it does not have a
seasoned loan portfolio and the ratio of the loan allowance for loan losses to
total loans, will likely be increased as its 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 the allowance for loan
losses. Regulatory agencies may require Northern Star to increase its 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 Northern Star's operating
results. Northern Star 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 Northern Star's net income, or an
increase in its operating losses, and possibly a decrease in its capital.
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<PAGE> 18
GOVERNMENT REGULATIONS SIGNIFICANTLY AFFECT NORTHERN STAR'S AND FIRST FEDERAL'S
BUSINESSES.
As a bank holding company, Northern Star is primarily regulated by the
Board of Governors of the Federal Reserve System. Northern Star 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 Northern Star Bank's operation including:
- adequate capital and financial conditions;
- permissible types and amounts of extensions of credit and investments;
- 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 Northern Star Bank and by Northern Star. Northern Star also
undergoes periodic examinations and inspections by one or more regulatory
agencies. Following such examinations, Northern Star may be required, among
other things, to change its asset valuations or the amounts of required loan
loss allowance or to restrict its operations. Those actions would result from
the regulators' judgments based on information available to them at the time of
their examination.
Government regulations also affect First Federal's business. First Federal
Savings Bank is primarily regulated by the Office of Thrift Supervision, which
has discretion and power to prevent or remedy unsafe or unsound practices or
violations of law by First Federal Savings Bank. If the proposed merger with
First Federal is completed, the combined operations may be affected by actions
of the Office of Thrift Supervision.
Northern Star's and First Federal's operations 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 Northern
Star and First Federal 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 Northern Star.
NORTHERN STAR IS DEPENDENT UPON MEMBERS OF ITS MANAGEMENT.
Northern Star's future success depends, in large part, upon the continuing
contributions of key management personnel, including its president, Thomas
Stienessen. Mr. Stienessen has been critical to Northern Star's formation and
operation and Northern Star believes that his leadership is critical to
executing the company's business plan and growing its business. Mr. Stienessen
has an employment agreement with Northern Star.
Upon completing the proposed merger with First Federal, the success of the
combined business will also depend largely on the efforts of Allan Thoren, who
has served as First Federal Savings Bank's president and chief executive officer
since 1990. Northern Star anticipates that Mr. Thoren will become its vice
chairman and chief operating officer after the merger. Northern Star will have
an employment agreement with Mr. Thoren, effective upon completing the merger.
NORTHERN STAR MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH OTHER FINANCIAL
INSTITUTIONS, EVEN IF THE PROPOSED MERGER WITH FIRST FEDERAL IS COMPLETED.
Northern Star faces 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 competitors have advantages including greater financial resources, a wider
geographic presence or more accessible
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<PAGE> 19
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 that Northern Star
originates and the interest rate received on these loans.
In attracting deposits, Northern Star Bank competes 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, which could
decrease the deposits that Northern Star Bank attracts or require it to increase
rates to attract new deposits. Increased deposit competition could increase
Northern Star Bank's cost of funds and adversely affect its ability to generate
the funds necessary for lending operations.
FIRST FEDERAL WILL INCUR SUBSTANTIAL STARTUP COSTS WITH ITS NEW BRANCH IN BIG
LAKE, MINNESOTA.
First Federal Savings Bank has recently received regulatory approval to
establish a new branch office in Big Lake, Minnesota (the "Big Lake Office").
First Federal Savings Bank has acquired a commercial building site and will
incur substantial expenses remodeling the building that currently occupies the
site and adding the equipment necessary to provide banking services, including a
vault, safety deposit vault, security devices, drive up banking facilities, data
processing equipment and furnishings. In addition, the Big Lake Office will
require staff, training and supervision, beginning several weeks before the
office can be opened for business. First Federal Savings Bank will incur
substantial startup costs, and there is no assurance when or whether the Big
Lake Office will attract deposits and develop a loan portfolio sufficient to
become profitable.
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 Northern Star. Northern
Star has 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
Northern Star's beliefs regarding its market, strategy, events or developments
that it expects or anticipates will occur in the future, including those
expected as a result of the proposed merger with First Federal found under the
Sections entitled "The Merger - Northern Star's Reasons for the Merger,"
"Northern Star Financial, Inc. - Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Northern Star Financial,
Inc. - Business - Strategy, Products and Services, 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).
- Competitive pricing and other pressures on loans and deposits and
Northern Star Bank's ability to maintain market shares in its trade
areas.
- The inherent uncertainties relating to Year 2000 compliance, including
compliance by Northern Star Bank's vendors, suppliers, and loan
customers.
- A downturn in local economic conditions in Northern Star's primary
markets, including the markets served by First Federal.
-12-
<PAGE> 20
- The failure to achieve any of the economic benefits from the proposed
merger with First Federal, as a result of an increase in the costs to
complete the merger and the failure of First Federal or Northern Star
to achieve their anticipated results of operations.
- Those risks identified under the Section entitled "Risk Factors."
- Other risks and uncertainties as detailed from time to time in
Northern Star's filings with the Securities and Exchange Commission.
-13-
<PAGE> 21
FIRST FEDERAL SPECIAL MEETING
Northern Star and First Federal are sending this Proxy Statement/Prospectus
to First Federal's shareholders in connection with the solicitation by the board
of directors of First Federal of proxies to be voted at the First Federal
Special Meeting. This Proxy Statement/Prospectus is first being mailed to
shareholders of First Federal on or about ____________, 2000.
DATE, PLACE, AND TIME
First Federal's Special Meeting will be held at _________, local time, on
__________, 2000, at First Federal's corporate headquarters, located at 532
Atlantic Avenue, Morris, Minnesota.
PURPOSE
At the Special Meeting, First Federal's shareholders will be asked to vote
on a proposal to approve the Plan of Merger and the Agreement and Plan of
Reorganization dated as of September 30, 1999 (for convenience, referred to as
the "merger agreement") attached to this Proxy Statement/Prospectus as Annex A.
That document provides for the merger of First Federal with and into Northern
Star, with Northern Star as the surviving company. Other terms and provisions
related to the merger are contained in the merger agreement.
First Federal shareholders may also be asked to vote upon a proposal to
adjourn or postpone the Special Meeting, in order to (among other things) allow
additional time for the companies to solicit additional votes to approve the
merger. If any matters other than approval of the merger are properly presented
for consideration at the Special Meeting, the persons named by shareholders in
the enclosed form of proxy will have discretion, as proxies, to vote on those
matters.
Under Minnesota law, shareholders can consider at the Special Meeting only
the matters contained in the notice for the Special Meeting.
RECORD DATE; VOTING RIGHTS; QUORUM; REQUIRED VOTE
The close of business on ____________, 2000 is the record date for
determining the holders of First Federal common stock who are entitled to
receive notice of and to vote at the Special Meeting or at any adjournment or
postponement of the Special Meeting.
First Federal has only one class of capital stock outstanding, which is
common stock, par value $100 per share. Each holder of First Federal common
stock outstanding on the record date is entitled to one vote for each share
held. The holders of a majority of the outstanding shares of First Federal
common stock entitled to vote must be present at the Special Meeting, in person
or by proxy, to constitute a quorum to transact business.
The holders of a majority of the outstanding shares of First Federal common
stock as of the record date must vote in favor of the merger in order to approve
the merger. On the record date, 1,017 shares of First Federal common stock were
outstanding, held by seven holders of record.
Abstentions will be treated as shares present in determining whether First
Federal has a quorum for the Special Meeting, but abstentions will have the same
effect as a vote against approval of the merger.
The board of directors of First Federal has unanimously approved the
merger. The board of directors of Northern Star has approved the merger and the
issuance of shares of Northern Star common stock in the merger. See "The Merger
- - Background of the Merger."
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RECOMMENDATION OF THE BOARD OF DIRECTORS OF FIRST FEDERAL
THE BOARD OF DIRECTORS OF FIRST FEDERAL RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE MERGER AND ADOPTION OF THE MERGER AGREEMENT. See
"The Merger - Interests of First Federal's Directors and Officers in the Merger"
for a discussion of conflicts of interest that certain directors and members of
management may have in connection with the merger.
PROXIES; REVOCATION
A green proxy card is enclosed for use by First Federal shareholders. The
board of directors of First Federal requests that shareholders SIGN AND RETURN
THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is required if mailed
within the United States. If you have questions or requests for assistance in
completing and submitting proxy cards, please contact Allan Thoren at the
following address and telephone number:
First Federal Holding Company of Morris, Inc.
532 Atlantic Avenue
P.O. Box 656
Morris, MN 56267
Telephone: (320) 589-3454
All properly executed proxies that are not revoked will be voted at the
Special Meeting as instructed on those proxies. Proxies containing no
instructions will be voted in favor of the merger. A shareholder who executes
and returns a proxy may revoke it at any time before it is voted, but only by
executing and returning a proxy bearing a later date, by giving written notice
of revocation to an officer of First Federal, or by attending the Special
Meeting and voting in person.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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<PAGE> 23
NORTHERN STAR SPECIAL MEETING
Northern Star and First Federal are sending this Proxy
Statement/Prospectus to Northern Star's shareholders in connection with the
solicitation by the board of directors of Northern Star of proxies to be voted
at the Northern Star Special Meeting. This Proxy Statement/Prospectus is first
being mailed to shareholders of Northern Star on or about ____________, 2000.
DATE, PLACE, AND TIME
Northern Star's Special Meeting will be held at _________, local time, on
__________, 2000, at Northern Star's corporate headquarters, located at 1650
Madison Avenue, Mankato, Minnesota.
PURPOSE
At the Special Meeting, Northern Star's shareholders will be asked to vote
on a proposal to approve the Plan of Merger and the Agreement and Plan of
Reorganization dated as of September 30, 1999 (for convenience, referred to as
the "merger agreement") attached to this Proxy Statement/Prospectus as Annex A.
That document provides for the merger of First Federal with and into Northern
Star, with Northern Star as the surviving company. Other terms and provisions
related to the merger are contained in the merger agreement.
Northern Star shareholders may also be asked to vote upon a proposal to
adjourn or postpone the Special Meeting, in order to (among other things) allow
additional time for the companies to solicit additional votes to approve the
merger. If any matters other than approval of the merger are properly presented
for consideration at the Special Meeting, the persons named by shareholders in
the enclosed form of proxy will have discretion, as proxies, to vote on those
matters.
Under Minnesota law, shareholders can consider at the Special Meeting only
the matters contained in the notice for the Special Meeting.
RECORD DATE; VOTING RIGHTS; QUORUM; REQUIRED VOTE
The close of business on ____________, 2000 is the record date for
determining the holders of Northern Star common stock who are entitled to
receive notice of and to vote at the Special Meeting or at any adjournment or
postponement of the Special Meeting.
Northern Star has only one class of capital stock outstanding, which is
common stock, par value $.01 per share. Each holder of Northern Star common
stock outstanding on the record date is entitled to one vote for each share
held. The holders of a majority of the outstanding shares of Northern Star
common stock entitled to vote must be present at the Special Meeting, in person
or by proxy, to constitute a quorum to transact business.
The holders of a majority of the outstanding shares of Northern Star common
stock as of the record date must vote in favor of the merger in order to approve
the merger. On the record date, [425,600] shares of Northern Star common stock
were outstanding, held by approximately [49] holders of record.
Abstentions will be treated as shares present in determining whether
Northern Star has a quorum for the Special Meeting, but abstentions will have
the same effect as a vote against approval of the merger.
The board of directors of Northern Star has unanimously approved the merger
and the issuance of shares of Northern Star common stock in the merger. See "The
Merger - Background of the Merger."
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<PAGE> 24
RECOMMENDATION OF THE BOARD OF DIRECTORS OF NORTHERN STAR
THE BOARD OF DIRECTORS OF NORTHERN STAR RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE MERGER AND ADOPTION OF THE MERGER AGREEMENT.
PROXIES; REVOCATION
A blue proxy card is enclosed for use by Northern Star shareholders. The
board of directors of Northern Star requests that shareholders SIGN AND RETURN
THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is required if mailed
within the United States. If you have questions or requests for assistance in
completing and submitting proxy cards, please contact Tom Stienessen at the
following address and telephone number:
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, MN 56001
Telephone: (507) 344-3501
All properly executed proxies that are not revoked will be voted at the
Special Meeting as instructed on those proxies. Proxies containing no
instructions will be voted in favor of the merger. A shareholder who executes
and returns a proxy may revoke it at any time before it is voted, but only by
executing and returning a proxy bearing a later date, by giving written notice
of revocation to an officer of Northern Star, or by attending the Special
Meeting and voting in person.
SOLICITATION OF PROXIES
In addition to soliciting proxies by mail, Northern Star's directors,
officers, and employees may, if they do not receive extra compensation for doing
so, solicit proxies personally or by telephone or fax. Northern Star intends to
reimburse brokerage houses and other custodians, nominees, and fiduciaries for
reasonable out-of-pocket expenses incurred in forwarding copies of solicitation
material to beneficial owners of Northern Star common stock held of record by
those persons.
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<PAGE> 25
THE MERGER
The following summary of the merger and certain terms of the merger
agreement and related matters is not complete and is qualified in its entirety
by reference to the merger agreement, which is attached as Annex A and is
incorporated in this document by reference.
GENERAL
Northern Star and First Federal have entered into the merger agreement,
which provides that First Federal will be merged with and into Northern Star,
and Northern Star will be the surviving company. Each outstanding share of First
Federal common stock will be converted at the Effective Time (as defined below)
into the right to receive 876.5 shares of Northern Star common stock. For a more
detailed description of how the First Federal common stock converts into
Northern Star common stock in the merger, see "The Merger - Conversion of First
Federal Common Stock in the Merger."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after the conditions to consummation of the merger
described below have been satisfied or waived, and unless the merger agreement
has been terminated as provided below, a certificate of merger will be filed
with the Secretary of State of the State of Minnesota, at which time the merger
will become effective (the "Effective Time"). It is presently contemplated that
the Effective Time will be as soon as practicable after approval of the merger
at First Federal's and Northern Star's Special Meetings. See "The Merger -
Conditions to the Merger; Waiver."
BACKGROUND OF THE MERGER
The terms of the merger agreement are the result of arm's length
negotiations between Northern Star's representatives and representatives of
First Federal. The following briefly discusses the background of these
negotiations and related matters.
Over the last several years the financial services industry has become
increasingly competitive, with many financial institutions expanding their size
and market area through consolidation. This trend has accelerated with a number
of mergers announced whose effects would continue to increase the competition in
the banking and the financial services industry in First Federal's marketplace.
As part of its effort to remain competitive within this environment, First
Federal's management and board of directors have continually analyzed various
strategic options available to First Federal, including the following:
1. remaining as an independent financial institution via operational
improvements, internal growth, continued investment in technology, and
shareholder capital infusions.
2. pursuing growth through a potential merger-of-equals transaction; and
3. entering into a business combination with a larger entity.
In spring and early summer of 1997, First Federal's board of directors
contemplated First Federal's role in this increasingly competitive environment
and the internal operating efficiencies and investments that would have to take
place in order to continue to remain competitive. After discussions of various
alternatives for First Federal, including a continuation of, or changes in,
First Federal's own operations and programs, various types of affiliations with
other companies, a stock sale program and other matters to enhance shareholder
value, First Federal's board of directors determined it was appropriate to
expand the scope of its review of the strategic options available to First
Federal to maximize shareholder value and, accordingly authorized management to
explore opportunities for pursuing growth through a potential merger-of-equals
transaction.
This authorization led to discussions with Northern Star's board of
directors.
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<PAGE> 26
Thomas Stienessen, Northern Star's President, and Allan Thoren, the
President of First Federal Savings Bank became acquainted in 1996 as both
participated with a consortium of bankers placing a bid for branch office
locations that were being spun off by a larger regional bank. In addition, the
two individuals served as industry leaders active in a banking trade
association. The possibility of a strategic business relationship was first
discussed in very preliminary terms in conversations between Mr. Stienessen and
Mr. Thoren in the summer of 1997 at a trade association meeting in St. Cloud,
Minnesota while Mr. Stienessen served as the Chief Executive Officer and
President of SGL, Inc., a holding company for the Family Bank.
Mr. Stienessen resigned his positions with the SGL organization in December
1997 and organized Northern Star. During the period between December 1997 and
the summer of 1998, Mr. Stienessen and Mr. Thoren engaged in various telephone
conversations regarding the feasibility of a business combination with Northern
Star and First Federal.
Messrs. Stienessen, Frank Gazzola and Thomas Reynolds as organizers of
Northern Star Bank, met with the members of First Federal's board of directors
in New Ulm, Minnesota in late summer of 1998 to discuss a potential strategic
alliance.
Subsequently, after review and discussion, Mr. Stienessen advised Mr.
Thoren that Northern Star was not interested in pursuing an alliance at that
date, but might be willing to entertain proposals in the future. No agreement
was reached and no other proposal was submitted.
In the Fall of 1998, Mr. Thoren met with Mr. Stienessen to review the
construction of Northern Star Bank in Mankato, Minnesota. Discussions between
the individuals regarding a possible business combination resurfaced. From
January 1999 through April 1999, Mr. Stienessen conducted a due diligence
investigation and explored the possibility of a business combination with Mr.
Thoren. The board of directors of both organizations concluded that a joint
venture in First Federal's affiliated mortgage banking company would be in their
mutual interest and would serve as a suitable format to conduct further
discussions regarding a potential combination of banking organizations. Northern
Star filed with the Federal Reserve Bank of Minneapolis, Minnesota a Notice for
Prior Approval to invest in a joint venture with First Federal. The Notice for
Prior Approval was approved on July 2, 1999 and Northern Star's investment in
Homeland Mortgage, LLC was made on July 15, 1999.
Detailed discussions and negotiations regarding a possible merger
between the two banking organizations and due diligence investigations continued
following the commencement of the joint venture and resulted in the execution of
an Agreement and Plan of Reorganization on September 30, 1999. Such discussions
and negotiations included an analysis of an appropriate rate of exchange of the
stock of the respective organizations.
Representatives from Northern Star met several times with the
representatives of the board of directors of First Federal to discuss a
combination of First Federal and Northern Star prior to signing the merger
agreement.
In negotiating the final exchange ratio, First Federal and Northern
Star considered the relative book value and earnings of each entity, as well as
certain special factors relating to historical performance, market growth
potential, ancillary businesses and future growth plans. First Federal and
Northern Star did not follow a precise formula in the negotiation of the final
exchange ratio, which was based on a determination by management of each
institution that the exchange ratio fairly represented equivalent value for the
stockholders of each institution participating in the merger.
To assist the board of directors of First Federal with its deliberations on
whether to approve and recommend the merger, the board of directors retained
counsel to help in negotiating the terms of the merger agreement. Likewise, the
board of directors of Northern Star retained the services of counsel to review
the proposed agreement.
The board of directors of First Federal and its counsel met on September
28, 1999, to discuss the merger agreement and the merger. Prior to that meeting,
the board received a special board package that contained a draft of the
negotiated merger agreement. After review of the matters considered by the board
of directors, the board of directors of First Federal unanimously approved the
merger agreement and authorized the President and Chief Executive Officer of
First Federal Savings Bank and the Chairman of First Federal to take the
appropriate actions necessary to execute the merger agreement.
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<PAGE> 27
The board of directors of Northern Star met on September 15, 1999, to
discuss the merger agreement and related agreements. After review of the matters
relating to the merger, the board of directors of Northern Star unanimously
approved the merger agreement and authorized the President and Chief Executive
Officer of Northern Star to take the appropriate actions necessary to execute
the merger agreement in substantially the form approved by the board.
The merger agreement was executed as of September 30, 1999.
FIRST FEDERAL'S REASONS FOR THE MERGER
The First Federal board of directors endorsed the merger with Northern Star
after considering the following factors:
- The effect on shareholder value of First Federal remaining an
independent entity. The board of directors considered the current and
prospective economic environment facing financial institutions and the
increased competition faced by community banks in general from large
bank holding companies and other financial institutions.
- A review of (a) the business, operations, earnings and financial
condition, including capital levels and asset quality, of Northern
Star on both an historical and prospective basis; (b) the business fit
of First Federal and Northern Star; (c) Northern Star's decentralized
style of management, which would enable First Federal to maintain its
name, its community bank image, and its responsiveness to its
customers; and (d) the operating philosophy, competence, experience
and integrity of First Federal and its management.
- The adequacy of the merger consideration. A comparison of the
financial terms of recent bank acquisitions indicated that the
financial terms of the merger agreement compared favorably with other
recent transactions.
- The terms of the merger agreement, including the per share exchange
rate and the ability of First Federal to terminate the merger
agreement under certain circumstances.
- That the merger would be free from federal income taxes for the
shareholders of First Federal receiving solely Northern Star common
stock in exchange for their shares of First Federal common stock.
- The strong likelihood that regulatory approval for the merger would be
obtained without undue conditions or delay.
- The economic effect of the merger on First Federal and First Federal
Savings Bank, as well as the employees of and customers and
communities served by First Federal Savings Bank.
While each member of the First Federal board of directors individually
considered the foregoing and other factors, the board of directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination as to any individual factor.
NORTHERN STAR'S REASONS FOR THE MERGER
Northern Star believes the proposed merger with First Federal will further
its strategic goal to grow and diversify its community banking business.
Northern Star believes the proposed merger with First Federal will provide the
following benefits:
- The merger builds upon Northern Star's efforts to expand and diversify
its community banking organization within and outside of Minnesota.
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<PAGE> 28
- The merger diversifies Northern Star's market and balance sheet,
reducing its reliance on a single bank and a single market.
- The merger provides opportunities to branch into new geographic
markets. Because savings associations like First Federal may establish
branches without many of the regulatory restrictions imposed on banks,
the merger will facilitate expansion within and outside of Minnesota.
The merger will also enhance Northern Star's ability to establish
branches within Minnesota, since savings associations are not subject
to state laws that restrict branching.
- The merger increases Northern Star's size and strength to allow it to
serve a broader segment of the community banking market, in particular
larger and more complex business organizations.
- Northern Star anticipates that the merger will contribute to its
profitability.
- The merger will provide additional flexibility to expand Northern Star
Bank's loan portfolio within regulatory lending limitations.
- The merger enhances Northern Star's access to capital markets.
- The merger enhances Northern Star's ability to attract and retain
skilled employees.
In reaching its determination that the proposed merger is in the best
interest of shareholders, Northern Star consulted with senior management with
respect to strategic and operational matters, legal counsel with respect to the
legal duties of its board of directors and regulatory and tax matters and its
independent accountants with respect to the accounting treatment of the merger.
Northern Star's board of directors carefully considered the following material
factors before unanimously approving the merger:
- The historical financial information of First Federal, including First
Federal's business, asset quality, market share and growth prospects
and the composition of the earning assets portfolio of First Federal;
- The financial terms of the merger, including the relationship of the
value of the consideration Northern Star will provide First Federal
shareholders in relation to First Federal's historical book value and
earnings;
- The non-financial terms of the merger, including the treatment of the
merger as a tax-free exchange of First Federal common stock for
Northern Star common stock for federal income tax purposes;
- The likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay;
- The opportunity for reducing the non-interest expense of the
operations of First Federal and Northern Star and the ability of the
operations of First Federal after the effective date of the merger to
contribute to Northern Star's consolidated earnings;
- The attractiveness of the First Federal franchise, the market position
of First Federal in West Central Minnesota and the northwestern
suburbs of Minneapolis, Minnesota, the compatibility of the franchise
with Northern Star's operations and the ability of First Federal to
contribute to Northern Star's business strategy;
- The opportunity to leverage Northern Star's infrastructure to grow its
earnings.
While each member of Northern Star's board of directors individually
considered the foregoing factors, the board of directors did not collectively
assign any specific or relative weights to the factors considered and did not
make any
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<PAGE> 29
determination with respect to any individual factor. Northern Star's board of
directors collectively made its determination with respect to the merger based
on the unanimous conclusion reached by its members, in light of the factors that
each of them consider as appropriate, that the merger is in Northern Star's best
interests and the best interests of its shareholders.
The financial terms of the merger, including the exchange ratio, were the
result of arm's-length negotiations between Northern Star and representatives of
First Federal.
In arriving at a fair value of First Federal Savings Bank and determining
the exchange ratio, Northern Star reviewed publicly available information
regarding recent acquisitions of banks, information provided by First Federal
and performed studies and analysis as deemed appropriate to determine the
appropriate exchange ratio. In arriving at the exchange ratio, Northern Star:
- Discussed the past and current operations and financial conditions and
the prospects of Northern Star;
- Reviewed certain unaudited interim and audited financial statements,
call reports, budget reports, operating and performance data and other
information of First Federal;
- Discussed the past and current operations and financial condition and
the future prospects of First Federal with senior executives of First
Federal;
- Reviewed the financial terms of reported bank acquisitions, including
banks similar in size to First Federal;
- Reviewed and compared the performance of Northern Star common stock
and its trading activity with that of certain other comparable public
traded companies;
- Prepared and reviewed pro forma financial information and performed
other analysis and considered such other factors as deemed appropriate
in connection with the merger.
Northern Star analyzed and compared the financial performance of First
Federal based on various measures of earnings performance, operating efficiency,
capital adequacy and asset quality and various measures of market performance.
For purposes of this analysis, Northern Star reviewed the historical performance
of First Federal Savings Bank as reflected in First Federal Savings Bank's
financial statements as of and for the year ended September 30, 1998 and
subsequent interim financial data. Northern Star compared some of this
information to publicly available information regarding prices paid, during the
first six months of 1999, for banks similar in size to First Federal.
Northern Star also considered the market price and trading volume of
its common stock as traded and quoted on the OTC Bulletin Board for the ten day
period prior to the execution of the Merger Agreement. Based upon the limited
number of shares traded, the average bid and ask prices quoted and Northern
Star's limited operating history, Northern Star assigned a value to its common
stock, for purposes of computing the consideration to be issued in the merger,
equal to $10.50 per share.
Northern Star's analysis of First Federal Savings Bank's financial
performance for the year ended September 30, 1998, showed the following
concerning First Federal Savings Bank's financial performance:
- return on equity was 12.44%, compared with a published average of
12.80% for its peer group of banks of similar size;
- return on assets was 1.0% compared with a published average of 1.06%
for the peer group; and
- the equity to asset ratio was 8.70% compared to a published average of
8.93%.
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<PAGE> 30
Northern Star reviewed published financial data relating to comparable
acquisitions of banks similar in size to First Federal Savings Bank that were
completed during the first six months of 1999. Northern Star's analysis of the
merger consideration to be paid in relation to First Federal Savings Bank's
financial performance and position shows that the consideration will be:
- approximately 2.24 times First Federal Savings Bank's book value,
compared to a published average consideration paid for banks of
similar size of 2.22 times book value;
- approximately 16.23 times First Federal Savings Bank's 1998 earnings,
after tax, compared to published average consideration paid for banks
of similar size of 17.55 times earnings;
- approximately 11.5% of First Federal Savings Bank's core deposits as
of September 30, 1998 compared to published median premium/core
deposits paid for thrifts in the first quarter of 1999 of 11.9%, and
second quarter of 1999 of 10.7%.
Northern Star also performed a pro forma merger analysis that combined its
and First Federal's financial information to assess the feasibility of a merger
and its potential impact on Northern Star following the merger. Northern Star
made assumptions regarding accounting treatment, acquisition adjustments, cost
savings, the number of shares to be issued in the merger and assumed that
Northern Star would also purchase the minority interest in First Federal Savings
Bank. This analysis showed that based upon the merger being completed as of June
30, 1999, the merger is expected to: (i) be accretive to earnings (excluding the
effect of a nonrecurring merger charge incurred in connection with the merger),
(ii) increase estimated return on equity and (iii) decrease the fully diluted
tangible book value. The pro forma information was prepared solely for Northern
Star's management. The actual results achieved by Northern Star following the
merger will likely vary from its pro forma results and these variations may
prove to be material.
NORTHERN STAR BELIEVES THAT AFTER CAREFUL CONSIDERATION OF ALL THE TANGIBLE
AND INTANGIBLE BENEFITS THAT ARE EXPECTED TO MATERIALIZE AS A RESULT OF THE
MERGER WITH FIRST FEDERAL AND THE FINANCIAL AND NON-FINANCIAL TERMS OF THE
MERGER, THAT THE TERMS OF THE MERGER ARE FAIR AND THE MERGER IS IN NORTHERN
STAR'S AND ITS SHAREHOLDERS' BEST INTERESTS. THE NORTHERN STAR BOARD OF
DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT NORTHERN STAR'S SHAREHOLDERS
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER.
CONVERSION OF FIRST FEDERAL COMMON STOCK IN THE MERGER
At the Effective Time, each outstanding share of First Federal common stock
will convert automatically into the right to receive 876.5 shares of Northern
Star common stock (referred to for convenience as the "conversion ratio"). Under
the Merger Agreement, the conversion ratio was calculated by dividing the value
of First Federal as of [April 30, 2000], as determined by the parties, by an
assumed price of Northern Star common stock. For purposes of the merger, First
Federal and Northern Star assigned a value of $9,360,039 to First Federal and a
per share price of $10.50 to Northern Star's common stock.
Northern Star will issue approximately 891,397 shares of Northern Star
common stock in exchange for First Federal common stock upon consummation of the
merger. Such shares would represent approximately 49% of the shares of Northern
Star common stock that would be outstanding after consummation of the merger,
assuming the sale of the minimum number of shares in Northern Star's pending
public offering.
Because the value of Northern Star shares fluctuates, the market value of
the Northern Star common stock that First Federal shareholders will receive in
the merger may increase or decrease following the merger.
FRACTIONAL SHARES
Northern Star will not issue any certificates or scrip representing
fractional shares of Northern Star common stock in the merger. If a fractional
share results from the application of the conversion ratio to the number of
shares of First Federal
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<PAGE> 31
common stock owned, then, in lieu of any such fractional share, each holder of
First Federal common stock who otherwise would be entitled to receive a
fractional share of Northern Star common stock in the merger will receive an
amount of cash (without interest) determined by multiplying (1) the $10.50
assumed price of a share of Northern Star common stock, by (2) the fractional
share interest of Northern Star common stock to which such holder would
otherwise be entitled.
EXCHANGE OF FIRST FEDERAL STOCK CERTIFICATES
As soon as practicable after the Effective Time, Northern Star will mail a
letter of transmittal to First Federal shareholders. The letter of transmittal
will include instructions regarding the surrender of certificates representing
shares of First Federal common stock in exchange for certificates representing
shares of Northern Star common stock.
As soon as practicable after the Effective Time, Northern Star's transfer
agent will distribute to holders of shares of First Federal common stock, after
those holders surrender to Northern Star the First Federal stock certificates
held by them for cancellation, together with executed letters of transmittal,
(1) one or more certificates representing the number of whole shares of Northern
Star common stock into which the shares represented by the certificate(s) have
been converted and (2) a check in the amount of any cash in lieu of fractional
shares. Holders of First Federal common stock will not receive interest on any
cash received in the merger.
After the Effective Time, First Federal stock certificates will evidence
ownership of the shares of Northern Star common stock into which they were
converted. Holders of First Federal common stock will be entitled to any
dividends that become payable to persons who are holders of record of Northern
Star common stock as of a record date on or after the Effective Time, but only
after they have surrendered their certificates representing shares of First
Federal common stock for exchange. Any such dividends will be paid to each First
Federal shareholder entitled to them, without interest, at the time that such
certificates representing shares of First Federal common stock are surrendered
for exchange, subject to any applicable abandoned property, escheat, or similar
law. Holders of First Federal common stock will not be entitled, however, to
dividends that become payable before or after the Effective Time to persons who
were holders of record of Northern Star common stock as of a record date prior
to the Effective Time.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, First Federal makes certain representations
and warranties to Northern Star regarding First Federal and its subsidiaries,
including as to: (1) their corporate existence; (2) the authorization,
execution, and enforceability of the merger agreement and related agreements;
(3) First Federal's capital structure; (4) the accuracy of First Federal's
recent financial statements; (5) the absence of material litigation; (6) the
absence of material adverse changes since August 31, 1999; (7) certain tax
matters; (8) the absence of material violations of agreements; (9) First
Federal's benefit plans; (10) First Federal's minute books; (11) the absence of
brokerage commissions, finder's fees, or other payments in connection with the
merger; (12) the accuracy of certain information for regulatory filings; (13)
compliance with regulatory reporting requirements; (14) the adequacy of
insurance; (15) the administration of trust accounts; (16) the absence of
environmental liabilities; (17) the existence of interest rate risk management
instruments; and (18) the extent of unfunded commitments.
Northern Star also makes certain representations and warranties to First
Federal regarding Northern Star and its subsidiaries, including as to: (1) their
corporate existence; (2) the authorization, execution, and enforceability of the
merger agreement and related agreements; (3) Northern Star's capital structure;
(4) the accuracy of Northern Star's recent financial statements; (5) the absence
of material litigation; (6) the absence of material adverse changes since June
30, 1999; (7) certain tax matters; (8) the absence of material violations of
agreements; (9) Northern Star's benefit plans; (10) the absence of brokerage
commissions, finder's fees, or other payments in connection with the merger;
(11) the accuracy of certain information for regulatory filings; (12) compliance
with regulatory reporting requirements; (13) the adequacy of insurance; and (14)
the absence of environmental liabilities.
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<PAGE> 32
CERTAIN COVENANTS BY FIRST FEDERAL
CONDUCT OF BUSINESS OF FIRST FEDERAL PENDING THE MERGER. With certain
exceptions, First Federal has agreed that prior to completing the merger, First
Federal will maintain its corporate existence and general character of its
business; conduct its business in its ordinary and usual manner; maintain its
books and records; maintain its properties; maintain its insurance coverage; use
its best efforts to keep the services of its present principal employees and to
preserve its good will and the good will of its suppliers, customers and others
having business relationships with it; use its best efforts to obtain any
approvals or consents required to maintain existing leases and other contracts
in effect following the merger; comply in all material respects with all
applicable laws, regulations, ordinances, codes, orders, licenses and permits;
terminate or, if requested by Northern Star, amend its employee benefit plans;
use its best efforts to obtain letters from its affiliates relating to actions
that might affect "pooling of interests" accounting treatment; obtain Phase I
environmental assessments, title insurance commitments, and boundary surveys for
each of its owned properties.
First Federal has also agreed not to amend or otherwise change its
articles of incorporation or by-laws; issue any securities; authorize or incur
any long-term debt (other than deposit liabilities); subject any of its
properties to liens or other encumbrances, except in the ordinary course of
business; enter into any commitment in excess of $5,000 except banking
transactions in the ordinary course of business and in accordance with existing
policies and procedures; make any investments except investments made by bank
subsidiaries in the ordinary course of business for terms of up to one year and
in amounts of $1,000,000 or less; amend or terminate or make any contribution to
any benefit plan except as required by law or by the terms of such plan;
declare, set aside, make or pay any dividend or other distribution with respect
to its capital stock except: (i) any dividend declared by a subsidiary in
accordance with applicable law and regulation or (ii) dividends declared by
First Federal consistent with past practices and in an aggregate amount not
exceeding $300,000; redeem, purchase or otherwise acquire, directly or
indirectly, any capital stock; increase the compensation of any officers,
directors or executive employees, except pursuant to existing compensation plans
and practices; sell or otherwise dispose of any shares of the capital stock of
any subsidiary; sell or otherwise dispose of any of its assets or properties
other than in the ordinary course of business; take any action that would
disqualify the merger from "pooling of interests" accounting treatment.
ACCESS. First Federal has also agreed to permit Northern Star and its
representatives to examine its and its subsidiaries' books, records and
properties and to interview officers, employees and agents at all reasonable
times when it is open for business.
NO SOLICITATION OF COMPETING TRANSACTIONS. First Federal has agreed that it
and its representatives and affiliates will not solicit, authorize the
solicitation of or enter into any discussions with any corporation, partnership,
person or other entity or group (other than Northern Star) concerning any
competing offer. A competing offer would include any offer (i) to purchase any
shares of common stock or any other equity security of First Federal or a
subsidiary of First Federal, (ii) to make a tender or exchange offer for any
shares of such common stock or other equity security, (iii) to purchase, lease
or otherwise acquire the assets of First Federal or any subsidiary except in the
ordinary course of business, or (iv) to merge, consolidate or otherwise combine
with First Federal or any subsidiary. If a competing offer or communication
regarding a competing offer is made, First Federal has agreed to promptly
disclose to Northern Star the fact that such offer or inquiry was made and the
terms of such offer (if any), and perform the transaction under the terms of
such offer with Northern Star rather than the competing offeror at Northern
Star's option. If First Federal breaches its non-solicitation obligations or if
Northern Star chooses not to match the terms of a competing offer, First Federal
has agreed to pay to Northern Star an amount equal to Northern Star's reasonable
expenses and fees incurred in connection with the merger (including, without
limitation, all fees and expenses of counsel and accountants to Northern Star)
plus $200,000.
CERTAIN COVENANTS BY NORTHERN STAR
CONDUCT OF BUSINESS OF NORTHERN STAR PENDING THE MERGER. With certain
exceptions, Northern Star has agreed that prior to completing the merger,
Northern Star will maintain its corporate existence in good standing; conduct,
and cause its subsidiaries to conduct, their respective businesses in compliance
with all material obligations and duties imposed on them by all applicable laws,
governmental regulations, rules and ordinances, and judicial orders, judgments
and decrees; maintain its
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books and records; and use its best efforts to obtain any approvals or consents
required for the merger. Northern Star has also agreed not to take any action
that would will disqualify the merger from "pooling of interests" accounting
treatment.
ACCESS. Northern Star has also agreed to permit First Federal and its
representatives to examine its and its subsidiaries' books, records and
properties and to interview officers, employees and agents at all reasonable
times when it is open for business.
INTERESTS OF FIRST FEDERAL'S DIRECTORS AND OFFICERS IN THE MERGER
In considering the recommendation of the First Federal board with
respect to the merger agreement and the transactions contemplated by that
agreement, shareholders of First Federal should be aware that certain members of
the management and board of directors of First Federal have certain interests in
the merger that are in addition to, and may be in conflict with, the interests
of shareholders of First Federal generally. All such interests are described
below, to the extent material, and First Federal believes that, except as
described below, such persons do not have any material interest in the merger
that is different from those of First Federal shareholders generally. The First
Federal board was aware of, and considered the interests of, its directors and
officers when it approved the merger agreement and the merger.
After the merger, the following members of First Federal's board of directors
will become members of Northern Star's board of directors: Lloyd Fehr, Kenneth
Johnson, Neil Schmidgall, and Allan Thoren. In addition, Northern Star will
enter into an employment agreement with Allan Thoren, First Federal's current
chairman, chief executive officer and president. Mr. Thoren will be an officer
of Northern Star after the merger.
CONDITIONS TO COMPLETING THE MERGER; WAIVER
The respective obligations of Northern Star and First Federal to effect
the merger are subject to the satisfaction at or prior to the merger of certain
conditions, including, among others: (a) the approval of the merger by the
shareholders of First Federal and Northern Star; (b) the effectiveness of the
Registration Statement; (c) the approval of the Federal Reserve Board and other
governmental agencies; (d) the absence of an order by any court or governmental
authority restraining, enjoining or otherwise prohibiting the merger; and (e)
the receipt by Northern Star of an opinion from Northern Star's and First
Federal's independent accountants to the effect that the merger will qualify as
a "pooling of interests" for accounting purposes.
In addition, the obligations of Northern Star to effect the merger are
subject to the satisfaction at or prior to the merger of certain conditions,
including that: (a) First Federal has performed in all material respects its
obligations under the merger agreement required to be performed by it at or
prior to the closing; (b) the representations and warranties of First Federal
are true and correct on the date of the merger in all respects material to First
Federal and its subsidiaries or to the Merger, except to the extent such
representations and warranties have been affected by transactions contemplated
by the merger agreement and except to the extent such representations and
warranties are by their express provisions made as of a specified date and
except for activities or transactions occurring after the date of the merger
agreement made in the ordinary course of business and not expressly prohibited
by the merger agreement; (c) First Federal and its subsidiaries have obtained
all material consents and waivers required for the consummation of the merger;
(d) First Federal and its subsidiaries have not sustained a material casualty
loss since June 30, 1999; (e) no reasonable basis shall exist for any
environmental liability to be imposed upon First Federal or its subsidiaries;
and (f) no material adverse change in the business of First Federal or its
subsidiaries shall have occurred since September 30, 1999.
In addition, the obligations of First Federal to effect the merger are
subject to the satisfaction at or prior to the merger of certain conditions,
including that: (a) Northern Star has performed in all material respects its
obligations under the merger agreement required to be performed by it at or
prior to the closing; (b) the representations and warranties of Northern Star
are true and correct on the date of the merger in all respects material to
Northern Star and its subsidiaries or to the Merger, except to the extent such
representations and warranties have been affected by transactions contemplated
by the merger agreement and except to the extent such representations and
warranties are by their express provisions made as of a specified date and
except for activities or transactions occurring after the date of the merger
agreement made in the ordinary course of business
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<PAGE> 34
and not expressly prohibited by the merger agreement; (c) the shares of Northern
Star common stock issuable in the merger have been authorized for quotation on
the OTC Bulletin Board; (d) an employment agreement is effective between
Northern Star and Allan Thoren, First Federal's current Chief Executive Officer;
and (e) First Federal has received an opinion of its legal counsel, to the
effect that the merger will constitute a "tax-free" reorganization for federal
income tax purposes. See "The Merger - Certain Federal Income Tax Consequences."
Either Northern Star or First Federal may waive (to the extent
permitted by applicable law) any failure to comply with any obligation,
covenant, agreement, or condition in the merger agreement that is for the
benefit of that party.
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT; EFFECTS OF TERMINATION
Subject to applicable law, any of the provisions of the merger
agreement may be amended by written agreement of the respective parties at any
time prior to the Effective Time of the merger. Even if the shareholders
Northern Star and First Federal approve the merger, the boards of directors of
Northern Star and First Federal can agree at any time to terminate the merger
agreement without completing the merger.
In addition, either company can terminate the merger agreement if:
- a final court or governmental order prohibits the merger; or
- a material adverse change in the business or financial condition
of the other party has occurred; or
- the merger is not completed by June 30, 2000; provided, however,
that the company seeking to terminate the agreement for this
reason must provide 10 days advance written notice to the other
company, stating the specific agreements, covenants and conditions
under the merger agreement that remain unsatisfied. The company
seeking to terminate the agreement may do so only if: (i) the
merger has not been completed at the end of the 10 day notice
period; and (ii) the agreements, covenants and conditions under
the merger agreement that were specified in the notice remain
unsatisfied at the end of the 10 day notice period; and (iii) the
party seeking to terminate the agreement is not in material breach
of its obligations under the merger agreement.
Northern Star can terminate the merger agreement if First Federal
receives a competing acquisition proposal and Northern Star elects not to match
the terms of such competing offer. First Federal has agreed to pay Northern Star
a termination fee if Northern Star elects not to match the terms of such an
offer. The amount of the termination fee will be equal to Northern Star's
reasonable fees and expenses, including fees and expenses of Northern Star's
legal counsel and accounting fees, incurred in connection with the merger plus
$200,000.
EXPENSES AND FEES
Whether or not the merger is consummated, all expenses incurred in
connection with the merger (including but not limited to accounting and legal
fees) and the transactions contemplated thereby will be paid by the party
incurring such costs and expenses, except as otherwise described in this proxy
statement/prospectus.
RESTRICTIONS ON RESALE OF NORTHERN STAR COMMON STOCK
The Northern Star common stock issuable in connection with the merger
has been registered under the Securities Act and will be freely transferable by
the recipients, except that this registration does not cover resales by
shareholders of First Federal who may be deemed to control or be under common
control with First Federal at the time of the First Federal Special Meeting
("Affiliates"). Affiliates may not sell their shares of Northern Star common
stock acquired in connection with the merger except pursuant to an effective
registration statement under the Securities Act covering such shares, or in
compliance with Rule 145 under the Securities Act or another applicable
exemption from the registration requirements of the Securities Act. First
Federal has delivered to Northern Star, and agreed to update as necessary, a
list identifying all persons who, in First
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<PAGE> 35
Federal's opinion, upon advice of counsel, are Affiliates of First Federal for
purposes of Rule 145. First Federal has delivered to Northern Star from each
person already identified as an Affiliate, and has agreed to use all reasonable
efforts to cause each person who is subsequently identified as an Affiliate to
deliver to Northern Star at or prior to the Effective Time, an agreement that
such person (1) will not offer to sell, sell, or otherwise dispose of any shares
of Northern Star common stock received in the merger in violation of the
Securities Act, and (2) will not sell, transfer, pledge, dispose of, or
otherwise reduce such person's risk relative to Northern Star common stock or
First Federal common stock during the period commencing 30 days prior to the
Effective Time of the merger and ending at such time as Northern Star publishes
financial results covering at least 30 days of post-merger combined operations.
It is expected that, after the period described in clause (2) above, Affiliates
will be able to sell such shares without registration and in accordance with the
volume, manner of sale, and other applicable limitations of the Securities Act
and the rules and regulations of the SEC thereunder.
It is estimated that Affiliates of First Federal will receive a maximum
of approximately shares of Northern Star common stock upon
consummation of the merger. Such shares would constitute % of the total
number of shares of Northern Star common stock anticipated to be outstanding
immediately after the Effective Time after giving effect to the shares issued
pursuant to the merger and the sale of the minimum number of shares in Northern
Star's pending public offering.
ACCOUNTING TREATMENT OF THE MERGER
Northern Star intends to account for the merger as a pooling of
interests for accounting and financial reporting purposes under generally
accepted accounting principles. This means the companies will be treated as if
they had always been combined for accounting and financial reporting purposes.
Under the pooling of interests method, the recorded assets and liabilities of
the companies are carried forward to the combined corporation at their recorded
amounts and the income (loss) of the companies constitutes the income (loss) of
the combined corporation for the entire fiscal period in which the combination
occurs as well as for prior fiscal periods. It is a condition to the obligations
of Northern Star and First Federal to consummate the merger that Northern Star
shall have received opinions from Northern Star's and First Federal's
independent accountants, dated the Closing Date, to the effect that the merger
will qualify as a pooling of interests.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain material United States federal
income tax consequences of the merger. This discussion merely summarizes certain
principal United States federal income tax consequences of the merger and is not
a complete analysis of all of the potential tax effects relevant to the merger.
In this regard, this discussion does not deal with all federal income tax
considerations that may be relevant to certain First Federal shareholders in
light of their particular circumstances, or to shareholders subject to special
rules under United States federal income tax law, including dealers in
securities, shareholders who do not hold their First Federal common stock as
capital assets, foreign persons, tax-exempt entities, banks, insurance
companies, shareholders who hold their shares as a hedge or as part of a
hedging, straddle, conversion, or other risk reduction transaction, or persons
who are subject to the alternative minimum tax provisions of the Internal
Revenue Code (the "Code"). Furthermore, it does not address First Federal
shareholders who acquired their shares in connection with stock options or stock
purchase plans or in other compensatory transactions. It also does not address
the tax consequences of the merger under foreign, state, or local tax laws.
First Federal shareholders are urged to consult their own tax advisors
as to the consequences of the merger, including the applicable federal, state,
local, and foreign tax consequences to them.
It is a condition to the obligations of Northern Star and First Federal
to consummate the merger that First Federal shall have received from Lindquist &
Vennum P.L.L.P., counsel to First Federal, an opinion (the "Tax Opinion") to
the effect that (i) the merger will constitute a reorganization within the
meaning of Section 368 of the Code; (ii) no gain or loss will be recognized by
the holders of First Federal common stock upon receipt of Northern Star common
stock except for cash received in lieu of fractional shares; (iii) the basis of
the Northern Star common stock received by the shareholders of First Federal
will be the same as the basis of First Federal common stock exchanged; and (iv)
the holding period of the shares
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of Northern Star common stock received by the shareholders of First Federal will
include the holding period of the First Federal common stock, provided such
shares were held as a capital asset as of the Effective Time of the merger.
Neither First Federal nor Northern Star will request a ruling from the Internal
Revenue Service (the "IRS") with regard to any of the United States federal
income tax consequences of the merger. The Tax Opinion will be based on and
subject to certain assumptions and limitations as well as factual
representations received from First Federal and Northern Star, as discussed
below. An opinion of counsel represents only counsel's best legal judgment and
has no binding effect or official status of any kind. No assurance can be given
that contrary positions may not be taken by the IRS or a court considering the
issues.
Subject to the assumptions, limitations, and qualifications described
in the Tax Opinion and in this discussion, the Tax Opinion will state that it is
the opinion of Lindquist & Vennum P.L.L.P that the material United States
federal income tax consequences of the merger can be summarized as follows:
- The merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code;
- Northern Star and First Federal will each be a party to the
reorganization within the meaning of Section 368(b) of the Code;
- No gain or loss will be recognized for federal income tax purposes
by any First Federal shareholder, except to the extent of cash
received in lieu of fractional shares of Northern Star common
stock upon the exchange of First Federal common stock for Northern
Star common stock in the merger;
- No gain or loss will be recognized for federal income tax purposes
by First Federal as a result of the completion of the merger.
The foregoing is only a general description of certain federal income
tax consequences of the merger and does not discuss all the tax considerations
that may be relevant to a particular First Federal shareholder in light of his
or her personal investment circumstances, or to certain types of shareholders of
First Federal who acquired their First Federal common stock pursuant to the
exercise of employee stock options or otherwise as compensation. The summary
above does not purport to be a complete analysis of all potential facts of the
transaction contemplated by the merger agreement or the merger itself. No
information is provided as to the tax consequences, if any, of the merger under
state, local, foreign or other tax laws.
REGULATORY REQUIREMENTS
Completion of the merger requires approval by the Federal Reserve Board.
Northern Star has filed all of the required applications and notices with the
Federal Reserve Board, but, as of the date of this proxy statement/prospectus,
the required approval has not been received. While Northern Star is not aware of
any reason that would prevent the necessary approval from being received in a
timely manner, Northern Star cannot be certain when or if the approval will be
received. Approval of the merger does not imply a conclusion by the reviewing
agency that the consideration exchanged or the terms and conditions of the
transaction are fair, from a financial point of view, to the shareholders of
First Federal or Northern Star.
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation
Act (the "MBCA") provide to each First Federal and Northern Star shareholder the
right to dissent from the merger, and obtain payment in cash for the "fair
value" of such shareholder's shares following the consummation of the merger.
The following summary of the material provisions of Sections 302A.471
and 302A.473 of the MBCA is qualified in its entirety by reference to such
sections, the full texts of which are attached as Annex B to this proxy
statement. These sections should be reviewed carefully by any shareholder who
wishes to exercise dissenters' rights or who wishes to preserve
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the right to do so, since failure to comply fully with the procedures set forth
herein or therein will result in the loss of dissenters' rights.
Under the MBCA, First Federal's and Northern Star's shareholders will
have the right, by fully complying with the applicable provisions of Sections
302A.471 and 302A.473, to dissent with respect to the merger and to receive from
the Surviving Corporation payment in cash of the "fair value" of their shares of
common stock after the merger is completed. The term "fair value" means the
value of the shares of common stock immediately before the Effective Time.
All references in Sections 302A.471 and 302A.473 and in this summary to
a "shareholder" are to a record holder of the shares of common stock as to which
dissenters' rights are asserted. A person having beneficial ownership of shares
of common stock that are held of record in the name of another person, such as a
broker, nominee, trustee or custodian, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner in
order to perfect whatever dissenters' rights such beneficial owner may have.
Shareholders of record who desire to exercise their dissenters' rights
must satisfy all of the following conditions. A written notice of intent to
demand fair value for shares must be delivered to the executive offices of the
company before the shareholder vote on the merger. This written demand must be
in addition to and separate from any proxy or vote against the merger. Voting
against, abstaining from voting or failing to vote on the merger does not by
itself constitute a notice of intent to demand fair value within the meaning of
the MBCA.
Shareholders electing to exercise their dissenters' rights under the
MBCA must not vote for approval of the merger agreement. A shareholder's failure
to vote against the merger agreement will not constitute a waiver of dissenters'
rights. However, if a shareholder returns a signed proxy but does not specify a
vote against adoption of the merger agreement or direction to abstain, the proxy
will be voted for approval of the merger agreement, which will have the effect
of waiving that shareholder's dissenters' rights.
A shareholder may not assert dissenters' rights as to less than all of
the shares registered in such holder's name except where certain shares are
beneficially owned by another person but registered in such holder's name. If a
record owner, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares beneficially owned by another person, such shareholder
must dissent with respect to all of such shares and must disclose the name and
address of the beneficial owner on whose behalf the dissent is made. A
beneficial owner of shares of common stock who is not the record owner of such
shares may assert dissenters' rights as to shares held on such person's behalf,
provided that such beneficial owner submits a written consent of the record
owner to the company at or before the time such rights are asserted.
Northern Star shareholders who elect to exercise dissenters' rights
must send a written demand, before the vote on the merger agreement, to Northern
Star Financial, Inc., 1650 Madison Avenue, Mankato, Minnesota 56001; Attention:
Tom Stienessen. First Federal shareholders who elect to exercise dissenters'
rights must send a written demand, before the vote on the merger agreement, to
First Federal Holding Company of Morris, Inc., 532 Atlantic Avenue, P.O. Box
656, Morris, Minnesota 56267; Attention: Allan Thoren. In either case, the
written demand should specify the shareholder's name and mailing address, the
number of shares owned and that the shareholder intends to demand the fair value
of his or her shares.
If the merger is completed, the Surviving Corporation will send a
written notice to each shareholder who filed a written demand for dissenters'
rights and did not vote for approval of the merger agreement. The notice will
contain the address to which the shareholder should send a demand for payment
and the stock certificates representing the dissenting shares in order to obtain
payment and the date by which they must be received, a form to be used in
connection therewith and other related information.
In order to receive fair value, a dissenting shareholder must, within
30 days after the date such notice was given (for which purpose notice by the
Surviving Corporation is deemed to have been given under Minnesota law when
deposited in the U.S. mail), demand the payment of fair value for his or her
shares, and deposit his or her stock certificates with the Surviving Corporation
at the address specified in such notice. A dissenting shareholder will retain
all rights as a shareholder until the
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Effective Time. After a valid demand for payment and the related stock
certificates are received, or after the Effective Time, whichever is later, the
Surviving Corporation will remit to each dissenting shareholder who has complied
with statutory requirements the amount that the Surviving Corporation estimates
to be the fair value of such shareholder's shares, with interest commencing five
days after the Effective Time at a rate prescribed by statute (currently 5%).
Remittance will be accompanied by the Surviving Corporation's closing balance
sheet and statement of income for a fiscal year ending not more than 16 months
before the Effective Time, together with the Surviving Corporation's latest
available interim financial data, an estimate of the fair value of the
shareholder's shares and a brief description of the method used to reach the
estimate, a brief description of the procedure to be followed if such holder is
demanding supplemental payment and copies of Sections 302A.471 and 302A.473 of
the MBCA.
If the dissenting shareholder believes that the amount remitted by the
Surviving Corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the Surviving Corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be given at the executive offices of Northern
Star at the address set forth above. A shareholder who fails to give such
written notice within this time period is entitled only to the amount remitted
by the Surviving Corporation.
Within 60 days after receipt of a demand for supplemental payment, the
Surviving Corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the Surviving Corporation or
file in court a petition for the determination of the fair value of the shares,
plus interest. The petition shall name as parties all shareholders who have
demanded supplemental payment and have not reached an agreement with the
Surviving Corporation. The court, after determining that the shareholder or
shareholders in question have complied with all statutory requirements, may use
any valuation method or combination of methods it deems appropriate to use,
whether or not used by the Surviving Corporation or the dissenting shareholder,
and may appoint appraisers to recommend the amount of the fair value of the
shares. The court's determination will be binding on all shareholders who
properly exercised dissenters' rights and did not agree with the Surviving
Corporation as to the fair value of the shares. Dissenting shareholders are
entitled to judgment in cash for the amount by which the court-determined fair
value per share, plus interest, exceeds the amount per share, plus interest,
remitted to the shareholders by the Surviving Corporation. The shareholders
shall not be liable to the Surviving Corporation for any amounts paid by the
Surviving Corporation which exceed the fair value of the shares as determined by
the court, plus interest. The costs and expenses of such a proceeding, including
the expenses and compensation of any appraisers, will be determined by the court
and assessed against the Surviving Corporation, except that the court may, in
its discretion, assess part or all of those costs and expenses against any
shareholder whose action in demanding supplemental payment is found to be
arbitrary, vexatious or not in good faith. The court may award fees and expenses
to an attorney for the dissenting shareholders out of the amount, if any,
awarded to such shareholders. If the court finds that the Surviving Corporation
has failed to comply substantially with Section 302A.473, the court may assess
against the Surviving Corporation such fees or expenses of experts or attorneys
as the court deems equitable. Fees and expenses of experts or attorneys may also
be assessed against any person who acted arbitrarily, vexatiously or not in good
faith in bringing the proceeding.
The Surviving Corporation may withhold the remittance of the estimated
fair value, plus interest, for any shares owned by any person who was not a
shareholder, or who is dissenting on behalf of a person who was not a beneficial
owner, on September 30, 1999, the date on which the proposed merger was first
announced to the public (the "Public Announcement Date"). The Surviving
Corporation will forward to any such dissenting shareholder who has complied
with all requirements in exercising dissenters' rights the notice and all other
materials sent after shareholder approval of the merger to all shareholders who
have properly exercised dissenters' rights, together with a statement of the
reason for withholding the remittance and an offer to pay the dissenting
shareholder the amount listed in the materials if the shareholder agrees to
accept that amount in full satisfaction. The shareholder may decline this offer
and demand payment by following the same procedure as that described for demand
of supplemental payment by shareholders who owned their shares as of the Public
Announcement Date. Any shareholder who did not own shares on the Public
Announcement Date and who fails properly to demand payment will be entitled only
to the amount offered by the Surviving Corporation. Upon proper demand by any
such shareholder, rules and procedures applicable in connection with receipt by
the Surviving Corporation of the demand for supplemental payment given by a
dissenting shareholder who owned shares on the Public Announcement Date will
also apply
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to any shareholder properly giving a demand but who did not own shares of record
or beneficially on the Public Announcement Date, except that any such
shareholder is not entitled to receive any remittance from the Surviving
Corporation until the fair value of the shares, plus interest, has been
determined pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in
mind that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the value of the consideration they would receive
pursuant to the merger agreement if they do not exercise dissenters' rights with
respect to their shares.
Under Section 302A.471 of the MBCA, a shareholder has no right at law
or equity to set aside the adoption of the merger agreement or the consummation
of the merger, except if such adoption or consummation is fraudulent with
respect to such shareholder or the company.
Cash received pursuant to the exercise of dissenters' rights would be
subject to federal or state income tax. See "THE MERGER - Certain Federal Income
Tax Consequences."
FIRST FEDERAL SHAREHOLDERS WHO FAIL TO COMPLY FULLY WITH THE STATUTORY
PROCEDURE SUMMARIZED ABOVE WILL FORFEIT THEIR RIGHTS OF DISSENT AND WILL RECEIVE
THE MERGER CONSIDERATION FOR THEIR SHARES. NORTHERN STAR SHAREHOLDERS WHO FAIL
TO COMPLY FULLY WITH THE STATUTORY PROCEDURE SUMMARIZED ABOVE WILL FORFEIT THEIR
RIGHTS OF DISSENT AND WILL NOT BE ENTITLED TO EXCHANGE THEIR SHARES FOR PAYMENT
FROM THE SURVIVING COMPANY.
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<PAGE> 40
MARKET FOR NORTHERN STAR 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> <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.......
, 2000.....
</TABLE>
In the merger, each share of First Federal common stock will be
converted into the right to receive shares of Northern Star common
stock. On , 2000 the last sale price for Northern Star common
stock was $ per share. On the record date for Northern Star's special
meeting, there were issued and outstanding 425,600 shares of common stock held
by 49 shareholders of record. Record ownership includes ownership by nominees
who may hold for multiple owners.
First Federal is a private company and is not required to file reports
with the Securities and Exchange Commission. Its common stock is not traded
publicly on any exchange nor are prices for its common stock quoted by any
service. On the record date for First Federal's special meeting, there were
issued and outstanding 1,017 shares of its common stock held by seven
shareholders of record.
Neither Northern Star nor First Federal has ever paid cash dividends.
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NORTHERN STAR FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Northern Star's
consolidated financial statements and the related notes for the years ended June
30, 1998 and 1999 and for the six months ended December 31, 1999 included
elsewhere this prospectus. Northern Star's consolidated financial statements
include Northern Star Financial, Inc. and its wholly-owned subsidiary, Northern
Star Bank.
OVERVIEW
Northern Star Financial, Inc. was incorporated in Minnesota on January 22,
1998. Northern Star is a bank holding company and owns all of the outstanding
capital stock of Northern Star Bank. Northern Star's operations during the
period from its inception through January 25, 1999, when Northern Star Bank
commenced operations, consisted solely of organizing activities. Northern Star's
organizing activities consisted primarily of: (i) preparing and coordinating its
application for deposit insurance with the Federal Deposit Insurance
Corporation; (ii) preparing and coordinating Northern Star Bank's application
with the Minnesota Department of Commerce; (iii) conducting the private
placement of shares of common stock to Northern Star's officers and directors;
and (iv) preparing and filing with the Securities and Exchange Commission a
registration statement relating to Northern Star's initial public offering of
common stock. The SEC declared Northern Star's registration statement effective
on October 9, 1998. On October 16, 1998, the Department of Commerce approved the
application of Northern Star Bank to become a state-chartered community bank,
and on December 24, 1998, the FDIC approved Northern Star's application for
deposit insurance for Northern Star Bank. On December 31, 1998, Northern Star
completed the private placement of 154,000 shares of common stock to its
officers and directors and the public offering of 146,000 shares of common
stock. Northern Star Bank began operations on January 25, 1999 at its only
banking location in Mankato, Minnesota. On April 1, 1999, Northern Star
completed the sale of an additional 125,600 shares of common stock to complete
its initial public offering. Northern Star raised a total of $3,923,733 in net
proceeds from its private placement and initial public offering.
During the development stage, from January 1998 to January 25, 1999,
Northern Star accumulated a net loss of $226,103. The net loss from the date
Northern Star Bank opened on January 25, 1999 to June 30, 1999 amounted to
$271,529. During fiscal 1999 Northern Star's total assets grew from $14,806 to
$9,635,608, and its net loss amounted to $493,672, or $1.60 per share, including
$55,691 in organizational expenditures. During the first quarter of fiscal 2000
Northern Star's total assets grew from $9,635,608 to $11,003,196, and its net
loss amounted to $173,149 or $0.41 per share.
RESULTS OF OPERATIONS
Northern Star's operating results depend primarily on net interest income.
Net interest income is determined by interest rate spread, the relative amounts
of interest-earning assets and interest-bearing liabilities, and the degree of
mismatch in the maturing and repricing characteristics of interest earning
assets and interest-bearing liabilities. Interest rate spread is the difference
between the yield earned on interest-bearing assets and the rates paid on
interest-bearing liabilities. Northern Star's operations are also affected by
the establishment of provisions for loan losses and the level of other income,
including service charges on deposit accounts and sold real estate loan fees, as
well as other expenses and income tax provisions.
Northern Star's 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 Northern Star Bank on January 25, 1999.
Northern Star has no results of operations to report for the fiscal year ended
June 30, 1998 or for the six months ended December 31, 1998 since it did not
engage in any operating activity for these periods, other than those organizing
activities described above.
-34-
<PAGE> 42
FISCAL YEAR ENDED JUNE 30, 1999
Northern Star 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
interest income, since Northern Star had the largest portion of earning assets
in its loan portfolio. The weighted average yield earned on interest-bearing
assets of $1,866,661 was 8.30% for the period and the average rate paid on
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 Northern Star's estimate of the amount necessary to adequately
reflect possible loan losses. The allowance for loan losses as a percentage of
year-end loans was 1.14%. Northern Star's judgment as to the adequacy of the
allowance is based upon an evaluation of the inherent risks in the loan
portfolios, which Northern Star believes to be reasonable, which may or may not
prove to be accurate. Thus, Northern Star 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. Northern
Star had no charge-offs in 1999.
Northern Star earned non-interest income of $45,499 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
sale of loans of $3,050. As a percentage of average assets, non-interest income
was 1.77% for Northern Star's truncated year of operations ended June 30, 1999.
Northern Star incurred other non-interest expenses of $594,734 for fiscal
year ended June 30, 1999, inclusive of costs associated with setting up Northern
Star Bank's operations. Northern Star incurred nonrecurring pre-opening expenses
of approximately $304,000 in organizing Northern Star Bank's operations. The
pre-opening expenses also include $248,000 in organizational costs expensed due
to a change in accounting. Staffing at Northern Star Bank was at a full-service
level beginning the first part of December 1998 for training in preparation for
its opening on January 25, 1999, and other non-interest expenses were incurred
in operating Northern Star Bank. Non-interest expense included $40,364 in
salaries and employee benefits incurred during the initial start-up phase and
approximately $15,636 in opening expenses. As a percentage of average assets,
non-interest expenses were 24.8%.
Northern Star's net loss for the year ended June 30, 1999 was $493,672.
At June 30, 1999, Northern Star had total assets of $9,635,608, which
consisted of cash and due from the Northern Star Bank 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, Northern Star had liabilities of $6,164,569 in deposits and $47,337 in
other liabilities. Stockholders' equity at June 30, 1999 was $3,423,702.
FISCAL QUARTER ENDED DECEMBER 31, 1999
From Northern Star Bank's opening date on January 25, 1999 through December
31, 1999, it attracted $13,138,387 in deposits, and made net loans of
$9,016,495. Northern Star's net loss for the six months ending December 31, 1999
equaled $364,143 compared to a net loss of $115,321 for the six months ending
December 31, 1998. A direct comparison of the results of operations during these
time periods would not be meaningful. Although staffing at Northern Star Bank
had been initiated in preparation of its January 25, 1999 opening and other
noninterest expenses were incurred in opening Northern Star Bank, Northern Star
did not engage in any operating activity during 1998 other than in the
organization of Northern Star and Northern Star Bank.
35
<PAGE> 43
Net interest income earned during the six-month period ending December 31,
1999 totaled $197,282. Net interest income for the quarter ending December 31,
1999 was $105,872. The increase in net interest income in the three month period
ending December 31, 1999 over the prior quarter is the result of the higher
level of earning assets held during the second quarter. Total interest income
for the six-month period ending December 31, 1999 was $420,510 as compared to
total interest income of $239,274 for the three-month period ending December 31,
1999. The increase of $58,000 in total interest income represents a 32% increase
in interest income in the second quarter over the first quarter. Interest income
from loans receivable of $180,408 represented the largest portion of interest
income because Northern Star Bank's loan portfolio represented the largest
portion of earning assets.
During the six-month period ending December 31, 1999, Northern Star Bank
sold residential mortgage loans totaling $2.87 million and recognized gains on
those sales of $25,824. This compares to residential mortgage loan sales of
$1.61 million for the three-month period ending December 31, 1999, during which
recognized gains amounted to $20,722. Northern Star's noninterest expenses
during the quarter and six months ended December 31, 1999 were $326,624 and
$605,285, respectively. The second quarter increase of nearly $50,000 in
noninterest expenses over first quarter levels resulted from expanded activities
in mortgage banking and the pending merger with First Federal. Noninterest
expenses for the period included $40,130 of equity loan associated with the
joint venture in Homeland Mortgage LLC and $36,918 of expenses related to the
pending merger with First Federal. Employee compensation and benefits
represented the largest noninterest expense during the period, totaling
$101,205. This expense category is expected to remain relatively flat for the
duration of fiscal year ending June 30, 2000.
Since Northern Star Bank had no historical loan loss experience, Northern
Star established an additional provision for loan losses of $33,750 for the
three-month period ended December 31, 1999 based upon a periodic evaluation of
the inherent risk in the loan portfolios, which Northern Star believes to be
reasonable, which may or may not prove to be accurate. Thus, there can be no
assurance 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. Northern Star had no charge-offs during the quarter ended December
31, 1999.
Total consolidated assets equaled $16.67 million as of December 31, 1999
compared to $9.64 million as of June 30, 1999. Cash and cash equivalents
decreased $0.34 million from June 30 to December 31, 1999. Net loans receivable
increased $4.07 million during the six months ending December 31, 1999 and loans
held for sale decreased $0.62 million. Deposits increased $6.97 million during
the period.
AVERAGE BALANCES, YIELDS AND RATES
The following tables summarize Northern Star's weighted average yields
earned, weighted average rates paid, interest rate spread and net yield on
earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1999
--------------------------------------
AVERAGE
AVERAGE YIELD OR
BALANCE INTEREST RATES
----------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Federal Funds Sold........................... $ 544,083 $ 26,089 4.79%
Investment Securities........................ 60,531 3,590 5.93%
Loans........................................ 1,098,420 120,005 10.93%
Other Interest-Earning Assets................ 163,637 5,191 3.17%
---------- --------- -----
Total Earning Assets......................... 1,866,661 154,875 8.30%
Non Interest-Earning Assets.................. 526,684
----------
Total Assets................................. $2,393,345
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits.................... $ 901,088 $ 40,012 4.44%
Non Interest Bearing Deposits................ 255,238
Other Liabilities............................ 71,765
Stockholders' Equity......................... 1,165,254
----------
Total Liability and Stockholders' Equity..... $2,393,345
==========
Net Interest Spread.......................... 3.86%
Net Interest Income/Margin................... $ 114,863 6.15%
========= =====
</TABLE>
-36-
<PAGE> 44
<TABLE>
<S> <C>
Ratio of Average Interest
Earning Assets to Average Interest-Bearing
Liabilities................................ 2.07x
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999
---------------------------------------
AVERAGE
AVERAGE YIELD OR
BALANCE INTEREST RATES
-------------- -------------- ---------
<S> <C> <C> <C>
Assets
Loans Receivable............................. $ 7,344,675 $323,041 8.80%
Investment Securities........................ 1,946,247 64,285 6.61%
Federal Funds Sold........................... 1,271,661 33,185 5.22%
----------- -------- -----
Total Earning Assets......................... 10,562,583 420,511 7.96%
Non Interest-Earning Assets.................. 1,021,390
-----------
Total Assets................................. $11,583,973
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits.................... $ 7,072,125 152,758 4.32%
Non Interest Bearing Deposits................ 1,192,111
Other Liabilities............................ 99,321 2,970 5.98%
Stockholders' Equity......................... 3,220,416
----------- -------- ----
Total Liability and Stockholders' Equity..... 11,583,973 155,728
----------- --------
Net Interest Spread.......................... $264,783 3.62%
======== =====
Net Interest Income/Margin................... 5.01%
Ratio of Average Interest Earning Assets to
Average Interest-Bearing Liabilities....... 1.47x
</TABLE>
The average balances for the year ended June 30, 1999 were calculated on an
annualized basis, even though Northern Star did not have operations for the
entire fiscal year.
RATE/VOLUME ANALYSIS
Net interest income can be analyzed in terms of the impact of changing rates
and changing volume. As described above, Northern Star commenced operations in
January 1999. Because Northern Star has no prior period results for comparison
purposes, information analyzing period to period changes in net interest income
have been omitted.
LIQUIDITY AND RATE SENSITIVITY
Asset/liability management is the process by which Northern Star monitors
and controls the mix and maturities of its assets and liabilities. The essential
purposes of asset/liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities to minimize potentially adverse impacts on earnings from changes in
market interest rates.
Northern Star's primary sources of liquidity are a stable base of deposits,
scheduled repayments on loans, and interest on and maturities of investments.
Northern Star holds these funds in various forms of investments with various
degrees of liquidity. All securities holdings have been classified as
available-for-sale. If necessary, Northern Star has the ability to sell a
portion of its investment securities to manage interest sensitivity gap or
liquidity. Northern Star also may utilize its cash and due from banks and
federal funds sold to meet liquidity needs. Additionally, Northern Star has an
unsecured line of credit with a correspondent bank in the amount of $250,000. No
borrowings have been drawn on this line of credit.
As a monitoring technique, Northern Star measures its interest sensitivity
"gap", which is the positive or negative dollar difference between assets and
liabilities that are subject to interest rate repricing within a given period of
time. Interest rate sensitivity can be managed by repricing assets or
liabilities, selling securities available-for-sale, replacing an asset or
liability at maturity, or adjusting the interest rate during the life of an
asset or liability. Managing the amount of assets and liabilities repricing in
this same time interval helps to minimize interest rate risk and manage net
interest income in changing interest rate environments. Northern Star's net
interest income generally would benefit from rising interest rates when it is in
an asset-sensitive gap position. Conversely, net interest income generally would
benefit from decreasing rates of interest when Northern Star is in a
liability-sensitive gap position.
-37-
<PAGE> 45
Because Northern Star Bank has been open only since January 25, 1999, and
has not yet generated a substantial amount of loans, Northern Star was asset
sensitive for the year and quarter. However, gap analysis is not a precise
indicator of Northern Star's interest sensitivity position, because the analysis
presents only a static view of the timing of maturities and repricing
opportunities without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a
substantial portion of core deposits may change contractually within a
relatively short time frame, but Northern Star views those rates as
significantly less interest-sensitive than market-based rates such as those paid
on non-core deposits. Net interest income may be impacted by other significant
factors in a given interest rate environment, including changes in the volume
and mix of earning assets and interest-bearing liabilities.
INTEREST RATE SENSITIVITY ANALYSIS
Northern Star continually evaluates the asset mix of its 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,
Northern Star focuses on expanding various funding sources. The interest rate
sensitivity position at June 30 and December 31, 1999 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 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%
<CAPTION>
AS OF DECEMBER 31, 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......... $ 2,160 $ -- $ -- $ -- $ 2,160
Investment Securities...... 497 -- 3,276 692 4,465
Loans...................... 3,547 646 3,241 1,700 9,134
------- ------- ------- ------- --------
Total Earning Assets......... $ 6,204 $ 646 $6,517 $2,392 $ 15,759
======= ======= ======= ======= ========
Interest Bearing Liabilities
Money Market & Now......... $ 685 $ -- $ -- $ -- $ 685
Regular Savings............ 4,373 -- -- -- 4,373
Time Deposits.............. 505 4,505 957 -- 5,967
------- ------- ------- ------- --------
Total Interest Bearing
Liabilities................ $ 5,563 $ 4,505 $ 957 $ -- $ 11,025
======= ======= ======= ======= ========
Interest Sensitivity Gap..... $ 641 $(3,859) $5,560 $2,392 $ 4,734
Cumulative Interest Sensitivity
</TABLE>
-38-
<PAGE> 46
<TABLE>
<S> <C> <C> <C> <C> <C>
Gap.......................... 641 (3,218) 2,342 4,734 4,734
Ratio of Interest Sensitivity
Gap to total earning assets.. 4.07% -24.49% 35.28% 15.18% 30.04%
Ratio of Cumulative Interest
Sensitivity Gap to total
earning assets............... 4.07% -20.42% 14.86% 30.04% 30.04%
</TABLE>
As evidenced by the tables above, Northern Star is cumulatively
asset-sensitive at one year. 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 Northern Star's 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, Northern Star's intent is to channel a substantial percentage of
earning assets into the loan category. However since Northern Star Bank
commenced operations only recently, that category has not yet grown to a
percentage of total earning assets comparable to other banks that are well
established. Average loans on an annualized basis were $1,098,222 for the year
ended June 30, 1999. Total gross loans outstanding, including loans held for
sale, were $5,619,345 as of June 30, 1999 and $9,134,233 as of December 31,
1999.
The following table summarizes the composition of Northern Star's loan
portfolio:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 AS OF DECEMBER 31, 1999
-------------------------- ----------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Commercial, Lease & Agricultural... $1,843,707 32.81% $2,668,664 29.22%
Real Estate-- individual........... 1,496,460 26.63 1,600,518 17.52
Real Estate-- other................ 843,394 15.01 2,106,990 23.07
Consumer Loans..................... 1,435,784 25.55 2,758,061 30.19
---------- ------ ---------- ------
Total Loans........................ $5,619,345 100.00% $9,134,233 100.00%
---------- ====== ---------- ======
Less: Allowance for Loan Loss...... (56,250) (123,750)
---------- ----------
Total Net Loans.................... $5,563,095 $9,010,483
========== ==========
</TABLE>
The principal components of Northern Star's loan portfolio were mortgage
loans and commercial loans which represented 74% of the portfolio at June 30,
1999 and 70% at December 31, 1999. Due to the short time the portfolio has
existed, the current mix of loans may not be indicative of the ongoing portfolio
mix. Northern Star 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, Lease & 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
---------- ---------- -------- ----------
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
</TABLE>
-39-
<PAGE> 47
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------
ONE YEAR AFTER ONE BUT AFTER
OR LESS WITHIN FIVE YEARS FIVE YEARS TOTAL
----------- ------------------ -------------- -----------
<S> <C> <C> <C> <C>
Commercial, Lease &
Agricultural................. $ 684,209 $1,436,855 $ 548,601 $2,669,664
Real Estate-- individual....... 49,000 717,682 833,836 1,600,518
Real Estate-- other............ 542,554 1,188,982 375,454 2,106,990
Consumer Loans................. 2,044,071 527,779 184,789 2,756,639
---------- ---------- ---------- ----------
Total........................ $3,319,834 $3,871,297 $1,942,679 $9,133,811
========== ========== ========== ==========
Loans maturing after one year
with:
Fixed Interest Rates......... $4,939,768
Floating Interest Rates...... $ 873,208
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Northern Star has developed policies and procedures for evaluating the
overall quality of its 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 an
analysis of the potential risk in the loan portfolio.
On June 30, 1999, Northern Star's allowance for loan losses was $56,250 or
1.14% of $4,937,752 in loans receivable (net of loans held for sale). On
December 31, 1999, Northern Star's allowance for loan losses was $123,750 or
1.36% of $9,067,793 in loans receivable (net of loans held for sale). Northern
Star Bank has not charged off any loans since commencing operations. The
provision for loan losses was established primarily as a result of an assessment
of general loan loss risk as Northern Star Bank recorded its first loans.
The following tables summarize Northern Star Bank's loan loss experience and
the allowance for possible loan losses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
------------------ -------------------
<S> <C> <C>
Balance at Beginning of $ -- $ 56,250
Period......................
Charge-offs................. -- --
Recoveries.................. -- --
Net Charge Offs............. -- --
Additions charged to 56,250 67,500
------- --------
operations..................
Balance at End of Period.... $56,250 $123,750
======= ========
</TABLE>
The allowance for loan losses was allocated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 DECEMBER 31, 1999
----------------------------- ---------------------------------
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 Lease & Agricultural $13,310 32.81% $ 19,105 29.22%
Real Estate-- individual...... 10,974 26.63% 11,669 17.52%
Real Estate-- other........... 5,288 15.01% 13,041 23.07%
Consumer Loans................ 5,808 25.55% 11,164 30.19%
Unallocated................... 20,870 -- 68,771 --
------- ------ --------- ------
Total......................... $56,250 100.00% $ 123,750 100.00%
======= ====== ========= ======
</TABLE>
INVESTMENT PORTFOLIO
At June 30, 1999, Northern Star's investment securities portfolio
represented approximately 8.42% of its earning assets of $8,897,899. Northern
Star 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. Northern Star also held investments in stock of the
Federal Home Loan Bank in the amount of $16,400.
At December 31, 1999, Northern Star's investment securities portfolio
represented approximately 29% of its earning assets of $15,663,068. Northern
Star held securities available for sale with a fair market value of $4,465,492
and an
-40-
<PAGE> 48
amortized cost of $4,512,125, for an unrealized loss of $46,633. Northern Star
also held investments in stock of the Federal Home Loan Bank in the amount of
$21,300.
Contractual maturities and yields on 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..... -- -- $ 549,286 6.12% $200,000 7.04% $ 749,286 6.36%
As of December 31,
1999:
US Government
Agencies..... -- -- $ 3,276,324 6.59% $691,637 7.13% $3,968,161 6.68%
Corporate Bonds. $ 497,331 5.75% -- -- -- -- $ 497,331 5.75%
----------- ------ ------------ ------- --------- ------ ----------- -----
Total........... $ 497,331 5.75% $ 3,276,324 6.59% $691,837 7.13% $4,465,492 6.58%
</TABLE>
Short-term investments in the amount of $2,533,236 at June 30, 1999 and
$2,159,781 at December 31, 1999 comprised a significant portion of total earning
assets. These funds were invested in Federal funds sold on an overnight basis.
As Northern Star Bank continues to grow, Northern Star expects a shift 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 and December 31, 1999, deposits were the only component of
interest-bearing liabilities. Average total deposits were $1,156,326 and average
interest-bearing deposits were $901,088 for the year ended June 30, 1999, on an
annualized basis. 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 16.20% $ 255,512 22.20% --
Now............................... 127,387 2.10% 52,395 4.50% 2.46%
Savings........................... 3,244,444 52.60% 375,076 32.40% 3.55%
Time Accounts less than $100,000.. 1,379,249 22.50% 336,573 29.20% 5.30%
Time Accounts of $100,000 or more. 400,000 6.60% 135,342 11.70% 5.45%
------------ ---------- ---------- --------
Total Deposits.................... $ 6,149,097 100.00% $1,154,898 100.00%
=========== ========== ========== ========
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------------
PERCENTAGE
PERCENTAGE OF TOTAL
ENDING OF TOTAL AVERAGE AVERAGE EFFECTIVE
BALANCE DEPOSITS BALANCE DEPOSITS COST
------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Demand Deposit.................... $ 2,205,378 16.79% $ 1,191,094 11.77% 0.00%
Now............................... 292,342 2.23% 238,972 2.36% 2.59%
Savings........................... 4,674,284 35.58% 4,842,436 47.84% 3.72%
Time Accounts less than $100,000.. 2,970,922 22.61% 2,476,489 24.47% 5.72%
Time Accounts of $100,000 or more. 2,995,462 22.80% 1,372,655 13.56% 6.09%
------------- ----------- ------------ ----------- ------------
Total Deposits.................... $ 13,138,387 100.00% $10,121,646 100.00%
============= =========== ============ ===========
</TABLE>
Core deposits, which exclude time deposits of $100,000 or more, provide a
relatively stable funding source for Northern Star's loan portfolio and other
earning assets. Northern Star's core deposits were $5,749,097 at June 30, 1999
and $10,142,925 at December 31, 1999. Northern Star's loan to deposit ratio was
90% at June 30, 1999 and 69% at December 31, 1999. The maturity distribution of
time deposits is as follows:
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<PAGE> 49
<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, 1999:
Time Accounts less than $30,000 $133,787 $ 866,625 $348,837 $ 1,379,249
$100,000...................
Time Accounts of $100,000 or
more....................... -- -- 400,000 -- 400,000
--------- --------- ----------- --------- -----------
Total...................... $30,000 $133,787 $ 1,266,625 $348,837 $ 1,779,249
========= ========= =========== ========= ===========
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 December 31, 1999:
Time Accounts less than
$100,000................ $ 109,974 $1,118,337 $ 886,663 $857,034 $ 2,972,008
Time Accounts of $100,000 or
more.................... 395,462 500,000 2,000,000 100,000 2,995,462
--------- ---------- ----------- -------- -----------
Total................... $ 505,436 $1,618,337 $ 2,886,663 $957,034 $ 5,967,470
========= ========== =========== ======== ===========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table summarizes Northern Star's 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, Northern Star has not paid
any cash dividends. The payment of dividends by Northern Star Bank is subject to
limitations imposed by law and governmental regulations.
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED SIX MONTHS
JUNE 30, 1999 ENDED DECEMBER 31, 1999
------------- -----------------------
<S> <C> <C>
Return (loss) on average
assets...................... (22.61)% (6.36)%
Return (loss) on average
equity...................... (69.87)% (22.82)%
----- -----
Equity to assets ratio...... 35.53% 27.80%
</TABLE>
SHORT TERM BORROWINGS
Northern Star had no short-term borrowings during fiscal year 1999. During
the quarter ended December 31, 1999, Northern Star borrowed $425,000 from the
Federal Home Loan Bank due October 18, 2000 bearing interest at an annual rate
of 5.85%.
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 should be 3.0% plus an additional cushion of at least 1 to 2
percent, depending upon risk profiles and other factors.
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<PAGE> 50
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 Northern Star's regulatory capital (in
thousands) and ratios:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION 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%
Leverage Ratio Tier I Capital
(to Average Assets)......... $ 2,729 36.50% $ 299 4.00% $ 374 5.00%
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets)................ $ 2,665 24.0% $ 888 8.0% $ 1,109 10.0%
Tier I Capital (to Risk
Weighted Assets)............ $ 2,541 22.9% $ 444 4.0% $ 666 6.0%
Tier I Capital (to Average $ 2,541 19.6% $ 519 4.0% $ 648 5.0%
Assets)................
</TABLE>
At December 31, 1999, Northern Star Bank is classified as well-capitalized
and is in compliance with all regulatory capital requirements. Management
anticipates Northern Star Bank will continue to be classified as
well-capitalized.
As of December 31, 1999, 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 Northern Star's 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 Northern Star's 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
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<PAGE> 51
effective for fiscal years beginning after June 15, 2000. Retroactive
application to financial statements of prior periods is not required. Northern
Star does not currently have any derivative instruments nor is it 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. Northern Star elected to
adopt SOP 98-5 early for the year ended June 30, 1999 and as a result,
recognized approximately $248,000 in its 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 by
allowing Northern Star 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. Northern Star
cannot predict whether any of these proposals will be adopted or, if adopted,
how these proposals would affect Northern Star.
YEAR 2000
Like many financial institutions, Northern Star relies on computers to
conduct its business and information systems processing. Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly, causing computer malfunctions. Some banking industry
experts remain concerned that some computers may not be able to interpret
additional dates in the year 2000 properly. Northern Star has operated and
evaluated its computer operating systems following January 1, 2000 and has not
identified any errors or experienced any computer system malfunctions. Northern
Star will continue to monitor its information systems to assess whether its
systems are at risk of misinterpreting any future dates and will develop
appropriate contingency plans to prevent any potential system malfunction or
correct any system failures. Northern Star has surveyed its key customers to
determine their exposure to the year 2000 issue and, based upon key customers'
reports, Northern Star believes it will not have any material exposure to its
loan portfolio as a result of the year 2000 issue.
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<PAGE> 52
NORTHERN STAR FINANCIAL, INC.
BUSINESS
Northern Star's 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 where the bank is located. Northern Star Bank offers 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. Northern Star Bank provides a range of lending
services including commercial, real estate and consumer loans to individuals,
small or medium-sized businesses and professional associations.
Northern Star believes that these businesses and individuals in its 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,
Northern Star Bank seeks to provide its 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. Northern Star is managed by
individuals who have lived and worked in the market for many years and believes
that Northern Star can leverage the experience of its management to grow its
business. By combining support with the products and services Northern Star
Bank's customers require and its local management and personalized service,
Northern Star seeks to foster a business that enables it to effectively compete
in its market with other financial institutions of all sizes.
STRATEGY
Northern Star believes 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. Northern
Star believes that there is a need and support for locally operated and managed
community banks in many of these communities.
Northern Star's plan is to grow its community banking business through
acquisition and branching, and diversify its revenue sources by providing other
traditional and non-traditional financial services. Northern Star intends to
diversify and grow its community banking business by expanding its geographic
presence in and outside the State of Minnesota. In connection with this
geographic expansion, Northern Star intends to expand and diversify its balance
sheet to be able to provide a greater level of commercial and agricultural
lending and other financial services.
Northern Star intends to grow its community banking business while
maintaining the critical components it believes support successful community
banking. Northern Star intends to operate each of its affiliated community banks
using local management and board of directors. Northern Star intends to rely on
each local community bank's management and board of directors to determine the
best interests of the community bank within its particular community and each
bank will have authority to make all decisions affecting credit, pricing and the
market of bank service. Northern Star believes 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 Northern Star increases the
number of its affiliated community banks, it intends to develop and implement a
technology integration strategy to integrate and improve each banks' information
management systems and enhance customer service.
Northern Star intends to diversify and expand its 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 Northern Star by allowing it to
provide non-traditional banking services such as insurance and securities
brokerage services. See "Supervision and Regulation." Northern Star intends to
explore expansion, through acquisition, internal development and the use of
strategic alliances with third parties, into non-community banking services.
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<PAGE> 53
PRODUCTS AND SERVICES
Northern Star Bank provides a wide variety of commercial and consumer
lending and deposit services. Northern Star Bank offers these traditional
banking products and services to its customers through loan representatives at
banking offices.
DEPOSITS. Deposits are Northern Star Bank's principal source of funds.
Northern Star Bank offers 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. Northern Star Bank
attempts to offer transaction accounts and time certificates at rates
competitive to those offered in the Mankato area. In addition, Northern Star
Bank offers certain retirement account services and Individual Retirement
Accounts (IRAs).
LENDING ACTIVITIES. Northern Star Bank emphasizes 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 Northern Star Bank's
market area.
Northern Star Bank offers 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.
Northern Star 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. Northern Star Bank attempts to reduce credit risk in its 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, Northern Star Bank often reviews the personal
financial statements of the principal owners and require personal guarantees of
the principal owners of the collateral property.
In addition, Northern Star Bank provides 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.
Northern Star Bank's 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 a designated senior loan officer.
Northern Star Bank has 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. Northern Star does not make any loans to any of its
directors, officers, or employees, unless the loan is approved by Northern Star
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 Northern Star.
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<PAGE> 54
Northern Star's 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 Northern Star Bank), in general, Northern Star
Bank is subject to a loan-to-one-borrower limit. Since the enactment of the
FIRREA in 1989, Northern Star generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its 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 Northern Star is able to sell
participations in loans to other financial institutions, Northern Star 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. Northern Star Bank provides a variety of other
services, including cash management services, safe deposit boxes, traveler's
checks, and direct deposit of payroll and social security checks. Northern Star
Bank offers telephone banking and intends to provide in the future automatic
drafts for various accounts. Northern Star Bank is associated with a shared
network of automated teller machines that may be used by customers throughout
Minnesota and other regions and permit customers to access their funds 24 hours
a day from locations outside Northern Star Bank's primary market area. Northern
Star Bank also offers MasterCard and VISA credit card services through a
correspondent bank as an agent for Northern Star Bank.
Northern Star entered into a joint venture in July 1999 with First Federal
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, Northern Star acquired a 49% equity interest in Homeland.
LOCATIONS AND SERVICE AREA
Northern Star's 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 Northern Star expects to
draw a significant portion of its business. Approximately 85,000 people reside
in Northern Star's principal market area. The 1997 median household income of
residents living in this 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 Northern
Star's principal market area. Northern Star believes there is a need for a
locally operated and managed community bank and that it can successfully fill
this need. Northern Star focuses its marketing efforts on attracting and
servicing small to medium-sized businesses and individuals. Northern Star has
utilized, or plans to utilize in the future, newspaper, radio and billboard
advertising in its principal market area to promote its products and services
and intends to continue to emphasize the customer benefits of Northern Star's
local management and ownership, its community focus, its commitment to providing
personalized customer service and its competitive products and services.
COMPETITION
Northern Star's business is highly competitive. Northern Star Bank competes
with community and national banks, credit unions, thrifts, and non-financial
institutions such as insurance companies and investment banks. Currently,
Northern Star's 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
Northern Star Bank. Most, if not all, of Northern Star's competitors have
substantially greater financial resources than Northern Star. Northern Star
believes its competitive strength will lie in providing long-term,
relationship-oriented banking services by management and
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<PAGE> 55
employees with strong ties to the Mankato area. Northern Star attempts to target
all residents of its principal market area, especially local businesses and
homeowners.
EMPLOYEES
As of December 31, 1999, Northern Star Bank had 8 full-time employees and
one part-time employee. Northern Star has only one employee, Thomas Stienessen,
who is also the President and Chief Executive Officer of Northern Star Bank.
Northern Star Bank's employees are not represented by a collective bargaining
agreement.
PROPERTIES
Northern Star's headquarters and Northern Star Bank's office is located at
1650 Madison Avenue, Mankato, Minnesota. Northern Star has entered into a 10
year lease agreement to rent approximately 5,000 square feet. Pursuant to the
lease agreement, Northern Star pays 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. Northern Star has
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. Northern
Star 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
Northern Star or any of its property.
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<PAGE> 56
NORTHERN STAR FINANCIAL, INC.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists Northern Star's directors and executive officers
and the senior officers of Northern Star Bank. Northern Star's directors also
serve as directors of Northern Star Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------- --- ----------------------------------
<S> <C> <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)............. 71 Chief Financial Officer, Treasurer,
Secretary and a Class II Director
Steven A. Loehr................. 50 Class I Director
Michael P. Reynolds(1).......... 57 Class I Director
Thomas J. Reynolds(1)........... 62 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 Northern Star's formation. He also serves as Chief
Executive Officer of Northern Star Bank. Prior to forming Northern Star, 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 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 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
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<PAGE> 57
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 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 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 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 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 a Class III director of Northern Star 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 Northern Star's
employee stock plans and an audit committee which is responsible for reviewing
Northern Star's audit process.
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<PAGE> 58
NORTHERN STAR FINANCIAL, INC.
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
Northern Star's 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 1999,
each current director except Mr. Stienessen received an option to purchase 3,000
shares at $10 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 Northern Star's formation. No other
executive officer received total salary and bonus compensation in excess of
$100,000 for fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
SECURITIES
SALARY BONUS UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) (# OF SHARES)
------------------------------ ------------ ------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Thomas P. Stienessen.......... 1999 $ 100,000 -- 9,400
Chief Executive Officer and 1998 -- -- --
President of Northern Star
Financial & Northern Star Bank
</TABLE>
- ----------
(1) Compensation to Mr. Stienessen is paid by Northern Star Bank, a
wholly-owned subsidiary of Northern Star.
EMPLOYMENT AGREEMENT
Northern Star has 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 Northern Star Bank. During the term of
the agreement, Mr. Stienessen will be paid an annual salary determined by the
board (currently $100,000) and is eligible to participate in discretionary
bonuses that may be authorized by the board of directors to senior management of
Northern Star Bank. Mr. Stienessen will be eligible to participate in any
management incentive program of Northern Star Bank or any long-term equity
incentive program and will be eligible for grants of stock options and other
awards thereunder. Additionally, Mr. Stienessen will participate in any
retirement, welfare and other benefit programs established by Northern Star Bank
and is entitled to a life insurance policy and an accident liability policy and
reimbursement for automobile expenses, club dues, and travel and business
expenses. Furthermore, if in connection with a change of control of Northern
Star Bank, Mr. Stienessen is terminated without cause or voluntarily quits
because of certain specified reasons, he is entitled to a lump sum payment of
2.99 times his annual base salary.
OPTION/SAR GRANTS DURING 1999 FISCAL YEAR
The following table sets forth options Northern Star has granted to the
Chief Executive Officer during its last fiscal year ended June 30, 1999.
Northern Star has not granted any stock appreciation rights.
-51-
<PAGE> 59
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
-------------------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas P. Stienessen .... 6,400(1) 51.6% $ 10.00 8/10/08
3,000(2) 24.2% $ 10.00 12/31/08
</TABLE>
- ----------
(1) Such option was exercisable immediately on the date of grant.
(2) Such option is exercisable in three equal annual installments of 1,000
shares each commencing December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES DURING 1999 FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
No options were exercised by the Chief Executive Officer during fiscal
1999. 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 VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Thomas P. Stienessen .... 6,400 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, 1999, as
quoted on the OTC Bulletin Board, was $10.00.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Northern Star's 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, a directors and
principal shareholder of Northern Star, is a partner of Colonial Square
Partners, Inc. Northern Star 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. Northern Star
obtained an independent appraisal of market rents in Northern Star Bank's
proposed market. Northern Star believes that this transaction is on terms no
less favorable to Northern Star Bank than could be obtained from an unaffiliated
third party.
Mr. Thomas Stienessen, Northern Star's President and Chief Executive
Officer, paid the organizational expenses of Northern Star and Northern Star
Bank until December 31, 1998, when the closing occurred on the minimum amount of
Northern Star's initial public offering. At that time Northern Star reimbursed
Mr. Stienessen for such expenses in the amount of $72,981 from the proceeds of
the offering.
Northern Star believes that all prior transactions between Northern Star
and its 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 Northern Star's
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 Northern Star's expense, to Northern Star's
or independent legal counsel.
-52-
<PAGE> 60
NORTHERN STAR FINANCIAL, INC.
SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table provides information as of December 31, 1999, and as
adjusted to reflect the sale of the minimum and maximum number of shares in
Northern Star's pending public offering, concerning the beneficial ownership of
Northern Star's common stock by each person known to be the beneficial owner of
more than 5% of Northern Star's outstanding common stock, by each executive
officer named in the Summary Compensation Table, by each director, and by all of
Northern Star's directors and executive officers as a group. The table does not
give effect to the issuance of shares of Northern Star common stock to First
Federal's shareholders in the merger. 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 PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES OUTSTANDING SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE PRIOR TO THE AFTER OFFERING
OFFERING AND THE OFFERING AND THE ------------------
NAME AND ADDRESS OF BENEFICIAL OWNER MERGER(1) MERGER MINIMUM MAXIMUM
---------------------------------------- ------------------ ------------------ ------- -------
<S> <C> <C> <C> <C>
Frank L. Gazzola(2)(3)................. 43,400 9.9% 4.6% 3.0%
Steven A. Loehr(2)(4).................. 42,400 9.7% 4.5% 3.0%
Thomas P. Stienessen(2)(5)............. 41,400 9.5% 4.4% 2.9%
Thomas J. Reynolds(2)(6)............... 43,400 9.9% 4.6% 3.0%
Robert H. Dittrich(2)(7)............... 36,000 8.4% 3.9% 2.5%
Dean M. Doyscher(2)(8)................. 35,000 8.0% 3.7% 2.4%
Michael P. Reynolds(2)(9).............. 6,200 1.4% 0.7% 0.4%
Joyce Larson(10)....................... 50,000 11.7% 5.4% 3.5%
Melvin Larson(10)...................... 50,000 11.7% 5.4% 3.5%
Mesirow Financial Inc.(11)............. 33,950 8.0% 3.7% 2.4%
Catalytic Combustion Corp. 401(k)
Plan(12)............................. 30,000 7.0% 3.2% 2.1%
Susan L. Baker(13)..................... 30,000 7.0% 3.2% 2.1%
All directors and executive officers
as a group (7 persons)(14)........... 247,800 50.8% 25.1% 16.7%
</TABLE>
- ----------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them as of December 31, 1999, 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 11,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(4) Includes 10,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(5) Includes 7,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Stienessen shares voting and investment power over such shares with his
wife.
(6) Includes 11,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Reynolds shares voting and investment power over such shares with his wife.
(7) Includes 4,000 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(8) Includes 10,000 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Doyscher shares voting and investment power over such shares with his wife.
(9) Includes 5,200 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(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 58,800 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
-53-
<PAGE> 61
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with First
Federal's consolidated financial statements and the related notes for the fiscal
years ended September 30, 1998 and 1999, included elsewhere in this prospectus.
First Federal's consolidated financial statements include First Federal Holding
Company of Morris, Inc. and First Federal Savings Bank ("Savings Bank"), its
majority-owned subsidiary bank, as well as West Central Investments, Inc., which
is a wholly-owned subsidiary of the Savings Bank, and Homeland Mortgage, LLC
("Homeland").
OVERVIEW
First Federal Holding Company of Morris, Inc. ("First Federal") is a
savings and loan holding company that was incorporated in Minnesota on December
16, 1991. First Federal owns 90.29% of the common stock of the Savings Bank.
The Savings Bank provides various financial services to communities of
Morris, Benson and Breckenridge, Minnesota and the surrounding areas. These
financial services include mortgage, commercial and consumer lending, and
various deposit and savings plans. The Savings Bank is the sole shareholder of
West Central Investments, Inc. ("Investments"), which provides investment and
brokerage services through the three savings bank locations. The Savings Bank
also holds 51% ownership interest in Homeland, which originates and services one
to four family real estate mortgage loans through its office in Morris,
Minnesota.
During the period from September 30, 1997 to September 30, 1999, total
assets grew approximate $2.3 million to $57,566,000, while total loans, net of
reserves, similarly increased from $41,598,000 to $45,163,000. Total assets
increased further during the first quarter of fiscal 2000, to $61,060,000, along
with total loans, net of reserves, which grew 1.7%, to $45,943,000. During
fiscal 1999, First Federal had net income of $369,000, compared with net income
of $537,000 during fiscal 1998. Net income for the fiscal quarter ending
December 31, 1999 was $21,000, compared with net income of $124,000 for the same
period in the prior fiscal year. The decline in net income during fiscal 1999
and the first quarter of fiscal 2000 is the result of several factors: expenses
associated with the conversion of the Savings Bank's data processing system, a
nonqualified retirement plan for directors and officers, and operating losses at
Homeland, particularly operating losses associated with Homeland's previous
Edina, Minnesota office, which was closed on December 31, 1999.
RESULTS OF OPERATIONS
First Federal's operating results depend primarily on its net interest
income. Net interest income is determined by interest rate spread, the relative
amounts of interest-earning assets and interest- bearing liabilities, and the
degree of mismatch in the maturing and repricing characteristics of
interest-earning assets and interest-bearing liabilities. The interest rate
spread is the difference between the yield earned on interest-bearing assets and
the rates paid on interest-bearing liabilities. Operations are also affected by
the establishment of provisions for loan losses and the level of other income,
including service charges on deposit accounts and sold real estate loan fees, as
well as other expenses and income tax provisions.
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Federal reported net interest income of $2,134,000 for the fiscal
year ended September 30, 1999. Net interest income before the provision for
credit losses of $2,000 was earned for the period after incurring an interest
expense of $2,203,000. Loan interest income of $3,936,000 represented the
largest portion of interest income, since First Federal had the largest portion
of earning assets in its loan portfolio. The weighted average yields earned on
interest-bearing assets of $53,279,000 were 8.14% for the period and the average
rate paid on interest-bearing liabilities of $52,054,000 were 4.23%
-54-
<PAGE> 62
for the period. The interest rates spread (the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities) was 3.91%. This compares with 1998 weighted
average yields of 8.15%, average rates paid of 4.42%, and an interest rate
spread of 3.73%.
The provision for loan losses was $527,000 at September 30, 1999,
reflecting management's estimate of the amount necessary to adequately reflect
possible loan losses. The allowance for credit losses as a percentage of
year-end loans was 1.12%, which is approximately the same allowance percentage
at September 30, 1998. Management's judgment as to the adequacy of the allowance
is based upon an evaluation of the inherent risks in the loan portfolio, which
management believes to be reasonable, but this may or may not prove to be
accurate. Thus, there is no assurance 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. First Federal had a total of $51,000
net bad debt recoveries in fiscal 1999, compared with net chargeoffs of $42,000
in fiscal year 1998.
First Federal earned non-interest income of $536,000 for the period,
representing loan origination fees and service charges on deposit accounts, a
gain on sale of investments and gains on the sale of residential mortgage loans.
As a percentage of average assets, non-interest income was 0.93% for the fiscal
year ended September 30, 1999 and 0.91% for the fiscal year ended September 30,
1998.
First Federal incurred non-interest expenses of $2,078,000 for fiscal year
ended September 30, 1999, consisting of compensation and employee benefits of
$1,203,000, occupancy expense and equipment costs of $218,000, federal deposit
insurance premiums of $55,000 and other general and administrative costs of
$602,000. As a percentage of average assets, non-interest expenses were 3.62%
for the fiscal year ended September 30, 1999, compared with 3.16% for the fiscal
year ended September 30, 1998.
Net income for First Federal for the year ended September 30, 1999 was
$369,000, compared with net income of $537,000 during fiscal year 1998, a
reduction of 31%. The decline in net income during fiscal 1999 is the result of
several factors: expenses associated with the conversion of the Savings Bank's
data processing system, expenses associated with the implementation of a
nonqualified retirement plan for directors and officers, and operating losses at
Homeland, particularly operating losses associated with Homeland's recently
closed Edina, Minnesota office.
At September 30, 1999, First Federal had total assets of $57,566,000, which
consisted of net loans of $45,163,000, loans held for sale of $1,516,000,
mortgage-backed securities of $2,478,000, investment securities of $2,258,000
and cash and cash equivalents of $2,180,000. Non-interest earning assets of
$3,971,000 consisted of total investment in premises and equipment of $752,000,
cash surrender value of life insurance of $1,703,000 and other assets of
$1,516,000. At September 30, 1999, First Federal had deposit liabilities of
$48,484,000, FHLB advances at $2,598,000 and other borrowings of $1,002,000.
Stockholder's equity at September 30, 1999 was $3,666,000, compared with
stockholders' equity of $3,320,000 at September 30, 1998.
FIRST QUARTER ENDED DECEMBER 31, 1999
First Federal reported net interest income of $521,000 for the fiscal
quarter ended December 31, 1999, after incurring an interest expense of
$559,000. Loan interest income of $996,000 again represented the largest portion
of interest income. The weighted average yields earned on interest-bearing
assets of $54,368,000 were 7.95% for the period and the average rates paid on
interest-bearing liabilities of $53,883,000 were 4.15% for the period. The
interest rates spread (the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities) was 3.80%. This compares with weighted average yields of 8.23%
average rates paid of 4.38%, and an interest rate spread of 3.85% during the
same period a year earlier.
The provision for loan losses was $525,000 at December 31, 1999, reflecting
management's estimate of the amount necessary to adequately reflect possible
loan losses. The allowance for credit losses as a percentage of quarter end
loans was 1.10%, which is approximately the same allowance percentage at
December 31, 1998 and at September 30, 1999.
-55-
<PAGE> 63
Management's judgment as to the adequacy of the allowance is based upon an
evaluation of the inherent risks in the loan portfolio, which management
believes to be reasonable, but this may or may not prove to be accurate. Thus,
there is no assurance 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. First Federal had a total of $2,000 net bad debt
charge-offs in the first quarter of fiscal 2000, compared with net recoveries of
$47,000 in the first quarter of fiscal year 1999.
First Federal earned non-interest income of $181,000 for the period,
representing loan origination fees and service charges on deposit accounts, a
gain in cash surrender value of life insurance and gains on the sale of
residential mortgage loans. As a percentage of average assets, non-interest
income was 0.3% for the fiscal quarter ended December 31, 1999 and 0.2% for the
fiscal quarter ended December 31, 1998.
First Federal incurred non-interest expenses of $708,000 for fiscal quarter
ended December 31, 1999, including compensation and employee benefits of
$367,000 occupancy expense and equipment costs of $64,000 and other general and
administrative costs of $277,000. As a percentage of average assets,
non-interest expenses were 1.2% for the fiscal quarter ended December 31, 1999,
compared with 0.8% for the fiscal quarter ended December 31, 1998.
Net income for First Federal for the fiscal quarter ended December 31, 1999
was $21,000, compared with net income of $125,000 during the fiscal quarter
ended December 31, 1998, a reduction of 83%. The decline in net income during
the fiscal quarter ended December 31, 1999 continued the decline in net income
during the 1999 fiscal year and was the result of the same factors: expenses
associated with the conversion of the Saving Bank's data processing system,
expenses associated with the implementation of a nonqualified retirement plan
for directors and officers, and operating losses at Homeland, particularly
operating losses associated with Homeland's recently closed Edina, Minnesota
office.
At December 31, 1999, First Federal had total assets of $61,060,000, which
consisted of net loans of $45,943,000, loans held for sale of $1,568,000,
mortgage-backed securities of $2,267,000 investment securities of $2,823,000 and
cash and cash equivalents of $4,297,000. Non-interest earning assets of
$4,162,000 consisted of total investment in premises and equipment of
$1,107,000, cash surrender value of life insurance of $1,724,000 and other
assets of $1,331,000. At December 31, 1999, First Federal had deposit
liabilities of $52,528,000. FHLB advances at $2,293,000 and other borrowings of
$1,097,000. Stockholders' equity at December 31, 1999 was $3,674,000 compared
with stockholders' equity of $3,439,000 at December 31, 1998.
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to First
Federal's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998
------------------------------ --------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................. $ 45,588 $3,936 8.63% $ 42,869 $3,843 8.96%
Mortgage-backed securities........ 3,369 219 6.50% 4,725 314 6.65%
Investment securities............. 4,322 182 4.21% 6,687 265 3.96%
-------- ------ -------- ------
Total interest-earning assets... 53,279 4,337 8.14% 54,281 4,422 8.15%
------ ------
Non-interest-earning assets....... 4,186 1,797
-------- --------
Total assets.................... $ 57,465 $ 56,078
======== ========
Interest-bearing liabilities:
Savings accounts.................. $ 48,512 1,947 4.01% $ 48,821 2,067 4.23%
Other liabilities................. 3,542 256 7.23% 2,376 193 8.12%
-------- ------ -------- ------
Total interest-bearing
liabilities..................... 52,054 2,203 4.23% 51,197 2,260 4.42%
------ ------
Non-interest bearing liabilities.... 1,918 1,748
-------- --------
Total liabilities................. 53,972 52,945
</TABLE>
-56-
<PAGE> 64
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Stockholders' Equity............................. 3,493 3,133
-------- --------
Total liabilities and stockholders' equity ..... $ 57,465 $ 56,078
======== ========
Net interest income.............................. $ 2,134 $ 2,162
======== ========
Interest rate spread............................. 3.91% 3.73%
Net yield on interest-earning assets............. 4.01% 3.98%
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 1.02x 1.06x
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
December 31, 1999
----------------------------------
Average Average
BALANCE INTEREST YIELD/COST
---------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable...................................... 47,402 $ 996 8.40%
Mortgage-backed securities............................ 2,358 39 6.62%
Investment securities................................. 4,608 45 3.91%
-------- -----
Total interest-earning assets....................... $ 54,368 $1,080 7.95%
Non-interest earning assets......................... 4,568
--------
Total assets........................................ $ 58,936
========
Interest-bearing liabilities:
Savings accounts...................................... $ 50,352 $ 499 3.96%
Other liabilities..................................... 3,531 60 6.80%
-------- -----
Total interest-bearing liabilities.................. $ 53,883 $ 559 4.15%
--------
Non-interest bearing liabilities........................ 1,089
--------
Total liabilities..................................... $ 54,972
Stockholders' equity.................................... 3,964
--------
Total liabilities and stockholders' equity. .......... $ 58,936
========
Net interest income..................................... $ 521
======
Interest rate spread.................................... 3.80%
Net yield on interest-earning assets.................... 3.83%
Ratio of average interest-earning
assets to average interest-bearing liabilities.......... 1.01x
</TABLE>
RATE/VOLUME ANALYSIS
The tables below set forth certain information regarding changes in interest
income and interest expenses of First Federal for periods indicated. For each
category of interest-earning assets 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 September 30,
1999 VS. 1998
----------------------------------------
INCREASE (DECREASE) DUE TO
----------------------------------------
RATE/
VOLUME RATE VOLUME NET
------ ---- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............. $ 242 $ (141) $ (9) $ 92
Mortgage-backed securities... (90) (7) 2 (95)
Investment securities........ (94) 18 (6) (82)
Other interest earning
assets....................... -- -- -- --
----- ------ ----- ------
Total interest-earning 58 (130) (13) (85)
----- ------ ----- ------
assets.........................
Interest expense:
Savings accounts............. (13) (107) 1 (119)
Other liabilities............ 93 (21) (10) 62
----- ------ ----- ------
Total interest-bearing
liabilities........... 80 (128) (9) (57)
----- ------ ----- ------
Net change in net interest
income....................... $ (22) $ (2) $ (4) $ (28)
===== ====== ===== ======
<CAPTION>
QUARTER ENDED DECEMBER 31,
1999 VS. 1998
-------------------------------------
INCREASE (DECREASE) DUE TO
-------------------------------------
RATE/
VOLUME RATE VOLUME NET
------ ---- ------ ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............. $ 80 $ (76) $ (6) $ (2)
Mortgage-backed securities... (29) (2) 1 (30)
Investment securities........ (27) -- -- (27)
</TABLE>
-57-
<PAGE> 65
<TABLE>
<S> <C> <C> <C> <C>
Other interest earning assets.......... -- -- - --
----- ----- ------- -----
Total interest-earning assets......... 24 (78) (5) $ (59)
----- ----- ------- -----
Interest expense:
Savings accounts......................... 7 (29) -- (22)
Other liabilities........................ 26 (10) (5) 11
----- ----- ------- -----
Total interest-bearing liabilities... 33 (39) (5) (11)
----- ----- ------- -----
Net change in net interest income........ $ (9) $ (39) $ (48)
===== ===== ======= =====
</TABLE>
Net interest income decreased slightly during the fiscal year ended
September 30, 1999 and for the fiscal quarter ended December 31, 1999, due to
the shift of approximately $1.7 million of earning assets to the nonqualified
retirement plan for directors and officers. The income from these assets is not
included in the calculation of net interest income (but is included in
non-interest income).
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1999, which are
expected to reprice or mature in each of the future time periods shown. The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined by the contractual terms of the asset or
liability. The table assumes prepayments and scheduled principal amortization of
fixed-rate loans and mortgage-backed securities, and assumes the adjustable rate
mortgage loans will reprice at contractual repricing intervals. No consideration
has been provided for the impact of future commitments and loans in process.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------
FOUR OVER ONE OVER OVER TEN
LESS THAN MONTHS THROUGH THREE OVER FIVE THROUGH OVER
THREE THROUGH THREE THROUGH THROUGH TWENTY TWENTY
MONTHS ONE YEAR YEARS FIVE YEARS TEN YEARS YEARS YEARS TOTAL
---------- --------- -------- ------------ --------- -------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans and MBS... $ 788 $ 2,048 $ 3,991 $ 2,348 $ 7,957 $ 7,618 $1,697 $ 26,447
Other loans.............. 1,917 2,961 4,393 10,918 2,589 424 -- 23,202
Investment securities.... 150 317 1,576 -- -- -- 3 2,046
--------- --------- --------- --------- --------- -------- ------ --------
Total interest-earning
assets............... 2,855 5,326 9,960 13,266 10,546 8,042 1,700 51,695
--------- --------- --------- --------- --------- -------- ------ --------
Interest-bearing
liabilities:
Non-interest bearing
deposits............... 3,770 3,770
NOW and Super NOW
accounts............... 5,106 5,106
Savings accounts......... 5,339 5,339
Money market deposit
accounts............... 2,727 2,727
Certificates of
deposit................ 6,124 16,947 7,578 893 -- -- -- 31,542
FHLB Advances............ 304 776 1,518 -- -- -- -- 2,598
Notes Payable............ 0 417 112 122 351 -- -- 1,002
--------- --------- --------- --------- --------- -------- ------ --------
Total interest-bearing
liabilities.......... 23,370 18,140 9,208 1,015 351 -- -- 52,084
--------- --------- --------- --------- --------- -------- ------ --------
Interest sensitivity gap... $ (20,515) $ (12,814) $ 752 $ 12,251 $ 10,195 $ 8,042 $1,700 $ (389)
========= ========= ========= ========= ========= ======== ====== ========
Cumulative interest
sensitivity gap.......... $ (20,515) $ (33,329) $ (32,577) $ (20,326) $ (10,131) $ (2,089) $ (389) $ (389)
========= ========= ========= ========= ========= ======== ====== ========
Cumulative ratio of
interest-earning assets
to interest-bearing
liabilities.............. 12.22% 19.71% 35.77% 60.71% 80.55% 95.99% 99.26% 99.25%
========= ========= ========= ========= ========= ======== ======= =========
Cumulative ratio of
cumulative gap to total
assets................... (35.64)% (57.90)% (56.59)% (35.31)% (17.60)% (3.63)% (0.68)% (0.68)%
========= ========= ========= ========= ========= ======== ======= =========
</TABLE>
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 which are expected
to reprice or mature in each of the future time periods shown. The amount of
assets or liabilities shown which reprice or mature during the particular period
were determined by the contractual terms of the asset or liability.
-58-
<PAGE> 66
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------
FOUR OVER ONE OVER OVER TEN
LESS THAN MONTHS THROUGH THREE OVER FIVE THROUGH OVER
THREE THROUGH THREE THROUGH THROUGH TWENTY TWENTY
MONTHS ONE YEAR YEARS FIVE YEARS TEN YEARS YEARS YEARS TOTAL
--------- -------- ----- ---------- --------- ----- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans and MBS... $ 826 $ 2,081 $ 3,772 $ 2,154 $ 7,612 $ 7,561 $ 2,111 $ 26,117
Other loans.............. 3,995 1,566 4,491 11,175 2,598 340 24,165
Investment securities.... 154 1,015 1,395 30 3 2,597
--------- --------- --------- --------- --------- -------- -------- --------
Total interest-earning
assets............... 4,975 4,662 9,658 13,329 10,240 7,901 2,114 52,879
--------- --------- --------- --------- --------- -------- -------- --------
Interest-bearing
liabilities:
Non-interest bearing
deposits............... 4,892 4,892
NOW and Super NOW
accounts............... 5,851 5,851
Savings accounts......... 5,646 5,646
Money market deposit
accounts............... 1,580 1,580
Certificates of
deposit................ 6,221 14,768 12,733 837 34,559
FHLB Advances............ 758 18 1,517 2,293
Notes Payable............ 96 417 112 122 350 1,097
--------- --------- --------- --------- --------- -------- -------- --------
Total interest-bearing
liabilities.......... 25,044 15,203 14,362 959 350 -0- -0- 55,918
--------- --------- --------- --------- --------- -------- -------- --------
Interest sensitivity
gap...................... $ (20,069) $ (10,541) $ (4,704) $ 12,370 $ 9,890 $ 7,901 $ 2,114 $ (3,039)
========= ========= ========= ========= ========= ======== ======== ========
Cumulative interest
sensitivity gap.......... $ (20,069) $ (30,610) $ (35,314) $ (22,944) $ (13,054) $ (5,153) $ (3,039) $ (3,039)
========= ========= ========= ========= ========= ======== ======== ========
Cumulative ratio of
interest-earning assets
to interest-bearing
liabilities.............. 19.87% 23.94% 35.33% 58.71% 76.66% 90.78% 94.57% 94.57%
========= ========= ========= ========= ========= ======== ======== ========
Cumulative ratio of
cumulative gap to total
assets................... (32.87)% (50.13)% (57.83)% (37.58)% (21.38)% (8.44)% (4.98)% (4.98)%
========= ========= ========= ========= ========= ======== ======== ========
</TABLE>
Interest rate sensitivity is the result of differences in the amounts and
repricing dates of rate-sensitive assets and rate-sensitive liabilities. These
differences, or interest rate repricing "gap", provide an indication of the
extent to which First Federal's net interest income is affected by future
changes in interest rates. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to affect net interest
income adversely. Conversely, during a period of rising interest rates, a
negative gap would tend to result in a decrease in net interest income, while a
positive gap would tend to result in an increase in net interest income. At
September 30, 1999 and again at December 31, 1999, First Federal was
asset-sensitive over short- and mid-terms and liability-sensitive over the
longer terms. However, this analysis is not a precise indicator of First
Federal's interest-sensitivity position, because the analysis presents only a
static view of the timing of maturities and repricing opportunities.
Certain shortcomings are inherent in the method of analysis presented in
the previous tables. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis over the life of the assets. Further, in the event of a change in interest
rates, prepayment levels and decay rates on core deposits may deviate
significantly from those assumed in calculating the table.
-59-
<PAGE> 67
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of First
Federal's loan portfolio by type of loan at the date indicated. Totals include
loans held for sale.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------------------
1999 1998
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of Loans:
Construction loans.................. $ 288 0.62% $ 177 0.41%
Residential......................... 9,800 20.99% 12,222 28.59%
Commercial.......................... 13,881 29.74% 12,901 30.17%
Commercial business loans............. 6,906 14.79% 5,876 13.74%
Consumer loans........................ 16,296 34.91% 12,036 28.15%
Other
Less:
Deferred loan origination fees and
costs.............................. 36 0.08% 20 0.05%
Allowance for loan losses........... (527) (1.13)% (474) (1.11)%
-------- ------ ------- ------
Total loans, Net...................... $ 46,680 100.00% $42,758 100.00%
======== ====== ======= ======
Type of Security:
Residential real estate 1-4 family.. $ 10,088 21.61% $12,400 29.00%
Other dwelling units................ 978 2.10% 1,010 2.36%
Commercial real estate.............. 12,902 27.64% 11,891 27.81%
Commercial business loans........... 6,906 14.79% 5,876 13.74%
Savings accounts.................... 321 0.69% 274 0.64%
Home improvement.................... 32 0.07% 43 0.10%
Automobiles......................... 7,988 17.11% 6,041 14.13%
Other............................... 7,956 17.04% 5,677 13.28%
Less:
Deferred loan origination fees and
costs.............................. 36 0.08% 20 0.05%
Allowance for loan losses........... (527) (1.13)% (474) (1.11)%
-------- ------ ------- ------
Total loans...................... $ 46,680 100.00% $42,758 100.00%
======== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1999
---------------------
PERCENT
AMOUNT OF TOTAL
------- ---------
<S> <C> <C>
Type of Loans:
Construction loans.................. $ 275 0.56%
Residential......................... 9,833 19.88%
Commercial.......................... 13,728 28.03%
Commercial business loans............. 7,322 14.95%
Consumer loans........................ 16,843 37.58%
Other............................... --
Less:
Deferred loan origination fees and
costs.............................. 36 0.07%
Allowance for loan losses........... (525) (1.07)%
------- ------
Total loans, Net...................... $47,512 100.00%
======= ======
Type of Security:
Residential real estate 1-4 family.. $ 9,177 18.54%
Other dwelling units................ 930 1.90%
Commercial real estate.............. 13,728 28.03%
Commercial business loans........... 7,322 14.95%
Savings accounts.................... 241 0.49%
Home improvement.................... 31 0.06%
Automobiles......................... 8,346 17.04%
Other............................... 8,226 19.99%
Less:
Deferred loan origination fees &
costs.............................. 36 0.07%
Allowance for loan losses........... (525) (1.07)%
------- ------
Total loans...................... $47,512 100.00%
======= ======
</TABLE>
At September 30, 1999, gross loans outstanding, including loans held for
sale, were $47,171,000, compared with total gross loans outstanding as of
September 30, 1998 of $43,212,000, an increase of 9.16%. Approximately half of
this increase was attributable to a special loan program to fund purchases of
interests in a local ethanol cooperative processing plant by producer/members.
Gross loans outstanding increased slightly to $48,001,000 as of December 31,
1999. The principal components of First Federal's loan portfolio as of September
30, 1999 and December 31, 1999 were commercial
-60-
<PAGE> 68
and residential real estate loans and commercial business loans (including
agricultural loans), all of which represented, in aggregate, over 65% of the
loan portfolio. The balance of the portfolio consisted primarily of consumer
loans.
LOAN MATURITY TABLES
The following tables set forth the maturity of First Federal's loan
portfolio at September 30, 1999 and at December 31, 1999. The table does not
include prepayments or scheduled principal repayments. Adjustable rate mortgage
loans are shown as maturing based on contractual maturities. Totals include
loans held for sale. Actual repayments of the loans may differ from maturities
reflected below because borrowers have the right to prepay obligations with or
without prepayment penalties.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------------------------------
1-4 FAMILY OTHER
REAL ESTATE RESIDENTIAL
MORTGAGE COMMERCIAL CONSTRUCTION CONSUMER TOTAL
------------ ----------- ------------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing............... $ 35 $ 113 $ -- $ 19 $ 167
Amounts Due:
Within 3 months............ 164 2,085 144 312 2,705
3 Months to 1 Year......... 230 3,075 144 927 4,376
After 1 Year:
1 to 3 years............... 569 2,268 -- 3,835 6,672
3 to 5 years............... 945 3,330 -- 8,818 13,093
5 to 10 years.............. 1,850 6,316 -- 2,254 10,420
10 to 20 years............. 4,306 3,630 -- 105 8,041
Over 20 years.............. 1,552 145 -- -- 1,697
------- -------- ----- -------- --------
Total due after one year..... 9,222 15,689 -- 15,012 39,923
------- -------- ----- -------- --------
Total amount due............. $ 9,651 $ 20,962 $ 288 $ 16,270 47,171
------- -------- ----- -------- --------
Less:
Allowance for loan losses.... (527)
Loans in process............. --
Deferred loan fees........... 36
--------
Loans receivable, net plus
Loans held for sale...... $ 46,680
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------------------
1-4 FAMILY OTHER
REAL ESTATE RESIDENTIAL
MORTGAGE COMMERCIAL CONSTRUCTION CONSUMER TOTAL
----------- ----------- ------------ -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing............... $ 16 $ -- $ -- $ 14 $ 30
Amounts Due:
Within 3 months............ 60 4,361 -- 399 4,820
3 Months to 1 Year......... 765 1,579 275 1,028 3,647
After 1 Year:
1 to 3 years............... 390 2,247 -- 3,885 6,522
3 to 5 years............... 903 3,237 -- 9,036 13,176
5 to 10 years.............. 1,794 6,154 -- 2,224 10,172
10 to 20 years............. 4,167 3,709 -- 25 7,901
Over 20 years.............. 1,291 442 -- -- 1,733
------- -------- ----- -------- --------
Total due after one year..... $ 8,545 $ 15,789 -- $ 15,170 $ 39,504
------- -------- ----- -------- --------
Total amount due............. $ 9,386 $ 21,729 $ 275 $ 16,611 $ 48,001
------- -------- ----- -------- --------
Less:
Allowance for loan losses (525)
Loans in process............. --
Deferred loan fees........... 36
--------
Loans receivable, net plus
Loans held for sale...... $ 47,512
========
</TABLE>
The following tables set forth as of September 30, 1999 and as of December
31, 1999 the dollar amount of all loans due after the indicated dates which have
pre-determined interest rates and which have floating or adjustable interest
rates.
-61-
<PAGE> 69
<TABLE>
<CAPTION>
As of September 30, 1999
----------------------------------------
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
One-to-four-family... $ 8,868 $ 783 $ 9,651
Commercial........... 16,203 4,759 20,962
Construction......... 288 -- 288
Consumer............. 16,189 81 16,270
------- ------ -------
Total.............. $41,548 $5,623 $47,171
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
One-to-four-family... $ 8,642 $ 744 $ 9,386
Commercial........... 16,147 5,582 21,729
Construction......... 275 -- 275
Consumer............. 16,541 70 16,611
-------- ------ --------
Total.............. $ 41,605 $6,396 $ 48,001
======== ====== ========
</TABLE>
ORIGINATION, PURCHASE AND SALE OF LOANS
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
For the Three Months FOR THE YEAR
------------------------------------------------------------------- ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- ------------------------------------
1999 1999 1998
------------------------------------------------------------------- --------------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total gross loans receivable at beginning of
period........................................ $ 47,171 $ 43,212 $ 42,876
-------- -------- --------
Loans originated:
1 to 4 family residential................... 2,454 8,045 11,135
Commercial real estate...................... 452 5,377 2,315
Construction loans.......................... 59 567 133
Consumer loans.............................. 2,593 12,917 9,886
Commercial business loans................... -- 3,302 3,160
-------- -------- --------
Total loans originated........................ $ 5,558 30,208 26,629
Loans purchased:
Commercial real estate, other residential... -- -- 150
Mortgage-backed securities.................. -- -- 1,032
-------- -------- --------
Total loans purchased......................... -- -- 1,182
-------- -------- --------
Loans sold:
Whole loans................................. 733 3,606 8,567
Mortgage-backed securities.................. -- -- --
-------- -------- --------
Total loans sold.............................. 733 3,606 8,567
-------- -------- --------
Loan principal repayments..................... 3,994 22,643 18,908
Net loan activity............................. 831 3,959 336
-------- -------- --------
Total gross loans receivable at end of
period................................ $ 48,002 $ 47,171 $ 43,212
======== ======== ========
</TABLE>
The foregoing information includes loans originated by Homeland Mortgage,
LLC, a mortgage originator and servicer established in July 1999.
-62-
<PAGE> 70
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------------------------------------- ----------------------------------
1999 1999 1998
-------------------- -------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling $ 16 $ 35 $ 27
units....................................
All other mortgage loans................... -- -- 283
Non-mortgage loans:
Commercial................................. -- 113 37
Consumer................................... 14 19 18
----- ----- -----
Total........................................ 30 167 365
===== ===== =====
Accruing loans which are contractually past
due 90 days of more:
Mortgage loans:
Mortgage loans other than 1-4 family....... -- -- --
----- ----- -----
Total........................................ -- -- --
===== ===== =====
Total non-accrual and accrual loans.......... 30 167 365
Real estate owned............................ -- -- 32
----- ----- -----
Total non-performing assets.................. $ 30 $ 167 $ 397
===== ===== =====
Total non-accrual and accrual loans to net
loans(1)................................... 0.06% 0.36% 0.85%
====== ====== =====
Total non-accrual and accrual loans to total
assets..................................... 0.05% 0.29% 0.64%
====== ====== =====
Total non-performing assets to total assets.. 0.05% 0.29% 0.69%
====== ====== =====
- ----------
</TABLE>
(1) Net loans include loans held for sale.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table summarizes First Federal's loan loss experience:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------------------ --------------------------------
1999 1999 1998
------------------------------------------------------------------ --------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total loans outstanding(1)................... $47,512 $47,171 $43,212
======= ======= =======
Average loans outstanding.................... $47,402 $45,588 $42,848
======= ======= =======
Allowance balances (at beginning of period).. $ 527 $ 474 $ 504
------- ------- -------
Provision (credit)
Residential................................ -- -- --
Commercial real estate..................... -- 2 12
Consumer................................... -- -- --
Net (charge-offs) recoveries
Residential................................ (2) 6 (28)
Commercial real estate..................... -- -- --
Consumer................................... -- 45 (14)
------- ------- -------
Allowance balance (at end of period)......... $ 525 $ 527 $ 474
======= ======= =======
Allowance for loan losses as a percent of
total loans outstanding.................... 1.10% 1.12% 1.10%
Net loans charged off as a percent of average
loans outstanding.......................... 0.00% 0.11% (0.10)%
======= ======= =======
- ----------
</TABLE>
(1) Includes loans held for sale.
First Federal had net recoveries of $51,000 during the fiscal year ended
September 30, 1999, compared with net charge-offs of $42,000 during the fiscal
year ended September 30, 1998. First Federal had net charge-offs of $2,000
during the fiscal quarter ended December 31, 1999, compared with net recoveries
of $47,000 during the same period in the prior fiscal year.
-63-
<PAGE> 71
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30,
-------------------- --------------------------------------------
1999 1999 1998
-------------------- -------------------- ----------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
At end of period allocated to:
One-to-four-family................. $ 67 18.94% $ 69 20.78% $ 88 28.28%
Commercial real estate and 114 30.58% 114 29.43% 139 29.86%
multi-family.....................
Construction....................... 2 15.72% 2 0.61% 1 0.41%
Consumer and other loans........... 342 34.76% 342 49.18% 246 41.45%
----- ------ ----- ------ ----- ------
Total allowance........... $ 525 100.00% $ 527 100.00% $ 474 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
First Federal has developed policies and procedures for evaluating the
overall quality of its credit portfolio and identifying potential collection
problems. Additions to the allowance for credit losses are made periodically,
based on management's analysis of potential credit risks. On September 30, 1999,
First Federal's allowance for credit losses was $527,000, or 1.18% of
$45,655,000 in loans receivable (net of loans held for sale). On December 31,
1999, First Federal's allowance for credit losses was $525,000, or 1.13% of
$46,433,000 in loans receivable (net of loans held for sale).
INVESTMENT PORTFOLIO
The following table, set forth the carrying value of First Federal's
investment securities portfolio, short-term investments, FHLB stock, and
mortgage-backed securities at the dates indicated. At September 30, 1999, the
fair value of First Federal's investment securities portfolio and
mortgage-backed securities portfolio were $2.023 million and $2.478 million,
respectively, compared with amortized costs of $2.048 million and $2.482
million, respectively, for an unrealized loss of $14,970, net of income taxes.
At December 31, 1999, the fair value of First Federal's investment securities
portfolio and mortgage-backed securities portfolio were $1.899 million and
$2.281 million, respectively, compared with amortized costs of $1.860 million
and $2.267 million, respectively, for an unrealized loss of $27,774, net of
income taxes.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------------ -----------------------------------
1999 1999 1998
--------------------- --------------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment Securities:
U.S. Government Securities....... $ -- $ -- $ --
U.S. Agency Securities........... 1,465 1,476 --
Corporate Notes and Bonds........ 395 547 1,318
State and Political Subdivisions. 33 3 74
Other securities................. 719 20 30
------- ------- -------
Total investment securities... 2,612 2,046 1,422
Federal funds sold................. -- -- --
FHLB stock......................... 211 211 183
Mortgage-backed securities held for
sale............................. 2,267 2,479 4,729
------- ------- -------
Total Investments............. $ 5,090 $ 4,736 $ 6,334
======= ======= =======
</TABLE>
INVESTMENT PORTFOLIO MATURITIES
The following tables set forth certain information regarding the carrying
values, weighted average yields and maturities of First Federal's investment
securities portfolio at September 30, 1999 and at December 31, 1999. 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.
-64-
<PAGE> 72
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------------------------------------------------------
ONE TO FIVE FIVE TO TEN MORE THAN 10
ONE YEAR OR LESS YEARS YEARS YEARS
-------------------- -------------------- -------------------- --------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations............ $ -- --% $ -- --% $ -- --% $ -- --%
U.S. Agency Obligations.. -- -- 1,476 5.26% -- -- -- --
Municipal Obligations.... -- -- -- -- -- -- -- --
Corporate Notes and
Bonds.................. 150 6.40% 397 6.00% -- -- -- --
Other Securities......... 23 6.07% -- -- -- -- -- --
----- ---- ------ ---- ---- ---- ---- ----
Total.................. $ 173 6.36% $1,873 5.42% $ -- --% $ -- --%
===== ==== ====== ==== ==== ==== ==== ====
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------
TOTAL INVESTMENT SECURITIES
-------------------------------
CARRYING AVERAGE MARKET
VALUE YIELD VALUE
--------- --------- --------
<S> <C> <C> <C>
U.S. Government
Obligations............ $ -- --% $ --
U.S. Agency Obligations.. 1,476 5.26% 1,476
Municipal Obligations.... -- -- --
Corporate Notes and
Bonds.................. 547 6.11% 547
Other Securities......... 23 6.07% 23
------ ---- ------
Total.................. $2,046 5.50% $2,046
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------------------------------------
ONE TO FIVE FIVE TO TEN MORE THAN 10
ONE YEAR OR LESS YEARS YEARS YEARS
-------------------- -------------------- -------------------- --------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations............ $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00%
U.S. Agency Obligations.. 296 4.98% 1,169 5.30% -- 0.00% -- 0.00%
Municipal Obligations.... 3 0.00% -- 0.00% 30 4.72% -- 0.00
Corporate Notes and
Bonds.................. -- 0.00% 395 6.00% -- 0.00% -- 0.00%
Other Securities......... 719 6.09% -- 0.00% -- 0.00% -- 0.00%
------ ---- ------ ---- ---- ---- ---- ----
Total.................. $1,018 5.75% $1,564 5.48% $ 30 4.72% $ -- 0.00%
====== ==== ====== ==== ==== ==== ==== ====
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------
TOTAL INVESTMENT SECURITIES
------------------------------
CARRYING AVERAGE MARKET
VALUE YIELD VALUE
--------- --------- --------
<S> <C> <C> <C>
U.S. Government
Obligations............ $ -- 0.00% $ --
U.S. Agency Obligations.. 1,465 5.26% 1,465
Municipal Obligations.... 33 4.72% 33
Corporate Notes and
Bonds.................. 395 6.00% 395
Other Securities......... 719 6.09% 719
------ ---- ------
Total.................. $2,612 5.59% $2,612
====== ==== ======
</TABLE>
-65-
<PAGE> 73
DEPOSIT PORTFOLIO
Deposits in First Federal Savings Bank as of September 30,1999 and December
31, 1999, were represented by various types of savings programs as described
below.
<TABLE>
<CAPTION>
MINIMUM BALANCE AS OF PERCENTAGE
BALANCE SEPTEMBER 30, OF TOTAL
CATEGORY TERM INTEREST RATE(1) AMOUNT 1999 DEPOSITS
- -------------------------------- ------------- ---------------- -------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Now Accounts ................... None 0 to 2.50% 100 $ 8,876 18.31%
Regular Savings ................ None 1.50% 100 5,339 11.01%
Money Market Accounts .......... None 1 to 2.50% 1000 2,727 5.62%
Certificates of Deposit:
Fixed Term, Fixed Rate ......... 1-3 Months 3.00% 500 195 0.40%
Fixed Term, Fixed Rate ......... 4-6 Months 4.25% 500 1,008 2.08%
Fixed Term, Fixed Rate ......... 7-12 Months 4.75% 500 9,427 19.44%
Fixed Term, Fixed Rate ......... 13-24 Months 6.18% 500 14,856 30.65%
Fixed Term, Fixed Rate ......... 25-36 Months 6.30% 500 2,093 4.32%
Fixed Term, Fixed Rate ......... 36-48 Months 5.25% 500 681 1.40%
Fixed Term, Fixed Rate ......... 49-120 Months 5.25% 500 1,478 3.05%
Jumbo Certificates ............. 100,000 1,216 2.51%
------- ------
Accrued interest on
deposits ..................... 588 1.21%
------- ------
Total .......................... $48,484 100.00%
======= ======
</TABLE>
- ----------
(1) Current interest rate offerings as of September 30, 1999
<TABLE>
<CAPTION>
MINIMUM BALANCE AS OF PERCENTAGE
BALANCE DECEMBER 31, OF TOTAL
CATEGORY TERM INTEREST RATE(1) AMOUNT 1999 DEPOSITS
- -------------------------------- ----------- ---------------- --------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Now/Checking Accounts .......... None 0 to 2.50% 100 $10,743 20.45%
Regular Savings ................ None 1.50% 100 5,646 10.75%
Money Market Accounts .......... None 1 to 5.00% 1,000 1,580 3.01%
Certificates of Deposit:
Fixed Term, Fixed Rate ......... 1-3 Months 3.00% 500 66 0.13%
Fixed Term, Fixed Rate ......... 4-6 Months 4.25% 500 977 1.86%
Fixed Term, Fixed Rate ......... 7-12 Months 4.75% 500 9,013 17.16%
Fixed Term, Fixed Rate ......... 13-24 Months 4.75 to 5.25% 500 14,889 28.34%
Fixed Term, Fixed Rate ......... 25-36 Months 5.25% 500 4,308 8.20%
Fixed Term, Fixed Rate ......... 36-48 Months 5.25% 500 634 1.21%
Fixed Term, Fixed Rate ......... 49-120 Months 5.25% 500 1,289 2.45%
Jumbo Certificates ............. 100,000 2,880 5.48%
------- ------
Accrued interest on
deposits ..................... 503 0.96%
------- ------
Total .......................... $52,528 100.00%
======= ======
</TABLE>
- ----------
(1) Current interest rate offerings as of December 31, 1999.
Core deposits, which exclude time deposits of $100,000 or more, provide the
primary funding source for First Federal's loan portfolio and other earning
assets. Core deposits were $47,268,000 at September 30, 1999 and $49,648,000 at
December 31, 1999. First Federal's loan-to-deposit ratio was 94.16% at September
30, 1999, and 88.21% at December 31, 1999.
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<PAGE> 74
TIME DEPOSITS BY RATE
The following table sets forth the time deposits in First Federal Savings
Bank classified by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
1999 1999 1998
--------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Rate 2.01 -- 4.00%....... $ 2,160 $ 1,370 $ 72
4.01 -- 6.00%..................... 24,086 28,056 13,821
6.01 -- 8.00%..................... 7,826 1,528 17,507
Accrued interest on certificate
accounts.......................... 487 588 624
-------- ------- -------
Total........................... $ 34,559 $31,542 $32,024
======== ======= =======
</TABLE>
TIME DEPOSITS MATURITY SCHEDULE
The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
<TABLE>
<CAPTION>
AMOUNT DUE
---------------------------------------------------------------------
AFTER
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 2001 2002 2002 TOTAL
------------- ------------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Rate
2.01 -- 4.00%....... $ 2,893 $ -- $ -- $ -- $ 2,893
4.01 -- 6.00%....... 15,357 6,319 1,004 688 23,368
6.01 -- 8.00%....... 4,233 43 212 205 4,693
Accrued interest on
Certificate
Accounts............ 588 -- -- -- 588
-------- ------ ------ ----- --------
Total............. $ 23,071 $6,362 $1,216 $ 893 $ 31,542
======== ====== ====== ===== ========
</TABLE>
The following table sets for the amount and maturities of time deposits at
December 31, 1999.
<TABLE>
<CAPTION>
AFTER
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002 TOTAL
------------- ------------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Interest Rate
2.01 -- 4.00%.............. $ 2,154 $ 3 $ 3 $ -- $ 2,160
4.01 -- 6.00%.............. 16,837 6,390 530 329 24,086
6.01 -- 8.00%.............. 1,511 3,250 2,711 354 7,826
Accrued interest on
Certificate 487 -- -- -- 487
Accounts................. ------- ------- ------- ----- -------
Total.................... $20,989 $ 9,643 $ 3,244 $ 683 $34,559
======= ======= ======= ===== =======
</TABLE>
JUMBO CERTIFICATES OF DEPOSIT
The following table indicates the amount of First Federal Savings Bank's
certificates of deposit of $100,000 or more by time remaining until maturity as
of September 30 and December 31, 1999.
<TABLE>
<CAPTION>
AS OF AS OF
MATURITY PERIOD DECEMBER 31, 1999 SEPTEMBER 30, 1999
--------------- ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Within three months..... $ 100 $ 100
Three through six months 110 100
Six through twelve months 1,370 916
Over twelve months...... 1,300 100
------ -------
$2,880 $ 1,216
====== =======
</TABLE>
-67-
<PAGE> 75
SAVINGS DEPOSIT ACTIVITY
The following table sets forth the savings activities of First Federal
Savings Bank for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------- ------------------------------------
1999 1999 1998
----------------------------------------------------- --------------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Opening balance................ $48,484 $49,928 $47,906
Net deposits (withdrawals)..... 3,468 (2,954) 529
Interest credit on deposits.... 576 1,510 1,493
------- ------- -------
Ending balance................. 52,528 48,484 49,928
======= ======= =======
Total increase (decrease)
deposits....................... $ 4,044 $(1,444) $ 2,022
======= ======= =======
Percentage increase (decrease). 8.34% (2.89)% 4.22%
</TABLE>
Savings deposit activity is primarily the result of area economic activity
and the relative competitive position of First Federal to secure savings
deposits. Savings deposits declined by $1,444,000 for the fiscal year ended
September 30, 1999, after increasing by $2,022,000 during the fiscal year ended
September 30, 1998. Savings deposits increased by $4,044,000 during the fiscal
quarter ended December 31, 1999.
BORROWINGS
Savings deposits are the primary source of funds for First Federal Savings
Bank's lending and investment activities for its general business purposes. The
Savings Bank, if the need arises, may rely upon advances from the Federal Home
Loan Bank of Des Moines to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are typically secured by
the Savings Bank's stock in the FHLB and a portion of its residential mortgage
loans and other assets (principally securities which are obligations of or
guaranteed by the U.S. Government).
The following table sets forth certain information as to the Savings Bank's
FHLB advances at the date indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ------------------------------------------------
1999 1999 1998 1997
----------------------------------------- ----------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maximum balance....... $ 2,598 $ 3,722 $ 1,317 $ 4,788
Average balance....... 2,353 2,510 1,293 2,058
Balance at end of period 2,293 2,598 1,247 1,321
Weighted average rate:
at end of period.... 5.42% 5.29% 7.24% 7.24%
during the period... 5.42% 5.89% 7.24% 6.83%
</TABLE>
INTEREST RATE RISK EXPOSURE
Market risk is the risk of loss arising from adverse changes in market
prices and rates. First Federal's market risk is comprised primarily of interest
rate risk resulting from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market interest rates
might adversely affect First Federal's net interest income or the fair value of
its portfolio of assets and liabilities.
First Federal primarily relies on the OTS Net Portfolio Value Model (the
"Model") to measure its susceptibility to interest rate changes. Net Portfolio
Value ("NPV") is defined as the present value of expected cash flows from
existing assets minus the present value of expected net cash flows from existing
liabilities plus or minus the present value of net expected cash flows from
existing off-balance sheet contracts. First Federal does not currently own any
derivative financial instruments whose values are determined from underlying
instruments or market indices and whose notional or contractual amounts would
not be recognized in the financial statements. The Model estimates the current
economic value of each type of asset, liability and off-balance sheet contract
after various assumed instantaneous, parallel shifts in the Treasury yield
curve, both upward and downward.
The NPV model uses an option-based pricing approach to value one-to-four
family mortgages, mortgages serviced by others, and firm commitments to buy,
sell or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to
-68-
<PAGE> 76
estimate mortgage cash flows. Prepayment options and interest rate caps and
floors contained in mortgages and mortgage-related securities introduce
significant uncertainty in estimating the timing of cash flows for these
instruments that warrants the use of this sophisticated methodology. All other
financial instruments are valued using a static discounted cash flow method.
Under this approach, the present value is determined by discounting the cash
flows that the instrument is expected to generate by the yields currently
available to investors from an instrument of comparable risk and duration.
The following tables set forth First Federal's present value estimates as of
September 30 and December 31, 1999, as calculated by its NPV Model. The table
shows the NPV of First Federal under rate shock scenarios of -300 basis points
to +300 basis points in increments of 100 basis points. As market rates
increase, the market value of First Federal's portfolio of mortgage loans and
securities declines and prepayments slow down. As rates decrease, the market
value of mortgage loans and securities increases due to prepayment risk,
periodic rate caps and other embedded options. Actual changes in market value
will differ from estimated changes set forth in this table due to various risks
and uncertainties.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------
CHANGE PERCENT OF CHANGE IN NPV
INTEREST RATES AMOUNT OF ESTIMATED RATIO(4)
(BASIS POINTS) ESTIMATED NPV CHANGE(1) NPV(2) NPV RATIO(3) (BASIS POINTS)
-------------- ------------------- -------------- --------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
+300 4,286 (1,535) --26% 7.72% --233bp
+200 4,811 (1,010) --17% 8.54% --151bp
+100 5,331 (490) --8% 9.33% --72bp
-- 5,821 -- -- 10.05% --
--100 6,276 456 +8% 10.70% +65bp
--200 6,835 1,014 +17% 11.49% +144bp
--300 7,477 1,656 +28% 12.37% +232bp
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------------------------------------------------
CHANGE PERCENT OF CHANGE IN NPV
INTEREST RATES AMOUNT OF ESTIMATED RATIO(4)
(BASIS POINTS) ESTIMATED NPV CHANGE(1) NPV(2) NPV RATIO(3) (BASIS POINTS)
-------------- ----------------- ------------- --------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
+300 4,346 (1,102) --20% 7.41% --153bp
+200 4,728 (720) --13% 7.96% --99bp
+100 5,102 (346) --6% -- --46bp
-- 5,448 -- -- 8.95% --
--100 5,744 296 +5% 9.33% +38bp
--200 6,128 679 +12% 9.83% +88bp
--300 6,554 1,106 +20% 10.37% +143bp
</TABLE>
- ----------
(1) Represents the excess (deficiency) assuming the indicated change in interest
rates minus the estimated NPV assuming no change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Savings associations are subject to an interest rate risk ("IRR") component
in calculating their required regulatory capital. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis points
change in market interest rates. A resulting change in NPV of more than 2% of
the estimated market value of its assets will require the institution to deduct
from its capital 50% of that excess change. The following table as computed by
the OTS determined that First Federal had no IRR modification required to its
regulatory capital requirement.
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31 DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------- ------------- ---------
<S> <C> <C> <C> <C>
Risk Measures: 200 bp rate shock
Pre-Shock NPV Ratio: NPV as % of PV
of Assets....................... 8.95% 8.39% 10.05% 8.88%
Exposure Measure:
Post-Shock NPV Ratio............... 7.96% 7.68% 8.54% 8.33%
Sensitivity Measure: Change in NPV
Ratio........................... 99bp 71bp 151bp 54bp
Calculation of Capital Component
Change in NPV as % of PV of
Assets.......................... --1.18% --1.43% --1.74% --0.72%
Interest Rate Risk Capital
Component (9000)................ -- -- -- --
</TABLE>
-69-
<PAGE> 77
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit runoffs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions First Federal may undertake in response to changes in the interest
rates.
Although First Federal is not subject to the IRR component reduction
discussed above, First Federal is still subject to interest rate risk and, as
can be seen above, rising interest rates will reduce First Federal's net asset
value. The OTS has the authority to require otherwise exempt institutions to
comply with the rule concerning interest rate risk.
-70-
<PAGE> 78
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
BUSINESS
GENERAL
First Federal Holding Company of Morris, Inc. ("First Federal") is a
savings and loan holding company and parent of First Federal Savings Bank (the
"Savings Bank"), a federally-chartered savings bank with its principal office in
Morris, Minnesota and branch offices in Benson and Breckenridge, Minnesota. The
Savings Bank has obtained regulatory approval for an additional branch in Big
Lake, Minnesota, and anticipates opening the branch in May 2000. The Savings
Bank currently serves customers and the borrowers located in west central
Minnesota, particularly in the communities of Morris, Benson and Breckenridge
and the counties of Stevens, Swift and Wilkin. At December 31, 1999, First
Federal had consolidated assets of $61.1 million, deposits of $52.5 million and
shareholders' equity of $3.7 million.
The Savings Bank was organized in 1922 as Morris Building and Loan
Association. In 1958, the name was changed to First Federal Savings and Loan
Association of Morris, which merged with Breckenridge Federal Savings and Loan
Association in 1973. The name was changed to First Federal Savings Bank in 1983.
The Savings Bank was converted from mutual to stock form in 1992, when First
Federal was organized as a savings and loan holding company and acquired
majority control of the Savings Bank.
The Savings Bank provides a broad range of commercial and retail banking
services designed to meet the borrowing and depository needs of consumers and
small and medium-sized businesses in the communities it serves. The Savings Bank
offers a full range of deposit accounts that are typically made available by
most banks and savings associations, including checking accounts, commercial
accounts, savings accounts and time deposit accounts. The Savings Bank provides
a range of lending services including real estate mortgages, consumer loans and
loans to businesses and farms.
First Federal believes that such businesses and individuals are
under-served in its market by the larger regional and national financial
institutions that have acquired other local banking and savings institutions. As
a community-based savings bank, the Savings Bank seeks to provide its customers
with personal service and support, and to make available to them a broad range
of products and services. The Savings Bank is managed by individuals who have
lived and worked in the markets for many years and believes that it can leverage
the experience of local management to attract business and make knowledgeable
credit decisions. First Federal believes that the Savings Bank competes
effectively with financial institutions of all sizes in these markets by
delivering products and services its customers require, through local management
and personalized service.
SAVINGS BANK PRODUCTS AND SERVICES
The Savings Bank offers a wide variety of consumer and commercial lending
and deposit services through representatives at its offices and its mortgage
subsidiary.
Deposits. Deposits are the Savings Bank's principal source of funds. The
Savings Bank offers a full range of deposit products that are typically
available in most banks and savings associations, including checking accounts,
commercial accounts, savings accounts, time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit. The
Savings Bank offers direct deposit of payroll and social security checks.
Transaction accounts and time certificates are offered at rates competitive to
those offered in the Savings Bank's market areas. In addition, the Savings Bank
offers individual retirement accounts and other retirement account services.
Lending Activities. As a federally-chartered savings bank, the Savings Bank
has historically emphasized home mortgages and second mortgages, although in
recent years, the Savings Bank has offered a range of other lending services,
including consumer loans and loans to small to medium-sized farms and businesses
that are located in the Savings Bank's market areas.
The Savings Bank offers a variety of real estate loans secured by first or
second mortgages on real estate. These loans generally consist of one to
four-family residential real estate loans, multi-family real estate loans,
construction and
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<PAGE> 79
development loans and farm land and commercial real estate loans. Additionally,
the Savings Bank is the majority shareholder of Homeland Mortgage, LLC, which
originates real estate loans through its office located in Morris, Minnesota.
Approximately 80% of first mortgage loans originated by the Savings Bank or by
Homeland are sold on the secondary market through such programs as Freddie Mac
and Fannie Mae. The Savings Bank is also certified as an approved lender in the
Minnesota Housing and Rural Development Authority. The Savings Bank has a loan
servicing portfolio of approximately $18.2 million one-to-four-family
residential real estate loans, which provide servicing fee income to the Savings
Bank.
The Savings Bank offers 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 checking account
overdraft protection. These consumer loans typically carry balances of less than
$30,000 and, in the case of non-revolving loans, are amortized over a period not
to exceed sixty months. Revolving loans typically bear interest at a fixed rate
and require monthly payments of interest and a portion of the principal balance.
The Savings Bank also offers a variety of commercial and agricultural
loans, although by law and regulation, no more than 20% of total assets may be
represented by these types of 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 inventory, the principal amount of the 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 would typically be due at
maturity.
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 other officers. The Savings Bank has established a
loan committee that has lending limits, and any loan in excess of this lending
limit must be approved by the board of directors. In compliance with law and
regulation, the Savings Bank does not make any loans to any of its directors,
officers or employees, unless the loan is approved by the Savings 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 the Savings Bank.
The Savings Bank's lending activities are subject to a variety of lending
limits imposed by federal law. While different lending limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Savings Bank), in general, the Savings Bank
may not currently make loans to one borrower and related entities in an amount
which exceeds $850,000. Unless the Savings Bank is able to sell participations
in loans to other financial institutions, the Savings Bank is not able to meet
all of the lending needs of loan customers requiring aggregate extensions of
credit above this limit.
Other Financial Services. The Savings Bank provides a variety of other
services, including cash management services, safe deposit boxes, travelers'
checks and direct deposit of payroll and social security checks. The Savings
Bank is associated with a shared network of automated teller machines that may
be used by customers throughout Minnesota and other regions and permits
customers to access their funds twenty-four hours a day. The Savings Bank also
offers MasterCard and Visa credit card services through a correspondent bank as
an agent for the Savings Bank.
In addition to products and services provided by or through the Savings
Bank, First Federal also provides financial services through certain non-bank
affiliates. First Federal organized a mortgage subsidiary in 1998, West Central
Service Corporation ("Service"). The Savings Bank acquired the assets of Service
and contributed them in a joint venture with Northern Star in July 1999 to form
Homeland Mortgage Company LLC ("Homeland"). Homeland was established to serve as
a mortgage servicer and originator, from its office in Morris, Minnesota.
Homeland primarily originates and services one-to-four-family real estate
mortgage loans, including a variety of guaranteed and conventional loan
programs. Under the terms of the joint venture agreement, the Savings Bank
acquired a 51% equity interest in Homeland.
First Federal organized an investment services subsidiary in 1986, West
Central Investments, Inc. ("Investments"). Investments is a wholly-owned
subsidiary of First Federal Savings Bank offering a variety of investment
products,
-72-
<PAGE> 80
including mutual funds, securities, insurance and annuities, all through a
third-party provider arrangement with Eagle One Investments. The investment
officer visits the three Savings Bank offices on a rotating basis through the
week.
LOCATION AND SERVICE AREA
The principal market areas of the Savings Bank are the Minnesota counties
of Stevens, Swift and Wilkin, which includes the communities of Morris, Benson
and Breckenridge, Minnesota, from which it draws a significant portion of its
business. Beginning in spring 2000, with the anticipated opening of the Big
Lake, Minnesota branch, the Savings Bank's market will expand to Sherburne
County, including the communities of Monticello, Big Lake, Elk River and
Clearwater, from which the Savings Bank hopes to draw significant additional
business. Approximately 30,000 people reside in the Savings Bank's current
principal market area, with an additional 50,000 people in the new Sherburne
market area. The 1995 median household income of residents living in the
principal market area was approximately $30,000; the 1995 median household
income of residents living in the Sherburne County market area was approximately
$48,000.
COMPETITION
The banking business is highly competitive. The Savings Bank competes with
community and national banks, credit unions, thrifts and non-financial
institutions such as insurance companies and mutual funds. Currently, in
addition to the Savings Bank, the Savings Bank's principal market areas of the
three Minnesota counties of Stevens, Swift and Wilkin are served by seventeen
offices of eleven different banks, plus a credit union. The Sherburne County
market area is served by twelve offices of nine different banks, plus a credit
union and an industrial loan and thrift. Financial institutions located outside
these counties also compete with the Savings Bank. Most, if not all, of these
competitors have substantially greater financial resources than the Savings
Bank. The Savings Bank believes its competitive strength will lie in providing
long-term relationship-oriented banking services by management and employees
with strong ties to the local market areas. The Savings Bank attempts to target
all residents of its principal market areas, especially the homeowners and local
businesses.
EMPLOYEES
As of December 31, 1999, the Savings Bank had 25 full-time employees and 4
part-time employees and Homeland had 9 full-time employees. The Savings Bank's
employees are not represented by a collective bargaining agreement.
PROPERTIES
The Savings Bank's headquarters and principal office is located at 532
Atlantic Avenue, Morris, Minnesota. The Savings Bank's branches are currently
located at 1329 Pacific Avenue, Benson, Minnesota and 214 North Fifth Street,
Breckenridge, Minnesota; the planned Big Lake branch is located at 240 Jefferson
Boulevard, Big Lake, Minnesota. The Savings Bank owns all of the facilities. The
principal office of the Savings Bank is the largest facility, with a teller line
with 5 tellers, a drive-through window and executive and administrative offices.
LEGAL PROCEEDINGS
There are no material litigation or other legal proceedings pending against
the Savings Bank or any of its properties.
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<PAGE> 81
FIRST FEDERAL HOLDING COMPANY OF MORRIS
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table set forth the directors and executive officers of the
Savings Bank:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Allan R. Thoren....... 54 President, Chairman and Chief Executive
Officer
Terry Singsaas........ 50 Senior Vice President
William L. Heikkila... 48 Vice President and Chief Financial
Officer
Lloyd Fehr............ 59 Director
Kenneth E. Johnson.... 65 Director
Edward J. Morrison.... 79 Director
Wayne Riser........... 60 Director
Neil E. Schmidgall.... 54 Director
Leonard Wulf.......... 73 Director
</TABLE>
ALLAN R. THOREN has been President, Chairman and Chief Executive Officer of
First Federal Savings Bank since July 1990. He has also served as President and
a director of West Central Service Corporation and as President, Chairman and
Chief Executive Officer of West Central Investments, Inc. since July 1990, as a
director of First Federal since September 1992 and as Chairman and governor of
Homeland Mortgage, LLC since July 1999.
TERRY SINGSAAS has been Senior Vice President of First Federal Savings Bank
since November 1997, and served as Branch Manager from May 1989 to November
1997.
WILLIAM L. HEIKKILA has been Vice President and Chief Financial Officer of
First Federal Savings Bank since August 1990, and has also served as Chief
Financial Officer and Treasurer of Homeland Mortgage, LLC since 1999.
LLOYD FEHR has been director of First Federal and First Federal Savings
Bank since September 1992. He has been a shareholder of Riverview Farm since
1990, a shareholder of Riverview Dairy since 1995 and owner of Riverview Feedlot
since 1996.
KENNETH JOHNSON has been a director of First Federal since December 1992
and a director of First Federal Savings Bank since January 1970. Since 1962, Mr.
Johnson has been the owner of Kenneth E. Johnson, CPA, an accounting firm in
Morris, Minnesota.
EDWARD J. MORRISON has been a director of First Federal since 1991 and a
director of First Federal Savings Bank and its predecessor since April 1954. He
has been a private investor since 1963.
WAYNE RISER has been a director of First Federal since September 1992 and
of First Federal Savings Bank since 1972. He has been employed as a pilot since
1988, and has served as corporate pilot for Superior Industries, Morris,
Minnesota, since September 1996. From 1968 to 1988, he was President and owner
of Concrete Minnesota, Inc. and Conrock Materials, Inc.
NEIL E. SCHMIDGALL has been a director of First Federal and First Federal
Savings Bank since September 1992. For more than five years, he has been the
owner of Superior Industries of Morris, Inc., a manufacturing company, and of
Midwest Equipment, Inc., which is engaged in sales of used equipment.
LEONARD WULF has been a director of First Federal and First Federal Savings
Bank since September 1992. He has been President of Leonard Wulf & Sons, Inc., a
livestock and grain farming company since 1978.
-74-
<PAGE> 82
FIRST FEDERAL HOLDING COMPANY OF MORRIS
SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Lloyd Fehr........................... 170.1 16.7%
Kenneth Johnson...................... 124.5 12.2%
Edward J. Morrison................... 170.1 16.7%
Wayne Reiser......................... 170.1 16.7%
Neil E. Schmidgall................... 170.1 16.7%
Allan R. Thoren...................... 42.0 4.1%
Leonard Wulf......................... 170.1 16.7%
-------- ------
All directors and executive officers 1,017.0 100.0%
as a group (7 persons)(14).........
</TABLE>
(1) The address of each person is 532 Atlantic Avenue, Morris, Minnesota 56267
-75-
<PAGE> 83
FIRST FEDERAL HOLDING COMPANY OF MORRIS
COMPENSATION OF EXECUTIVE OFFICERS AND MANAGEMENT
DIRECTOR COMPENSATION
First Federal directors currently receive directors' fees in the amount of $500
per month. Each First Federal director is also a director of the Savings Bank,
for which he receives $800 per month plus $150 for each additional board or
committee meeting attended, up to a total of three additional meetings per
month. Finally, Allan R. Thoren, Kenneth E. Johnson and Neil E. Schmidgall are
also directors of Homeland, for which they receive $500 per quarterly meeting
attended.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation paid
to the Chief Executive Officer. No other executive officer received total salary
and bonus compensation in excess of $100,000 for fiscal 1999 or fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION -------------------
FISCAL YEAR SALARY ($) BONUS ($)
----------- ---------- ---------
<S> <C> <C> <C>
Allan R. Thoren 1999 77,530 34,130
Chief Executive Officer and President of 1998 77,530 33,078
First Federal and the Savings Bank 1997 75,837 31,762
</TABLE>
EMPLOYMENT AGREEMENT
Although First Federal has no employment agreements with any officer, director
or employee, it is a condition of consummation of the merger agreement that
Allan R. Thoren enter into an employment agreement with Northern Star. The
general terms of Mr. Thoren's employment agreement have been discussed, but no
final agreement has been executed as of the date of this proxy
statement/prospectus.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
From time to time, First Federal and the Savings Bank have entered into
transactions with officers, directors and other affiliates. In each case, the
board of directors believes that such transactions were on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arms-length basis. All transactions, loans, and any forgiveness of loans with
directors, officers or stockholders holding more than 5% of outstanding common
stock, or affiliates of any such person, have been and will be made for bona
fide business purposes, on terms no less favorable than could be obtained from
an unaffiliated third party and approved by a majority of the independent
outside directors who do not have an interest in the transactions and who have
access to independent legal counsel, at the expense of First Federal. All loans
to officers and directors and members of their immediate family were made in the
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than the normal risk
of collectibility or present other unfavorable features.
-76-
<PAGE> 84
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following financial information is presented to assist you in your
understanding of the financial impact of the proposed merger with First Federal.
This information is unaudited and has been derived from the audited and
unaudited financial statements of Northern Star and First Federal.
The following combined historical condensed balance sheet, as of December
31, 1999, reflects the merger of Northern Star and First Federal. This pro forma
balance sheet merely reflects the companies on a combined historical basis and
does not take into account this offering. See "The Offering".
The following combined historical condensed statements of operations for
the six-month period ended December 31, 1999 and for the year ended June 30,
1999 give pro forma effect to the merger as if it had been in effect throughout
the periods presented. The merger of Northern Star and First Federal will be
accounted for as a business combination by the pooling-of-interests method. The
combined historical statements do not take into account the receipt of the net
proceeds from the proposed offering, and may not be indicative of the results
that actually would have occurred if the combination had been effective during
the periods shown.
The pro forma balance sheet and pro forma operating statements should be
read in connection with the Financial Statements of Northern Star and First
Federal and the Notes thereto contained elsewhere herein.
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<PAGE> 85
NORTHERN STAR FINANCIAL, INC. AND FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NORTHERN STAR FIRST PRO FORMA NORTHERN STAR
FINANCIAL FEDERAL ADJUSTMENTS AND FINANCIAL
(HISTORICAL) (HISTORICAL) ELIMINATIONS PRO FORMA
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 249,088 $ 4,296,544 -- $ 4,545,632
Federal funds sold....................... 2,159,781 -- -- 2,159,781
Securities available for sale............ 4,465,492 4,156,324 -- 8,621,816
Securities held to maturity.............. -- 722,341 -- 722,341
FHLB stock at cost....................... 21,300 211,200 -- 232,500
Loans held for sale...................... 66,440 1,568,300 -- 1,634,740
Loans receivable......................... 8,950,055 45,943,346 (95,700)(2) 54,797,701
Accrued interest receivable.............. 128,981 730,834 -- 859,815
Premises and equipment, net.............. 465,957 1,106,907 -- 1,572,864
Cash surrender value of life insurance... -- 1,660,914 -- 1,660,914
Other assets............................. 161,399 663,109 (115,822)(1) 708,686
----------- ------------ --------- -----------
Total assets........................... $16,668,493 $ 61,059,819 $(211,522) $77,516,790
=========== ============ ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits................................. $13,138,387 $ 52,528,200 $ -- $65,666,587
Advances from FHLB....................... 425,000 2,293,421 -- 2,718,421
Notes Payable............................ -- 1,097,038 (95,700)(2) 1,001,338
Advances from borrowers for tax and
insurance.............................. 5,436 140,637 -- 146,073
Other liabilities........................ 69,591 725,695 -- 795,286
----------- ------------ --------- -----------
Total liabilities...................... 13,638,414 56,784,991 (95,700) 70,327,705
Minority interest........................ -- 600,596 (115,822)(1) 484,774
SHAREHOLDERS' EQUITY
Common stock............................. 4,256 104,200 -- 108,456
Additional paid in capital............... 3,919,577 288,337 -- 4,207,914
(Accumulated deficit) retained (865,774) 3,441,469 -- 2,575,695
earnings.................................
Accumulated other comprehensive income
(loss)................................. (27,980) (27,774) -- (55,754)
Treasury stock........................... -- (132,000) -- (132,000)
----------- ------------ --------- -----------
Total shareholders' equity............. 3,030,079 3,674,232 -- 6,704,311
----------- ------------ --------- -----------
Total liabilities and shareholders'
equity............................ $16,668,493 $ 61,059,819 $(211,522) $77,516,790
=========== ============ ========= ===========
</TABLE>
- ------------
(1) Eliminate Northern Star's 49% ownership in Homeland Mortgage, LLC, which
was recorded on the equity method, with the minority interest recorded by
First Federal Holding Company. First Federal owns the controlling 51% of
Homeland Mortgage which is recorded by First Federal on the consolidated
method.
(2) Eliminated First Federal Holding Company's line of credit payable to
Northern Star.
-78-
<PAGE> 86
NORTHERN STAR FINANCIAL, INC. AND FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
NORTHERN STAR FIRST PRO FORMA NORTHERN STAR
FINANCIAL FEDERAL ADJUSTMENTS AND FINANCIAL
(HISTORICAL) (HISTORICAL) ELIMINATIONS PRO FORMA
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Interest income
Loans................................ $ 120,005 $ 3,928,809 $ -- $4,048,814
Other interest earning assets........ 34,870 486,602 -- 521,472
--------- ----------- --------- ----------
Total interest income............. 154,875 4,415,411 -- 4,570,286
Interest expense
Deposits............................. 40,012 2,000,394 -- 2,040,406
Borrowings........................... -- 235,660 -- 235,660
--------- ----------- --------- ----------
40,012 2,236,054 -- 2,276,066
Net interest income.................... 114,863 2,179,357 -- 2,294,220
Provision for loan losses.............. 56,250 5,000 -- 61,250
--------- ----------- --------- ----------
Net interest income after provision for
loan................................... 58,613 2,174,357 -- 2,232,970
losses...............................
Non-interest income
Fees and service charges............. 45,499 318,875 -- 364,374
Gain(loss) on sale of loan........... (3,050) 110,854 -- 107,804
Other................................ -- 77,589 -- 77,589
--------- ----------- --------- ----------
Total non-interest income......... 42,449 507,318 -- 549,767
Non-interest expense
Compensation and employee benefits... 247,497 1,148,937 (40,364)(1) 1,396,434
Occupancy............................ 39,556 208,967 -- 248,523
Advertising.......................... 6,937 29,079 -- 36,016
FDIC and OTS assessments............. -- 54,590 -- 54,590
Other................................ 300,744 510,183 (263,636)(1) 547,291
--------- ----------- --------- ----------
Total non-interest expense........ 594,734 1,951,756 (304,000) 2,242,490
Net income (loss) before income taxes.. (493,672) 729,919 304,000 540,247
Income taxes........................... -- 249,385 (54,900)(2) 194,485
--------- ----------- --------- ----------
Net income (loss) before minority (493,672) 480,534 358,900 345,762
interest...............................
Minority interest...................... -- 45,115 -- 45,115
--------- ----------- --------- ----------
Net income............................. $(493,672) $ 435,419 $ 358,900 $ 300,647
========= =========== ========= ==========
Basic (loss) earnings per share........ $ (1.60) $ 0.50 $ 0.26
========== =========== ==========
Weighted average shares(3)............. 307,831 870,559 1,178,390
</TABLE>
- ----------
(1) Eliminate nonrecurring organization and pre-opening expenses for Northern
Star as explained in Northern Star's Management Discussion and Analysis of
the results of operations.
(2) Tax effect of pro-forma combined income adjustments.
(3) Pro-forma weighted average shares are computed by adding Northern Star's
historical 307,831 amount with the 870,559 shares expected to be issued to
First Federal's shareholders.
-79-
<PAGE> 87
NORTHERN STAR FINANCIAL, INC. AND FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
NORTHERN STAR FIRST PRO FORMA NORTHERN STAR
FINANCIAL FEDERAL ADJUSTMENTS AND FINANCIAL
(HISTORICAL) (HISTORICAL) ELIMINATIONS PRO FORMA
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Interest income
Loans........................... $ 323,040 $ 1,968,196 $ -- $2,291,236
Other interest earnings assets.. 97,470 119,062 -- 216,532
--------- ----------- --------- ----------
Total interest income......... 420,510 2,087,258 -- 2,507,768
Interest expense
Deposits........................ 152,758 970,000 -- 1,122,758
Borrowings...................... 2,970 123,060 -- 126,030
--------- ----------- --------- ----------
156,728 1,093,060 -- 1,248,788
Net interest income............... 264,782 994,198 -- 1,258,980
Provision for loan losses......... 67,500 -- -- 67,500
--------- ----------- --------- ----------
Net interest income after
provision for loan losses......... 197,282 994,198 -- 1,191,480
Non-interest income
Fees and service charges........ 14,036 188,291 -- 202,327
Gain (loss) on sale of loan..... 25,824 37,245 -- 63,069
Other........................... -- 136,201 -- 136,201
--------- ----------- --------- ----------
Total non-interest income..... 39,860 361,737 -- 401,597
Non-interest expense
Compensation and employee 201,985 483,990 -- 685,975
benefits..........................
Occupancy....................... 48,257 118,242 -- 166,499
Other........................... 355,043 678,534 (80,178)(1) 920,169
(33,230)(2)
--------- ----------- --------- ----------
Total non-interest expense.... 605,285 1,280,766 (113,408) 1,772,643
Net income (loss) before income
taxes and minority shares......... (368,143) 75,169 113,408 (179,566)
Income taxes...................... -- 31,790 (31,790)(3) --
--------- ----------- --------- ----------
Net income (loss) before minority
interest........................ (368,143) 43,379 145,198 (179,566)
Minority interest................. -- (64,265) (80,178)(1) 15,913
--------- ----------- --------- ----------
Net (loss) income................. $(368,143) $ 107,644 $ 65,020 $ (195,479)
========= =========== ========= ==========
Basic (loss) earnings per share... $ (0.86) $ 0.12 $ (0.15)
========== =========== ==========
Weighted average shares(4)........ 425,600 870,559 1,298,159
</TABLE>
- ----------
(1) Eliminate Northern Star's 49% ownership in Homeland Mortgage, LLC, recorded
as a minority interest by First Federal.
(2) Eliminate nonrecurring expenses related to the proposed merger transaction.
(3) Tax effect of pro-forma combined income eliminates income tax expense.
(4) Pro forma weighted average shares are computed by adding Northern Star's
historical 425,600 amount with the 870,559 shares expected to be issued to
First Federal's shareholders.
-80-
<PAGE> 88
SHAREHOLDINGS OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
OF NORTHERN STAR FOLLOWING THE PROPOSED MERGER (PRO FORMA)
The following table provides information concerning the anticipated
beneficial ownership, immediately following completion of Northern Star's
proposed merger with First Federal, of outstanding Northern Star common stock by
(i) each person anticipated to be the beneficial owner of more than 5% of
Northern Star's outstanding common stock, (ii) by each anticipated director and
executive officer of Northern Star, and (iii) by all anticipated directors and
executive officers as a group. The information assumes that: (i) Northern Star
issues 870,559 shares of its common stock to consummate the merger, and (ii) no
directors or executive officers purchase or sell any Northern Star common stock
from December 31, 1999 through the date when the merger is completed. The table
gives effect to the sale of the minimum and maximum number of shares that may be
issued in this offering. Unless otherwise indicated, the shareholders listed in
the table have sole voting and investment powers with respect to the shares
indicated.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENTAGE OF OUTSTANDING
SHARES SHARES SHARES BENEFICIALLY OWNED
BENEFICIALLY BENEFICIALLY AFTER THE MERGER AND
OWNED PRIOR TO OWNED AFTER THE ASSUMING THE SALE OF THE
NAME AND ADDRESS OF BENEFICIAL OWNER THE MERGER(1) MERGER(1) MINIMUM MAXIMUM
------------------------------------- ----------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
Frank L. Gazzola(2)(3)............... 43,400 43,400 2.40% 1.88%
Thomas P. Stienessen(2)(4)........... 41,400 41,400 2.29% 1.80%
Thomas J. Reynolds(2)(5)............. 43,400 43,400 2.40% 1.88%
Dean M. Doyscher(2)(6)............... 35,000 35,000 1.94% 1.52%
Neil Schmidgall(8)................... 3,000 148,606 8.27% 6.47%
Edward Morrison(8)................... 2,500 148,106 8.25% 6.45%
Lloyd Fehr(8)........................ 1,000 146,606 8.16% 6.38%
Wayne Riser(8)....................... 0 145,606 8.11% 6.34%
Leonard Wulf......................... 0 145,606 8.11% 6.34%
Kenneth Johnson(8)................... 0 106,572 5.93% 4.64%
Allan Thoren(8)...................... 1,000 36,952 2.06% 1.61%
All directors and executive officers
as a group (8 persons)(7)............ 168,200 601,936 32.74% 25.74%
</TABLE>
- ----------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them as of December 31, 1999, 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 owner's address is 1650 Madison Avenue, Mankato, Minnesota 55401.
(3) Includes 11,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(4) Includes 9,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Stienessen shares voting and investment power over such shares with his
wife.
(5) Includes 11,400 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Reynolds shares voting and investment power over such shares with his wife.
(6) Includes 10,000 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999. Mr.
Doyscher shares voting and investment power over such shares with his wife.
(7) Includes 38,200 shares purchasable upon exercise of options presently
exercisable or exercisable within 60 days of December 31, 1999.
(8) The owner's address is 532 Atlantic Avenue, P.O. Box 656, Morris, Minnesota
56267.
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<PAGE> 89
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, Northern Star is extensively regulated by
special laws applicable only to financial institutions. Virtually all aspects of
Northern Star's 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 Northern Star's 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 Northern Star's
shareholders.
The highly regulated environment in which Northern Star operates 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. Northern Star cannot fully predict the nature or the extent of any
effects which this new law or other possible regulatory changes may have on its
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 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, Northern Star is subject to
supervision by the Board. This supervision generally consists of financial
reporting and inspections. With respect to financial reporting, Northern Star is
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 Northern Star 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 Northern Star to 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 Northern Star's insured depository subsidiaries.
-82-
<PAGE> 90
Regulation. As indicated above, bank holding companies such as Northern Star
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 Northern Star's 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 Northern Star will be
able to pay its 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 required capital ratios cannot be determined at this time.
Activity Limitations. Under the BHC Act, Northern Star must obtain Board
approval before acquiring direct or indirect ownership or control of any voting
securities of a bank or bank holding company if the acquisition results in
Northern Star's control of more than 5% of the outstanding shares of any class
of voting securities of the entity, unless Northern Star already owns a majority
of the voting securities of the entity. Northern Star also must obtain prior
Federal Reserve approval before acquiring 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 Northern Star and its 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, Northern Star 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 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
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<PAGE> 91
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 Northern Star 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. Northern Star 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 Northern Star Bank.
These statutes and regulations relate to many aspects of the operations of
Northern Star 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 Northern Star 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, Northern Star 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 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. Northern Star is not aware of any activity or condition
that could result in termination of Northern Star Bank's deposit insurance.
Payment of Dividends by Northern Star Bank. There are state and federal
statutory and regulatory requirements limiting the amount of dividends which may
be paid to Northern Star by Northern Star 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 Northern Star Bank's capital needs,
asset quality and overall financial condition. The governing regulatory agency
has the
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authority to prohibit Northern Star 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 Northern Star Bank, that the
governing regulatory agency may determine that the payment of dividends to
Northern Star by Northern Star 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 Northern Star Bank to set aside all
of its net profits to a surplus fund until the surplus fund is equal to 20% of
Northern Star Bank's capital stock, and 10% of its net profits while the surplus
fund is equal to between 20% and 50% of Northern Star 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. Northern Star Bank is subject to certain
restrictions imposed by federal law on "covered transactions" between Northern
Star Bank and its affiliates. These covered transactions are (i) loans or
extensions of credit by Northern Star 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 Northern Star Bank of securities issued by the affiliate as
security for a loan to any person or company, and (v) the issuance by Northern
Star 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 Northern Star Bank's capital and transactions with all affiliates
cannot exceed 20% of Northern Star 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 Northern
Star bank and Northern Star's affiliates, must be on terms and under
circumstances, including credit standards, that are substantially the same, or
at least as favorable to Northern Star 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. Northern Star 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 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
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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, Northern Star 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 Northern Star Bank is classified as "well capitalized."
Acquisitions and Branching. Banks, including Northern Star 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.")
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, Northern Star Bank may not be acquired by an out-of-state bank nor
may Northern Star 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;
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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 NORTHERN STAR CAPITAL STOCK
GENERAL
Northern Star's 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 December 31, 1999, 425,600 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 Northern Star's board of
directors may designate, the common stock shareholders are entitled to receive
dividends as and when declared by Northern Star's board of directors. However,
dividends on Northern Star's common stock are not contemplated in the
foreseeable future. Under the Minnesota Business Corporation Act (the "MBCA"),
Northern Star may declare and pay dividends on the common stock only if it will
be able to pay its debts in the ordinary course of business after making the
distribution. In addition, Northern Star's primary source of cash to make
dividend payments is dividends that it receives from Northern Star Bank, which
may be unable to make payments to Northern Star under various applicable
regulations. See "-- Dividend Policy" and "Supervision and Regulation."
Federal and state banking laws regulate Northern Star's ability to pay
dividends and redeem its 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 Northern Star's 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 Northern Star were liquidated, its common stockholders would be entitled
to receive, pro rata, all assets available for distribution to them after
satisfaction of Northern Star's liabilities and any payment applicable to any
preferred stock then outstanding.
No Cumulative Voting. Northern Star's Articles provide that 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. Northern Star's Articles provide that shareholders
will not have any preemptive rights to subscribe for or purchase additional
shares of capital stock. This means that Northern Star's shareholders will not
be entitled to acquire a certain fraction of the unissued securities or rights
to purchase Northern Star securities before Northern Star 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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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. Northern Star's Bylaws state that its
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, Northern Star's Articles of Incorporation or Bylaws,
or any agreement to which Northern Star is a party, or (iv) any transaction from
which the director derives an improper personal benefit. Northern Star's Bylaws
also provide that if the MBCA is later amended, then the liability of Northern
Star's directors will be eliminated or limited to the fullest extent permitted
by the MBCA, as so amended. The inclusion of this provision in Northern Star's
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 Northern
Star and its shareholders.
Minnesota Statutes Section 302A.521 provides that Northern Star's officers
and directors have the right to indemnification from Northern Star for liability
arising out of certain actions. Northern Star has included in its Bylaws a
provision to indemnify 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 Northern Star's directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, Northern Star has 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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COMPARISON OF RIGHTS OF NORTHERN STAR AND FIRST FEDERAL SHAREHOLDERS
Upon completing the merger, First Federal shareholders will become
shareholders of Northern Star. Although First Federal and Northern Star are both
incorporated under the laws of the state of Minnesota, the rights of Northern
Star's shareholders under its Restated Articles of Incorporation as amended
("Northern Star's Articles") and Bylaws differ in certain respects from the
rights of First Federal's shareholders under its Articles of Incorporation, as
amended ("First Federal's Articles"), and Bylaws, as amended ("First Federal's
Bylaws"). Certain significant differences between the rights of Northern Star
shareholders and First Federal shareholders are summarized below. This summary
does not, however, purport to be a complete description of all of the
differences between the rights of shareholders of First Federal and the rights
of shareholders of Northern Star.
CLASSIFICATION, REMOVAL, AND NOMINATION OF DIRECTORS
Classification. Northern Star's Articles provide for a classified board
of directors, under which directors are elected to three-year terms, with
one-third of the directors being elected each year. First Federal's Articles do
not classify its board of directors, and directors are elected each year for a
one-year term.
Amendment of Provisions. Northern Star's Bylaws provide that Northern
Star's board of directors has the power to make, alter, amend or rescind
provisions of Northern Star's Bylaws, except for provisions fixing a quorum for
meetings of shareholders and provisions regarding removal of directors or
filling vacancies on the board.
These provisions regarding classification, removal, and nomination of
directors afford some assurance of stability in the composition of the Northern
Star board of directors, but may discourage or deter attempts by individuals or
entities to take control of Northern Star by electing their own slate of
directors. To the extent that potential acquirers of Northern Star stock are
deterred by the classified board, such provision also may deter certain mergers,
tender offers, or other future takeover attempts which some or a majority of
holders of Northern Star common stock may deem to be in their best interests. In
addition, the classified Northern Star board would delay shareholders who do not
favor the policies of Northern Star's board of directors from removing a
majority of the directors for two years, unless they can obtain the requisite
vote.
Liability of Directors. Both Northern Star's Articles and First
Federal's Articles exempt directors from personal liability to the corporation
or its shareholders for monetary damages for breach of fiduciary duty as a
director to the full extent permitted by Minnesota law.
PREFERRED STOCK
Northern Star has 5,000,000 authorized but unissued shares of
undesignated stock. Under governing Northern Star's Articles, no action by its
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 Northern Star's independent directors who do not
have an interest in the transaction and who have access, at Northern Star's
expense, to Northern Star's 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 without further action by the
shareholders. Northern Star has no present plans to issue any shares of
preferred stock.
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SPECIAL MEETINGS OF SHAREHOLDERS
Under Northern Star's Bylaws, a special meeting of shareholders may be
called by certain officers, two or more directors, or shareholders holding at
least 10% of the voting power of all shares entitled to vote. Under Minnesota
law, a special meeting for the purpose of considering an action to effect,
directly or indirectly, a business combination must be called by shareholders
holding at least 25% of the voting power of all shares entitled to vote.
VOTING RIGHTS; SHAREHOLDER APPROVALS
Under both Northern Star's Articles and First Federal's Articles,
holders of common stock are entitled to one vote per share on all matters
submitted to a vote of the shareholders. Northern Star's Bylaws provide that,
except as specifically required otherwise under Northern Star's Articles or
Minnesota law, all matters submitted to the shareholders are decided by a
majority vote of the shares entitled to vote and represented at a meeting at
which there is a quorum. Northern Star's Articles require approval by a majority
of the shares entitled to vote to authorize a merger, exchange, sale of
substantially all its assets, or a dissolution of the corporation.
CUMULATIVE VOTING
Neither First Federal's Articles nor Northern Star's Articles provide
for cumulative voting for holders of common stock.
PREEMPTIVE RIGHTS
Under Northern Star's Articles, holders of common stock are expressly
denied preemptive rights. First Federal's Articles do not address preemptive
rights. The MBCA provides that a corporation's shareholders have preemptive
rights only if such rights are expressly granted in the corporation's articles
of incorporation.
AMENDMENT OF THE ARTICLES OF INCORPORATION
Under Minnesota law, an amendment to the articles of
incorporation requires the affirmative vote of the holders of a majority of the
shares present and entitled to vote unless a larger affirmative vote is required
by the corporation's articles. Except as specifically described otherwise in
this section, neither Northern Star's Articles nor First Federal's Articles
contain any provisions that require a larger affirmative vote in order to amend
the articles of incorporation.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS
Northern Star and First Federal are governed by Sections 302A.671 and
302A.673 of the MBCA. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved in a prescribed manner. A "control share
acquisition" is an acquisition, directly or indirectly, of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. In general, Section 302A.673 prohibits a
public Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a person
who is the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock or who is an affiliate or associate of the
corporation and at any time within four years prior to the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock.
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Such provisions of Minnesota law could have the effect of delaying, deferring,
or preventing a change in control of Northern Star or First Federal.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
BETWEEN NORTHERN STAR AND FIRST FEDERAL
On July 15, 1999, Northern Star acquired 49% of Homeland Mortgage, LLC,
a loan servicer and originator, for $196,000 in cash. Northern Star jointly
operates Homeland with First Federal Savings Bank, First Federal's
majority-owned subsidiary.
RECENT DEVELOPMENTS
Northern Star has commenced a public offering of a minimum of 500,000
and a maximum of 1,000,000 shares of its common stock at a price of $10.50 per
share pursuant to a registration statement on Form SB-2, which has been filed
with the Securities and Exchange Commission. The SEC declared the registration
statement effective on March 28, 2000. The offering is scheduled to terminate on
June 26, 2000, unless Northern Star elects to extend the offering for up to an
additional 90 days.
LEGAL MATTERS
The validity of the Northern Star common stock to be issued in
connection with the merger will be passed upon for Northern Star by Fredrikson &
Byron, P.A., Minneapolis, Minnesota.
Certain legal matters for First Federal, including the federal income
tax consequences in connection with the merger, will be passed upon by Lindquist
& Vennum P.L.L.P., Minneapolis, Minnesota.
EXPERTS
The audited financial statements of Northern Star as of June 30, 1999,
included in this proxy statement/prospectus, 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. The audited financial statements of First
Federal as of September 30, 1999, included in this proxy statement/prospectus,
have been audited by Michael L. Anderson & Associates, PLLC, 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 FIND MORE INFORMATION
Northern Star files annual, quarterly, and special reports, proxy
statements, and other information with the SEC. You may read and copy any
reports, statements, or other information filed by Northern Star at the SEC's
public reference rooms at 450 5th Street, N.W., Washington, D.C. 20549, or at 7
World Trade Center, Suite 1300, New York, New York 10048, or at Citicorp Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC
at 1-800-SEC-0330 for more information on the public reference rooms. The SEC
also maintains an Internet site at "http://www.sec.gov" that contain reports,
proxy and information statements, and other information regarding issuers, like
Northern Star, that file electronically with the SEC.
Northern Star has filed with the SEC a Registration Statement on Form
S-4 to register the Northern Star common stock to be issued in the merger. This
Proxy Statement/Prospectus is a part of that Registration Statement and
constitutes a prospectus of Northern Star in addition to being a proxy statement
of Northern Star and of First Federal for each of their respective special
meetings. As allowed by SEC rules, this Proxy Statement/Prospectus does not
contain all the information you can find in the Registration Statement and the
exhibits to the Registration Statement.
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If you are a shareholder of Northern Star, Northern Star may send you
some of the documents incorporated by reference, but you can obtain any of them
from Northern Star or the SEC. Documents incorporated by reference are available
from Northern Star without charge, except for any exhibits to those documents
unless Northern Star has specifically incorporated by reference a particular
exhibit in this Proxy Statement/Prospectus. Shareholders may obtain documents
incorporated by reference in this Proxy Statement/Prospectus by requesting them
in writing or by telephone from the appropriate party at the following address:
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, Minnesota 56001
Attention: Tom Stienessen
(507) 387-2265
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM NORTHERN STAR, PLEASE DO SO
BY [DATE ONE WEEK PRIOR TO MEETING DATE], 2000 TO RECEIVE THEM BEFORE NORTHERN
STAR'S SPECIAL MEETING.
Northern Star has not authorized anyone to provide you with information
that is different from, or in addition to, what is contained or referred to in
this Proxy Statement/Prospectus. Northern Star has supplied all information
contained or incorporated by reference in this Proxy Statement/Prospectus
relating to Northern Star, and First Federal has supplied all such information
relating to First Federal. If you are in a jurisdiction where offers to exchange
or sell, or solicitations of offers to exchange or buy, the securities offered
by this document or the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
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INDEX TO FINANCIAL STATEMENTS
NORTHERN STAR FINANCIAL, INC.
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statement of Financial Condition as of December
31, 1999 (unaudited) and June 30, 1999 and 1998........... F-3
Consolidated Statements of Operations for the six months
ended December 31, 1999 and 1998 (unaudited) and for the
year ended June 30, 1999 and for the period from inception
(January 22, 1998) to June 30, 1998....................... F-4
Statement of Changes in Stockholders' Equity for the Period
From Inception (January 22, 1998) to June 30, 1999........ F-5
Statement of Cash Flows for the six months ended December
31, 1999 and 1998 (unaudited) and for the year ended June
30, 1999 and for the period from inception (January 22,
1998) to June 30, 1998.................................... F-6
Notes to Quarterly Financial Statements as of and for the
Period ending December 31, 1999........................... F-8
Notes to Financial Statements as of and for the Period from
Inception (January 22, 1998) to June 30, 1999............. F-11
</TABLE>
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-26
Consolidated Balance Sheets as of December 31, 1999
(unaudited) and September 30, 1999 and 1998............... F-27
Consolidated Statements of Income for the three months ended
December 31, 1999 and 1998 (unaudited) and for the years
ended September 30, 1999 and 1998......................... F-28
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1999 and 1998........... F-29
Consolidated Statements of Cash Flows for the three months
ended December 31, 1999 and 1998 (unaudited) and for the
years ended September 30, 1999 and 1998................... F-30
Notes to Quarterly Financial Statements as of and for the
quarter ended December 31, 1999........................... F-32
Notes to Consolidated Financial Statements years ended
September 30, 1999 and 1998............................... F-34
</TABLE>
F-1
<PAGE> 102
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, 1999 and 1998 and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the year ended June 30, 1999
and for the period from inception, January 22, 1998 to June 30, 1998. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Northern Star
Financial, Inc. and Subsidiary as of June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the respective
year and period then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for organization costs.
BERTRAM COOPER & CO., LLP
Waseca, Minnesota
August 5, 1999
F-2
<PAGE> 103
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ---------------------
1999 1999 1998
------------ ---------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from bank............................ $ 249,088 $ 210,662 $ --
Federal funds sold................................ 2,159,781 2,533,236 --
----------- ---------- -------
Total cash and cash equivalents................ 2,408,869 2,743,898 --
Securities available for sale, at fair value........ 4,465,492 745,119 --
FHLB stock, at cost................................. 21,300 16,400 --
Loans held for sale................................. 66,440 681,593 --
Loans receivable, net of allowance for loan losses
of $56,250 in 1999 and $-0- in 1998............... 8,950,055 4,881,502 --
Accrued interest receivable......................... 128,981 59,527 --
Premises and equipment, net......................... 465,957 486,685 --
Other assets........................................ 45,577 20,884 14,806
Investment Homeland Mortgage........................ 115,822 -- --
----------- ---------- -------
Total Assets.............................. $16,668,493 $9,635,608 $14,806
=========== ========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits................................... $ 2,497,720 $1,121,450 $ --
Savings deposits.................................. 4,674,284 3,244,444 --
Time deposits..................................... 5,966,384 1,798,675 --
----------- ---------- -------
Total deposits................................. 13,138,387 6,164,569 --
Advances from FHLB.................................. 425,000 -- --
Advances from borrowers for taxes and insurance..... 5,436 23,941 --
Other liabilities................................... 69,591 23,396 18,665
----------- ---------- -------
Total Liabilities.............................. 13,638,414 6,211,906 18,665
Shareholders' equity:
Common stock, par value $0.01 per share, 15,000,000
shares authorized, 425,600 shares issued.......... 4,256 4,256 --
Undesignated stock, par value $0.01 per share,
5,000,000 shares authorized, no shares issued..... -- -- --
Paid in capital..................................... 3,919,577 3,919,577 100
Accumulated deficit................................. (865,774) (497,631) (3,959)
Accumulated comprehensive income (loss)............. (27,980) (2,500) --
----------- ---------- -------
Total shareholders' equity..................... 3,030,079 3,423,702 (3,859)
----------- ---------- -------
Total liabilities and shareholders equity...... $16,668,493 $9,635,608 $14,806
=========== ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 104
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED PERIOD FROM
---------------------- JUNE 30, INCEPTION TO
1999 1998 1999 JUNE 30, 1998
--------- --------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable.................... $ 323,040 $ -- $ 120,005 $ --
Securities available for sale....... 64,285 -- 3,590 --
Due from banks...................... -- 4,613 5,191 --
Federal funds sold.................. 33,185 -- 26,089 --
--------- --------- --------- -------
Total interest income............ 420,510 4,613 154,875 --
Interest expense:..................... --
Demand deposits..................... 2,801 -- 1,430 --
Savings deposits.................... 66,404 -- 13,363 --
Time deposits....................... 83,553 -- 25,219 --
Borrowed Funds...................... 2,970 -- -- --
--------- --------- --------- -------
Total interest expense........... 155,728 -- 40,012 --
--------- --------- --------- -------
Net interest income................. 264,782 4,613 114,863 --
Provision for loan losses........... 67,500 -- (56,250) --
--------- --------- --------- -------
Net interest income after
provision for loan losses...... 197,282 4,613 58,613 --
--------- --------- --------- -------
Noninterest income:
Other fees and service charges...... 14,036 -- 45,499 --
Gain/(loss) on sale of loans........ 25,824 -- (3,050) --
--------- --------- --------- -------
Total noninterest income......... 39,860 -- 42,449 --
--------- --------- --------- -------
Noninterest expenses:
Compensation and employee
benefits......................... 201,985 -- 247,497 --
Board fees.......................... 48,636 -- 70,429 --
Occupancy........................... 48,257 -- 39,556 --
Legal and accounting................ 35,790 -- 35,806 --
Printing and supplies............... 21,094 -- 22,261 --
Furniture, fixtures and equipment
depreciation..................... 33,337 -- 19,453 --
Data processing..................... 23,956 -- 16,758 --
Organizational expenditures......... -- 42,074 55,691 --
Merger expense...................... 37,310 -- -- --
Other............................... 68,295 77,860 87,283 3,959
Joint Venture....................... 86,624 -- -- --
--------- --------- --------- -------
Total noninterest expense........ 605,285 115,321 594,734 3,959
--------- --------- --------- -------
Net loss before income tax benefit.... (368,143) (115,321) (493,672) (3,959)
Income tax benefit.................... -- -- -- --
--------- --------- --------- -------
Net loss.............................. $(368,143) $(115,321) $(493,672) $(3,959)
--------- --------- --------- -------
Basic (loss) per share of common
stock............................... $ (0.86) N/A $ (1.60) N/A
========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 105
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON UNDESIGNATED PAID-IN ACCUMULATED INCOME COMPREHENSIVE
STOCK STOCK SURPLUS DEFICIT NET OF TAX INCOME TOTAL
------ ------------ ---------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30,
1997.................. $ -- $-- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock.............. -- -- 100 -- -- -- 100
Net loss for a period
of inception to
June 30, 1998...... -- -- -- (3,959) -- (3,959) (3,959)
Comprehensive loss.... -- -- -- -- -- $ (3,959) --
------ -- ---------- --------- ------- --------- ----------
Balance, June 30,
1998.................. -- -- 100 (3,959) -- -- (3,859)
Issuance of common
stock.............. 4,256 -- 4,251,744 -- -- -- 4,256,000
Offering costs........ -- -- (332,267) -- -- -- (332,267)
Net loss for the year
ended June 30,
1999............... -- -- -- (493,672) -- (493,672) (493,672)
Unrealized loss on
available-for-sale
securities net of
tax of $1,667...... -- -- -- -- (2,500) (2,500) (2,500)
Comprehensive loss.... -- -- -- -- -- -- --
------ -- ---------- --------- ------- --------- ----------
Balance, June 30,
1999.................. $4,256 -- $3,919,577 $(497,631) $(2,500) $(496,172) $3,423,702
====== == ========== ========= ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 106
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED PERIOD FROM
------------------------ JUNE 30, INCEPTION TO
1999 1998 1999 JUNE 30, 1998
----------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest received on loans and
investments........................ $ 352,924 $ 4,613 $ 95,343 $ --
Interest paid......................... (95,661) -- (20,391) --
Other fees, commissions, and income
received........................... 14,036 -- 42,449 --
Cash paid to suppliers, employees and
others............................. (549,956) (16,136) (552,833) (9,539)
Contributions to charities............ -- (185) --
Loans originated for sale............. (2,230,974) -- (1,866,642) --
Proceeds from sale of loans........... 2,871,950 -- 1,188,100 --
----------- ---------- ----------- -------
Net cash used in operating
activities....................... 362,319 (11,523) (1,114,159) (9,539)
----------- ---------- ----------- -------
Cash flows from investing activities:
Purchases of available-for-sale
securities......................... (4,097,722) (749,281) --
Maturities of available-for-sale
securities......................... 350,000 -- -- --
Purchase of FHLB stock................ (4,900) -- (16,400) --
Investment in Joint Venture........... (196,000) -- -- --
Loan originations and principal
payments on loans, net............. (4,136,053) -- (4,940,802) --
Deferred organizational costs......... -- -- -- (9,226)
Purchase of property and equipment.... (12,609) -- (509,419) --
----------- ---------- ----------- -------
Net cash used in investing
activities....................... (8,097,284) (6,215,902) (9,226)
----------- ---------- ----------- -------
Cash flows from financing activities:
Net increase in non-interest bearing
demand and savings deposit
accounts........................... 2,825,640 -- 4,365,700 --
Net increase in time deposits......... 4,167,801 -- 1,779,250 --
FHLB Borrowings....................... 425,000 -- -- --
Net increase in mortgage escrow
funds.............................. (18,505) -- 23,941 --
(Payment of) advances from
organizers......................... -- (18,665) 18,665
Proceeds from sale of common stock net
of offering costs.................. -- 3,087,353 3,923,733 100
----------- ---------- ----------- -------
Net cash provided by financing
activities....................... 7,399,936 3,087,353 10,073,959 18,765
----------- ---------- ----------- -------
</TABLE>
F-6
<PAGE> 107
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED PERIOD FROM
------------------------ JUNE 30, INCEPTION TO
1999 1998 1999 JUNE 30, 1998
----------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net increase in cash and cash
equivalents........................... (335,029) 3,075,830 2,743,898 --
Cash and cash equivalents at beginning
of year............................... 2,743,898 -- -- --
----------- ---------- ----------- -------
Cash and cash equivalents at end of
year.................................. $ 2,408,869 $3,075,830 $ 2,743,898 $ --
=========== ========== =========== =======
Net loss on joint venture............... $ (80,178) $ -- $ -- $ --
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net loss.............................. (368,144) (115,321) (493,672) (3,959)
Adjustments:
Depreciation....................... 33,337 -- 22,732 --
Joint venture loss................. 80,178 -- -- --
Provision for loan losses.......... 67,500 -- 56,250 --
Premiums accretion on
investments...................... (238) -- (39) --
Discount amortization on
investment....................... 2,107 -- 34 --
Loss on sale of loans.............. -- -- 3,050 --
(Increase) decrease in:
Loans held for sale.............. 615,513 -- (681,593) --
Accrued interest receivable...... (69,454) -- (59,527) --
Other assets..................... (24,694) (1,600) (4,600) (5,580)
Increase in:
Accrued interest payable......... 60,067 -- 19,621 --
Other liabilities................ (33,493) 105,398 23,396 --
----------- ---------- ----------- -------
Net cash provided by (used in)
operating activities.......... $ 362,679 $ (11,523) $(1,114,159) $(9,539)
=========== ========== =========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 108
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (UNAUDITED)
NOTE 1: PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the six month
period ended December 31, 1999, include the accounts of Northern Star Financial,
Inc. (the "Company") and its wholly owned subsidiary Northern Star Bank (the
"Bank"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2: BASIS OF PRESENTATION
GENERAL: The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all information and disclosures required by generally accepted accounting
principles for complete financial statements. The accompanying consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances and should be read with the fiscal
1999 consolidated financial statements and notes of Northern Star Financial,
Inc. included in its annual report for the year ended June 30, 1999.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have been
included. The results of operations for the six month period ended December 31,
1999, are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other period.
NOTE 3: 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. The Bank's charter became effective January 25, 1999.
The Company prior to January 25, 1999, reported as a development stage
enterprise because its activities included raising capital and establishing a
new bank. Upon opening the Bank, the Company's primary attention turned to
routine, ongoing bank activities and it ceased to be a development stage
enterprise.
F-8
<PAGE> 109
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: COMPREHENSIVE INCOME
Accumulated comprehensive income (loss) is composed of the following:
<TABLE>
<S> <C>
Unrealized loss on available-for-sale securities
Beginning balance -- June 30, 1999........................ $ (2,500)
Current -- period change.................................. (25,480)
---------
Ending balance -- December 31, 1999....................... $ (27,980)
=========
Comprehensive income (loss) for the six months ended
December 31, 1999:
Net loss.................................................. $(361,143)
---------
Other comprehensive loss.................................. (25,480)
=========
Total..................................................... $(393,623)
=========
</TABLE>
NOTE 5: EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. For the six-month
period ended December 31, 1999, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 425,600.
There were options to purchase 66,200 shares of common stock that were not
included in the calculation of diluted earnings per share because they were
antidilutive.
NOTE 6: 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.
NOTE 7: BUSINESS COMBINATION INITIATED
On September 30, 1999 the Company and First Federal Holding Company of
Morris, Inc. ("Morris") entered into an Agreement and Plan of Reorganization for
the merger of Morris with and into the Company. Under terms of the Agreement,
Morris shareholders will exchange their Morris common stock for approximately
870,559 shares of Company common stock, subject to certain adjustments as
specified in the Agreement. Completion of the merger is subject to regulatory
approvals and approval by the shareholders of both companies. The transaction
will be accounted for using the pooling of interest method of accounting.
Morris is a savings and loan holding company and through its subsidiary,
First Federal Savings Bank, provides various financial services including
mortgage, commercial and consumer lending and various deposits and savings plan.
At September 30, 1999 Morris had total assets of $57.5 million and shareholder
equity of $3.7 million.
F-9
<PAGE> 110
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon completion of the merger, the Company will have banking offices
located in Mankato, Morris, Benson, Breckenridge, and Big Lake, Minnesota and
mortgage banking offices located in Morris and Edina, Minnesota.
NOTE 8: SECONDARY STOCK OFFERING INITIATED
The Company filed a Registration Statement on Form SB-2 with the Securities
and Exchange Commission to register the sale of up to 1,000,000 shares of its
common stock. The shares will be offered and sold to the public on a best
efforts basis at a price to be negotiated between the company and its agent.
F-10
<PAGE> 111
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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 (including subscriptions from the
Bank's organizers to purchase an aggregate of 154,000 shares) 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 injected $3,000,500
into the Bank's capital accounts.
The Company prior to January 25, 1999, reported as a development stage
enterprise because its activities included raising capital and establishing a
new bank. Upon opening, the Bank and the Company's primary attention turned to
routine, ongoing bank activities and it ceases to be a development stage
enterprise.
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, 1999, the Bank operated one retail banking office in 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 authors.
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 allowances based on their
judgments about information available to them at the time of their examination.
F-11
<PAGE> 112
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 amortized
(deducted) and accreted (added), respectively, to interest income on the
straight-line and interest methods over the period to the maturity of the
related security.
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 that are required to be recognized under accounting standards as
components of comprehensive income to 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, unamortized premiums, any deferred fees or costs on
originated loans and/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 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 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 or against interest
income equal to all interest previously accrued. Income is subsequently
F-12
<PAGE> 113
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized only to the extent cash payments are received 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 no servicing assets
as of June 30, 1999.
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 Bank's taxable income, as if the
Bank's portion of income tax liability or benefit was separately determined
based on 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 the current period.
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
continently 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 307,831 weighted average shares.
F-13
<PAGE> 114
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Diluted EPS is the same as basic EPS because the option and warrant shares
were granted at a price which is equal to the current operating period market
price and those shares are not "in the money."
Ten shares were outstanding at June 30, 1998 and presentation of EPS for
the initial development period from inception would not be meaningful.
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.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures presented in Note 11, 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.
F-14
<PAGE> 115
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
JUNE 30, 1999:
Debt securities available for
sale:
U.S. Government and agency
obligations.................. $749,286 $ -- $(4,167) $745,119
======== ====== ======= ========
</TABLE>
There were no sales of securities during the year ended June 30, 1999.
The amortized cost and estimated market value of debt securities at June
30, 1999, 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................................ $549,286 $545,119
Due from five to ten years................................ 200,000 200,000
-------- --------
Total................................................... $749,286 $745,119
======== ========
</TABLE>
F-15
<PAGE> 116
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. LOANS RECEIVABLE
Loans receivable at June 30, 1999, consist of the following:
<TABLE>
<S> <C>
Commercial.................................................. $1,843,707
Real Estate................................................. 1,658,261
Consumer.................................................... 1,435,784
----------
Total loans receivable.................................... $4,937,752
Less:
Allowance for loan losses................................. (56,250)
----------
Loans receivable, net..................................... $4,881,502
==========
</TABLE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1999
-------------
<S> <C>
Balance, beginning of period................................ $ -0-
Provision for losses........................................ 56,250
-------
Balance, end of period...................................... $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, 1999, is as follows:
<TABLE>
<S> <C>
Beginning balance........................................... $ -0-
New loans................................................... 1,569,076
Less: Repayments............................................ (321,940)
----------
Ending balance.............................................. $1,247,136
==========
</TABLE>
NOTE 4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, 1999, is summarized as follows:
<TABLE>
<S> <C>
Investment securities....................................... $12,191
Loans receivable............................................ 47,336
-------
Total..................................................... $59,527
=======
</TABLE>
F-16
<PAGE> 117
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1999, consists of the following:
<TABLE>
<S> <C>
Leasehold improvements...................................... $200,035
Furniture and equipment..................................... 309,382
--------
Total..................................................... 509,417
Less accumulated depreciation............................... (22,732)
--------
Premises and equipment, net............................... $486,685
========
</TABLE>
NOTE 6. DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $400,000 at June 30, 1999. Deposited amounts in
excess of $100,000 per account holder are not insured by the Federal Deposit
Insurance Company.
At June 30, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,449,748
2001........................................................ 348,837
----------
Total..................................................... $1,798,585
==========
</TABLE>
Deposits by related parties were approximately $658,000 at June 30, 1999.
NOTE 7. INCOME TAXES
The following are the components of income tax expense as provided:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED INCEPTION TO
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Current income tax provision......................... $ -- $ --
Deferred income tax benefit.......................... -- --
------ ------
$ -- $ --
====== ======
</TABLE>
F-17
<PAGE> 118
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income taxes computed at the federal statutory income
tax rate to total income taxes is as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM
YEAR ENDED INCEPTION TO
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Pretax loss.......................................... $(493,672) $(3,959)
--------- -------
Income tax (benefit) computed at federal statutory
tax rate........................................... $(167,848) $(1,346)
Increase (decrease) resulting from:
Nondeductible expenses............................. 718 --
State income tax benefit, net of federal tax
benefit......................................... (28,751) (238)
Valuation allowance................................ 195,881 1,584
--------- -------
$ -- $ --
========= =======
</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,
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 131,400 $ 1,584
Deferred organization expenses............................ 48,450 --
Allowance for loan losses................................. 22,500 --
Securities unrealized losses.............................. 1,667 --
Less valuation allowance.................................. (197,465) (1,584)
--------- -------
Subtotal.................................................. 6,552 --
--------- -------
Deferred tax liabilities:
Depreciation and basis adjustment......................... 4,885 --
--------- -------
Subtotal.................................................. 4,885 --
--------- -------
Net deferred tax assets................................. $ 1,667 $ --
========= =======
</TABLE>
At June 30, 1999, the Company had cumulative net operating loss
carryforward for tax purposes of approximately $320,000 subject to a 20 year
limitation.
NOTE 8. 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
F-18
<PAGE> 119
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Code as well as nonincentive stock options
(collectively stock options). The options vest over a period ranging from
immediate (36,800 shares) to 3 years (18,000 shares) and must be exercised
within 10 years of the grant date.
A summary of the status of the stock options as of and for the year ended
June 30, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVG.
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Granted.................................................. 54,800 $10.00
Outstanding.............................................. 54,800 $10.00
Exercisable.............................................. 36,800 $10.00
</TABLE>
The weighted average fair value of the options granted is $4.33 per share
and the weighted average remaining contractual life of options outstanding is
9.7 years.
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").
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. Performance 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 options under the fair value method of that
statement. Pro forma net income/(loss) and earnings/(loss) per share for fiscal
1999 follows:
<TABLE>
<CAPTION>
LOSS PER
NET LOSS COMMON SHARE
--------- ------------
<S> <C> <C>
As reported........................................... $(493,672) $(1.60)
Pro forma............................................. $(661,584) $(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.
F-19
<PAGE> 120
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<S> <C>
Risk-free interest rate..................................... 5.129%
Expected life............................................... 5 Yrs.
Expected volatility......................................... 26.00%
Expected dividends.......................................... None
</TABLE>
NOTE 9. COMMITMENTS
At June 30, 1999, 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 $33,945 for the year ended June 30, 1999. The office
space is leased from a lessor entity in which a Company board member has a
significant interest. Minimum lease payments under the operating leases are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR OFFICE EQUIPMENT
ENDED LEASE LEASE
- ------------ -------- ---------
<S> <C> <C>
2000...................................................... $ 77,907 $ 4,044
2001...................................................... 77,907 4,044
2002...................................................... 78,560 2,022
2003...................................................... 79,212 --
2004...................................................... 79,212 --
2005 and thereafter....................................... 365,526 --
-------- -------
Total................................................... $758,324 $10,110
======== =======
</TABLE>
The Bank has an option to renew the office lease for two additional five
year terms.
NOTE 10. 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 11. FINANCIAL INSTRUMENTS
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.
F-20
<PAGE> 121
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Commitments to extend credit represent credit
risk totaling $961,207 for unused lines of credit at June 30, 1999.
Commitments to sell loans amounted to $681,593 at June 30, 1999.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................ $2,816,398 $2,816,398
Investment securities................................ 745,199 745,119
FHLB stock........................................... 16,400 16,400
Loans receivable..................................... 4,790,752 4,790,752
Loans held for sale.................................. 681,593 681,593
Accrued interest receivable.......................... 59,527 59,527
Financial liabilities:
Deposits............................................. $6,164,570 $6,164,570
Advance payments by borrowers........................ 23,941 23,941
</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 12. 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 year ended June 30, 1999.
The Bank maintains its cash in bank deposit accounts which at times, 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 13. 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
F-21
<PAGE> 122
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
classification are also subject to qualitative judgments 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,
1999, that the Bank meets all of capital adequacy requirements to which it is
subject.
As of June 30, 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 and Tier 1 leverage ratios as set
forth in the 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
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISION
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
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 14. 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.
F-22
<PAGE> 123
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. 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.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------- --------
<S> <C> <C>
ASSETS
Cash(1)..................................................... $ 704,700 $ --
Investment in Bank subsidiary............................... 2,726,471 --
Prepaid assets.............................................. -- 5,580
Deferred organizational costs............................... -- 9,226
---------- -------
Total..................................................... $3,431,171 $14,806
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities........................................... $ 7,469 $18,665
Shareholder's equity........................................ 3,423,702 (3,859)
---------- -------
Total..................................................... $3,431,171 $14,806
========== =======
</TABLE>
- -------------------------
(1) The parent company cash is deposited in the Bank and eliminated on the
consolidated statements of financial condition.
F-23
<PAGE> 124
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Interest from:
Deposits in subsidiary...................................... $ 7,565 $ --
Nonaffiliated bank.......................................... 5,191 --
--------- -------
Total income.............................................. $ 12,756 --
Expenses:
Non-interest expenses....................................... 234,899 3,959
Income tax (refund) expense................................. -- --
--------- -------
Total expenses............................................ 234,899 3,959
--------- -------
Loss before equity in undistributed net loss of Bank
subsidiary................................................ (222,143) (3,959)
Equity reduction from undistributed net comprehensive loss
of Bank subsidiary........................................ (274,029) --
--------- -------
Net comprehensive loss...................................... $(496,172) $(3,959)
========= =======
</TABLE>
F-24
<PAGE> 125
NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1999 1998
----------- ----------
<S> <C> <C>
Net loss.................................................... $ (222,143) $(3,959)
Adjustments:
Decrease (increase) in other assets....................... 5,580 (5,580)
Increase in other liabilities............................. 7,469 --
----------- -------
Net cash used in operations................................. (209,094) (9,539)
----------- -------
Cash flows from investing activities:
Investment in Bank subsidiary............................. (3,000,500) --
Deferred organizational costs............................. -- (9,226)
----------- -------
Net cash (used in) investing activities..................... (3,000,500) (9,226)
----------- -------
Cash flows from financing activities:
Proceeds from sale of common stock........................ 4,256,000 100
Payments for stock issuance costs......................... (332,267) --
Decrease in prepaid organizational costs.................. 9,226 --
(Refunds to) Advances from organizers..................... (18,665) 18,665
----------- -------
Net cash provided by financing activities................... 3,914,294 18,765
----------- -------
Increase in cash and cash equivalents....................... 704,700 --
Cash and cash equivalents
Beginning of year......................................... -- --
----------- -------
End of year............................................... $ 704,700 $
=========== =======
</TABLE>
F-25
<PAGE> 126
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Federal Holding Company of Morris, Inc.
Morris, Minnesota
We have audited the accompanying consolidated balance sheets of First
Federal Holding Company of Morris, Inc. and subsidiaries as of September 30,
1999 and 1998, and the related consolidated statements of income, changes in
stockholders' 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 financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Federal Holding
Company of Morris, Inc. and subsidiaries as of September 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
MICHAEL L. ANDERSON & ASSOCIATES, PLLC
Alexandria, Minnesota
October 21, 1999
F-26
<PAGE> 127
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------------
1999 1999 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks..................................... $ 4,296,544 $ 2,180,409 $ 6,382,462
Available-for-Sale Securities, at fair value -- Note 2...... 4,156,323 4,501,331 6,048,086
Held-to-Maturity Securities -- Note 2....................... 722,340 23,340 103,792
Federal Home Loan Bank Stock, at cost....................... 211,200 211,200 182,500
Loans Held for Sale......................................... 1,568,300 1,516,300 2,336,700
Loans Receivable -- Note 3
(net of allowance for loan losses of $525,329, $527,398
and $474,332).......................................... 45,943,346 45,163,267 40,421,225
Accrued Interest Receivable -- Note 4....................... 730,834 1,036,395 900,497
Loan Servicing Rights -- Note 5............................. 151,864 153,181 129,093
Foreclosed Real Estate -- Note 6............................ -0- -0- 31,600
Premises and Equipment -- Note 7............................ 1,106,907 752,042 578,183
Cash Surrender Value of Life Insurance...................... 1,723,619 1,702,705 -0-
Cost in Excess of Book Value -- Note 8...................... 100,619 102,740 111,224
Income Tax Refunds Receivable............................... 44,014 96,324 -0-
Prepaid Expenses and Other Assets........................... 303,909 127,247 138,409
----------- ----------- -----------
Total Assets.............................................. $61,059,819 $57,566,481 $57,363,771
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits -- Note 9........................................ $52,528,200 $48,484,169 $49,928,293
Advances from Federal Home Loan Bank -- Note 10........... 2,293,421 2,597,551 1,247,154
Note Payable -- First National Bank in Winnebago -- Note
11..................................................... 637,038 638,179 698,057
Notes Payable -- Shareholders -- Note 11.................. 364,300 364,300 364,300
Notes Payable LOC to NSF................................. 95,700 -0- -0-
Accrued Interest Payable on Notes......................... 24,365 32,209 -0-
Advance Payments by Borrowers for Taxes and Insurance..... 140,637 51,740 206,418
Current Income Taxes Payable.............................. 962 910 198,692
Deferred Income Taxes Payable -- Note 12.................. 77,444 88,128 105,342
Accrued Salary Continuation Payable....................... 39,463 29,597 -0-
Accrued Expenses and Other Liabilities.................... 583,461 976,476 838,747
----------- ----------- -----------
Total Liabilities......................................... 56,784,991 53,263,259 53,587,003
Minority Interest........................................... 600,596 637,004 456,589
Stockholders' Equity:
Common Stock -- $100 par value, 5,000 shares authorized,
1,042 shares issued, 1,017 shares outstanding.......... 104,200 104,200 104,200
Additional Paid in Capital................................ 288,337 288,337 288,337
Retained Earnings......................................... 3,441,469 3,420,651 3,051,801
Accumulated Other Comprehensive Income (Loss)............. (27,774) (14,970) 7,841
Treasury Stock (25 shares)................................ (132,000) (132,000) (132,000)
----------- ----------- -----------
Total Stockholders' Equity............................. 3,674,232 3,666,218 3,320,179
----------- ----------- -----------
Total Liabilities and Stockholders' Equity........... $61,059,819 $57,566,481 $57,363,771
=========== =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-27
<PAGE> 128
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income:
Loans.................................................. $ 996,390 $ 998,119 $3,935,512 $3,843,465
Investment Securities.................................. 31,379 30,850 113,513 77,288
Mortgage-Backed Securities............................. 38,562 69,410 218,808 313,521
Interest-Bearing Deposits.............................. 13,979 39,329 69,584 187,924
---------- ---------- ---------- ----------
Total Interest Income................................ 1,080,310 1,137,708 4,337,417 4,422,198
Interest Expense:
Demand Deposits........................................ 26,697 30,829 115,468 121,692
Savings Deposits....................................... 23,177 21,712 81,669 87,752
Certificate of Deposits................................ 449,435 467,021 1,750,093 1,857,726
Advances from FHLB..................................... 31,894 22,994 151,647 94,927
Notes Payable.......................................... 28,244 25,743 104,093 98,470
---------- ---------- ---------- ----------
Total Interest Expense............................... 559,447 568,299 2,202,970 2,260,567
---------- ---------- ---------- ----------
Net Interest Income...................................... 520,863 569,409 2,134,447 2,161,631
Provision for Loan Losses -- Note 3...................... -- (2,000) (2,000) (12,000)
---------- ---------- ---------- ----------
Net Interest Income After Provision for Loan Losses.... 520,863 567,409 2,132,447 2,149,631
Non-Interest Income:
Other Fees and Service Charges......................... 119,975 83,878 311,390 283,722
Loan Servicing Fees, net of amortization............... 6,068 4,427 27,945 21,443
Gain on Sale of Loans.................................. 16,473 32,190 94,909 152,463
Gain (Loss) on Sale of ORE and Other Assets............ 1,134 (2,642) (2,642) 1,959
Increase in Cash Surrender Value of Life Insurance..... 20,914 -- 62,705 -0-
Other Income........................................... 16,782 12,899 41,876 53,788
---------- ---------- ---------- ----------
Total Non-Interest Income............................ 181,346 130,752 536,183 513,375
Non-Interest Expense:
Compensation, Benefits, and Payroll Taxes.............. 325,171 247,984 1,069,230 967,547
Directors Fees......................................... 42,300 31,400 134,000 124,500
Occupancy.............................................. 63,849 20,042 217,572 183,150
Advertising............................................ 19,207 6,447 28,943 34,147
FDIC and OTS Assessments............................... 8,424 12,200 55,287 52,497
Legal and Professional Services........................ 37,838 11,629 86,914 35,805
Office Supplies........................................ 21,140 20,737 94,606 77,091
Postage................................................ 9,563 8,344 42,603 41,088
Telephone.............................................. 10,898 8,669 46,498 40,479
Other General and Administrative....................... 169,161 85,992 302,408 214,619
---------- ---------- ---------- ----------
Total Non-Interest Expense........................... 707,551 453,444 2,078,061 1,770,923
---------- ---------- ---------- ----------
Net Income (Loss) Before Income Taxes and Minority
Interest............................................... (5,342) 244,717 590,569 892,083
Income Tax Expense -- Note 12.......................... 8,871 108,664 220,294 300,840
---------- ---------- ---------- ----------
Net Income (Loss) Before Minority Interest............... (14,213) 136,053 370,275 591,243
Minority Interest........................................ (35,031) 11,911 1,425 54,666
---------- ---------- ---------- ----------
NET INCOME............................................... $ 20,818 124,142 $ 368,850 $ 536,577
========== ========== ========== ==========
Basic Earnings Per Share................................. 20.47 122.07 $ 362.68 $ 522.98
========== ========== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-28
<PAGE> 129
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY INCOME
-------- ---------- ---------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1997...... $104,200 $288,337 $2,515,224 $ 37,470 $ -0- $2,945,231
Net Income............ 536,577 536,577 $536,577
Unrealized loss on
available-for-sale
securities, net of
deferred income
taxes of $20,140.... (29,629) (29,629) (29,629)
Purchase of Treasury
Stock (25 shares)... (132,000) (132,000)
-------- -------- ---------- -------- --------- ---------- --------
September 30, 1998...... 104,200 288,337 3,051,801 7,841 (132,000) 3,320,179 $509,948
========
Net Income............ 368,850 368,850 $368,850
Unrealized loss on
available-for-sale
securities, net of
deferred income
taxes of $15,505.... (22,811) (22,811) (22,811)
-------- -------- ---------- -------- --------- ---------- --------
September 30, 1999...... $104,200 $288,337 $3,420,651 $(14,970) $(132,000) $3,666,218 $346,039
======== ======== ========== ======== ========= ========== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-29
<PAGE> 130
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income................................... $ 20,818 $ 124,142 $ 368,850 $ 536,577
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation............................... 45,297 9,171 51,719 29,995
Amortization of Cost in Excess of Book
Value................................... 2,121 2,121 8,484 8,484
Amortization of Servicing Rights........... 3,733 8,769 25,259 25,832
Premium Amortization -- Investment
Securities.............................. 192 3,342 8,062 1,551
Discount Accretion -- Investment
Securities.............................. (642) (451) (3,871) (4,048)
Amortization of Deferred Loan Costs
(Fees).................................. 11,424 (9,088) 9,367 26,309
Accretion of Deferred Gain on Sale of
Loans................................... -0- -0- (5,971) (4,798)
Provision for Loan Losses.................. -0- 2,000 2,000 12,000
Gain on Sale of Loans...................... (16,473) (32,190) (94,909) (152,463)
(Gain) Loss on Sale of ORE and Other
Assets.................................. (1,134) 2,642 2,642 (1,959)
Loss from Wildwoods Apartments Limited
Partnership............................. -0- -0- 1,372 1,179
Net Minority Interest Share of Earnings and
Dividends............................... (35,031) 11,911 (13,133) 40,108
(Increase) Decrease in Loans Held for
Sale.................................... (52,000) 833,100 820,400 (1,530,475)
(Increase) Decrease in Accrued Interest
Receivable.............................. 305,561 202,779 (135,898) 92
(Increase) in Cash Surrender Value of Life
Insurance............................... (20,914) -0- (62,705) -0-
(Increase) Decrease in Prepaid Expenses and
Accounts Receivable..................... (176,662) 47,208 9,656 (39,181)
Increase (Decrease) in Accrued Interest
Payable................................. (94,507) (77,139) (5,054) 75,131
Increase (Decrease) in Current Income Taxes
Payable................................. 52,362 (61,472) (294,106) 271,137
Deferred Tax Expense (Benefit)............. (194) (32,961) (42) (123,974)
Increase in Accrued Salary Continuation
Payable................................. 9,866 -0- 29,597 -0-
Increase (Decrease) in Accrued Expenses and
Other Liabilities....................... (393,015) 249,716 137,729 221,157
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Operating
Activities............................ (339,198) 1,283,600 859,448 (607,346)
Cash Flows from Investing Activities:
Proceeds from Certificates of Deposits
Maturing................................... -0- -0- 30,000 372,000
Purchase of Certificates of Deposit.......... (699,000) -0- (20,000) (30,000)
Proceeds from State and Political
Subdivisions Maturing...................... -0- 70,000 70,000 330,000
Purchase of State and Political
Subdivisions............................... (29,944) -0- -0- -0-
Principal Received from Benson Industrial
Development Bond........................... -0- -0- 452 427
Proceeds from Corporate Debt Securities
Maturing................................... 150,000 -0- 770,000 -0-
Purchase of Corporate Debt Securities........ -0- -0- -0- (1,325,552)
Proceeds from U.S. Government Agencies
Maturing................................... -0- -0- -0- 1,000,000
Purchase of U.S. Government Agencies......... -0- (1,000,000) (1,497,647) -0-
</TABLE>
F-30
<PAGE> 131
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Principal Received on Mortgage-Backed
Securities................................. 200,731 805,174 2,227,776 1,543,578
Purchase of Mortgage-Backed Securities....... -0- -0- -0- (1,050,560)
Proceeds from FHLB stock..................... -0- -0- -0- 225,700
Purchase of FHLB stock....................... -0- -0- (28,700) -0-
Net (Increase) Decrease in Loans
Receivable................................. (777,446) (2,379,533) (4,674,676) 1,159,001
Proceeds from Sale of ORE and Other Assets... 1,795 1,758 1,758 3,100
Premises and Equipment Acquired.............. (400,823) (19,112) (225,578) (129,765)
Investment in Life Insurance................. -0- (1,810,000) (1,810,000) -0-
Refund of Life Insurance..................... -0- -0- 170,000 -0-
Distribution from Wildwoods Apartments
Limited Partnership........................ -0- -0- 134 -0-
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Investing
Activities............................ (1,554,687) (4,331,713) (4,986,481) 2,097,929
Cash Flows from Financing Activities:
Net Increase (Decrease) in Demand and Savings
Deposits................................... $ 921,067 $ 95,375 $ (960,401) $ 1,119,634
Net Increase (Decrease) in Certificates of
Deposit.................................... 3,209,627 1,274,752 (446,460) 275,533
Net Advances by Borrowers for Taxes and
Insurance.................................. 88,897 (60,486) (154,678) 10,244
Advances from Federal Home Loan Bank......... 500,000 -0- 2,300,000 -0-
Principal Payments made to Federal Home Loan
Bank....................................... (804,130) (14,762) (949,603) (74,303)
Principal Payments on Note Payable........... (1,141) -0- (59,878) (173,523)
Proceeds from Shareholder Debt............... -0- -0- 204,000 132,000
Principal Payments on Shareholder Debt....... -0- -0- (204,000) -0-
Proceeds from Line of Credit................. 95,700 -0- -0- -0-
Minority Investment in Homeland Mortgage,
LLC........................................ -0- -0- 196,000 -0-
Purchase of Treasury Stock................... -0- -0- -0- (132,000)
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Financing
Activities.............................. 4,010,020 1,294,879 (75,020) 1,157,585
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and Due from
Banks........................................ 2,116,135 (1,753,234) (4,202,053) 2,648,168
Cash and Due from Banks, Beginning of Year..... 2,180,409 6,382,462 6,382,462 3,734,294
----------- ----------- ----------- -----------
Cash and Due from Banks, Ending Balance........ $ 4,296,544 $ 4,629,228 $ 2,180,409 $ 6,382,462
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash Paid for Interest....................... $ 653,954 $ 645,438 $ 2,208,024 $ 2,185,436
Cash Paid for Income Taxes................... $ 910 198,692 $ 514,442 $ 169,429
Significant Noncash Transactions:
Loan servicing rights valued as an asset to
be amortized over the expected repayment
term on the loans that increased the gains
on sale of loans........................... $ 2,416 $ 10,829 $ 49,347 $ 104,478
ORE repossessed.............................. -0- -0- -0- 31,600
ORE sold on contract for deed................ -0- 27,200 27,200 -0-
Trade old copy machine for new copy
machine.................................... -0- -0- -0- 2,883
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-31
<PAGE> 132
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO QUARTERLY FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED DECEMBER 31, 1999 (UNAUDITED)
NOTE 1: PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
month period ended December 31, 1999, include the accounts of First Federal
Holding Company of Morris, Inc. (the "Company") and its majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2: BASIS OF PRESENTATION
GENERAL: The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all information and disclosures required by generally accepted accounting
principles for complete financial statements. The accompanying consolidated
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances and should be read with the fiscal
1999 consolidated financial statements and notes of First Federal Holding
Company, Inc. and its subsidiaries included in our annual report for the year
ended September 30, 1999.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have been
included. The results of operations for the three month period ended December
31, 1999, are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other period.
NOTE 3: COMPREHENSIVE INCOME
<TABLE>
<S> <C>
Accumulated comprehensive income (loss) is comprised of the following:
Unrealized loss on available-for-sale securities:
Beginning balance -- September 30, 1999..................... $(14,970)
Current -- period change.................................... (12,804)
--------
Ending balance -- December 31, 1999......................... $(27,774)
========
Comprehensive income (loss) for the three months
Ended December 31, 1999:
Net income................................................ $ 20,818
Other comprehensive loss.................................. (12,804)
--------
Comprehensive income...................................... $ 8,014
========
</TABLE>
NOTE 4: EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the period presented. For the three month
periods ended December 31, 1999 and 1998, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 1,017.
F-32
<PAGE> 133
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO QUARTERLY FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED
DECEMBER 31, 1999 (UNAUDITED) -- (CONTINUED)
NOTE 5: BUSINESS COMBINATION INITIATED
On September 30, 1999, the Company and Northern Star Financial, Inc.
("Northern") entered into an Agreement and Plan of Reorganization for the merger
of the Company with and into Northern. Under terms of the Agreement, the
Company's shareholders will exchange their common stock for approximately
870,559 shares of Northern's common stock, subject to certain adjustments as
specified in the Agreement. Completion of the merger is subject to regulatory
approvals and approval by the shareholders of both companies. The transaction
will be accounted for using the pooling of interest method of accounting.
Northern is a bank holding company and through its subsidiary, Northern
Star Bank, provides various financial services including mortgage, commercial,
and consumer lending and various deposits and savings plans. Northern Star Bank
is located in Mankato, Minnesota.
F-33
<PAGE> 134
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
First Federal Holding Company of Morris, Inc. (the "Company") is a savings
and loan holding company that was incorporated on December 16, 1991. The Company
owns 90.2945684% of the common stock of First Federal Savings Bank (the "Bank").
The Bank provides various financial services to Morris, Benson and
Breckenridge, Minnesota and the surrounding areas, including mortgage,
commercial and consumer lending, and various deposit and savings plans. The Bank
is subject to regulation by the Office of Thrift Supervision. All accounts are
insured by the Federal Deposit Insurance Corporation (FDIC) through the Savings
Association Insurance Fund (SAIF).
West Central Investments, Inc. was incorporated in July of 1986 and is
wholly owned by the Bank. West Central Investments, Inc. provides investment and
brokerage services.
On July 16, 1999, the Bank formed a new mortgage servicing company:
Homeland Mortgage, LLC (the "LLC"). The Bank contributed assets of $204,000,
including most of the fixed assets and loans receivable of West Central Service
Corp. (a wholly-owned subsidiary of the Company), to obtain a 51% ownership.
Northern Star Financial, Inc., a Minnesota bank holding company, owns the
remaining 49%. The LLC currently has offices in Morris and Edina, Minnesota.
Homeland Mortgage, LLC has elected to be taxed as a partnership, with the income
or loss passing through to the members. Therefore, no provision for income taxes
has been established.
The consolidated organization chart is as follows:
<TABLE>
<S> <C> <C>
First Federal Holding Company of Morris, Inc.
First Federal Savings Bank West Central Service Corp.
90.2945684% 100%
West Central Investments Homeland Mortgage, LLC
100% 51%
</TABLE>
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practices of
the savings and loan industry. The Corporations maintain their accounts using
the accrual basis of accounting. Under the accrual basis of accounting, revenues
are recognized when earned and expenses are recognized when incurred. All
material intercompany accounts and transactions have been eliminated in the
consolidation.
On September 30, 1999 the Company and Northern Star Financial, Inc.
("Northern") entered into an Agreement and Plan of Reorganization for the merger
of the Company with and into Northern. Under terms of the Agreement, the
Company's shareholders will exchange their common stock for approximately
870,559 shares of Northern's common stock, subject to certain adjustments as
specified in the Agreement. Completion of the merger is subject to regulatory
approvals and approval
F-34
<PAGE> 135
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the shareholders of both companies. The transaction will be accounted for
using the pooling of interest method of accounting.
Northern is a bank holding company and through its subsidiary, Northern
Star Bank, provides various financial services including mortgage, commercial,
and consumer lending and various deposits and savings plans. Northern Star Bank
is located in Mankato, Minnesota.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting 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 determination of the allowances 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 real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
CASH EQUIVALENTS
The Company considers all cash amounts due from depository institutions,
interest-bearing deposits in other banks, money market accounts, and federal
funds sold to be cash equivalents for purposes of the statements of cash flows.
Cash includes short-term interest-bearing deposits in other depository
institutions of $1,469,694 and $4,822,543 at September 30, 1999 and 1998,
respectively.
INVESTMENT SECURITIES
TRADING SECURITIES: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income. There were no securities classified as trading
securities.
SECURITIES HELD-TO-MATURITY: U.S. Treasury Notes, State and Political
Subdivision obligations and other Securities that management has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts that are recognized in
interest income using the interest method over the period to maturity.
F-35
<PAGE> 136
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE: Available-for-sale securities consist of
investment securities not classified as trading securities nor as
held-to-maturity securities and mortgage-backed securities. Mortgage-backed
securities represent participating interests in pools of long-term first
mortgage loans originated and serviced by issuers of the securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. The amortization of
premiums and the accretion of discounts are recognized in interest income using
methods approximating the interest method over the period of maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
FHLB STOCK
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 is carried at cost.
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.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal adjusted by any charge-offs, 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 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.
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.
The Allowance for Loan Losses is maintained at an amount considered
adequate to provide for potential losses. The allowance is based on periodic
analysis of the loan portfolio and real estate and other property acquired by
Management. In this analysis, Management considers factors including but not
limited to, general economic conditions, loan portfolio composition and
historical experience. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions. Loans are considered
impaired if full principal or interest payments are not
F-36
<PAGE> 137
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require an increase, such an increase is reported as a component of the
provision for loan losses. Loans are charged against the allowance when they are
deemed to be uncollectible. Real estate and other property acquired are
charged-down to fair value.
Loans are reviewed regularly by Management and are placed in a non-accrual
status when the loan is 90 days or more past due and/or the collection of
interest or principal is considered unlikely. When a loan is placed on a
non-accrual basis, any uncollected interest accrued in the current year is
charged against current income. Subsequent interest on non-accrual loans is
recognized as income only when collected.
Interest Income is accrued on loan balances outstanding. Loans are reviewed
regularly by Management and are placed on a non-accrual status when the loan is
90 days or more past due, and/or the collection of interest or principal is
considered unlikely. Also, the Bank has started foreclosure or judgment
procedures against some of the non-accrual loans. When the Bank has acquired
control or title to the real estate or other property, it is transferred to real
estate and other property acquired in settlement of loans.
Interest income on loans is recognized on the accrual basis and includes
the accretion and amortization of deferred loan fees and costs as required by
SFAS 91. Deferred loan fees and costs are amortized and accreted using the
effective interest method.
LOAN SERVICING RIGHTS
The cost of loan servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of loan servicing
rights is assessed based on the fair value of those rights. Amortization is
computed in proportion to and over the period of estimated net servicing income.
Fair values are estimated using discounted cash flows based on a current
market interest rate. The Bank evaluates the mortgage servicing rights strata
for impairment by estimating the fair value based on anticipated future net cash
flows, taking into consideration prepayment predictions. The predominant
characteristics used as the basis for stratifying are loan types, period of
origination, and interest rates. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or
fair value minus estimated costs to sell. Revenue and expenses from operations
and changes to the valuation allowance are included in operations.
F-37
<PAGE> 138
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Real estate and other property acquired in settlement of loans are recorded
at the lower of the following at the time of foreclosure:
1) The fair value of the property, or;
2) The recorded amount of the loan at the time of foreclosure.
Subsequent to foreclosure, the assets are recorded at the lower of:
1) The lower of 1 or 2 above, or;
2) The fair value minus the estimated costs to sell.
Gains or losses on the sale of real estate and other property acquired are
charged to operations. Write-downs resulting from periodic revaluation of the
real estate and other property are charged to expense. Rental income and
expenses of real estate and other property acquired are charged to operations.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and equipment
are carried at cost, less accumulated depreciation. Buildings and equipment are
depreciated using the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Premises.................................................... 10-40 years
Furniture and equipment..................................... 3-10 years
</TABLE>
Expenditures for additions, major renewals, and improvements are
capitalized and maintenance and repairs are charged to expense as incurred. Net
gains and losses on disposal or retirement of premises and equipment are
included in other income.
INCOME TAXES
The Company and Subsidiaries (except Homeland Mortgage, LLC) file a
consolidated federal income tax return on a fiscal year ending September 30th.
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, accumulated depreciation, the remaining
Section 481(a) adjustment attributable to the recapture of the excess bad debt
reserves, and FHLB stock dividends for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
Any tax benefit from the utilization of a net operating loss in the
consolidated federal and state unitary income tax returns is paid to the loss
companies, utilizing the separate return method of income tax allocation.
F-38
<PAGE> 139
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK
Treasury stock is recorded at cost. In the event of subsequent reissue, the
treasury stock account will be reduced by the cost of such stock on the average
cost basis with any excess proceeds credited by additional paid-in capital.
Treasury stock is available for general corporate purposes. On February 12, 1998
the Company repurchased 25 shares of its own common stock from an individual
shareholder for $132,000.
COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted 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
general-purpose financial statements. The statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income to 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.
EARNINGS PER SHARE
Basic earnings per share amounts are computed by dividing the net income by
the weighted average number of common shares outstanding. Diluted earnings per
share is the same as basic earnings per share due to the lack of dilutive items
in the Company.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Effective September 30, 1999, the Company adopted SFAS No. 107, Disclosures
About Fair Value of Financial Instruments.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
CASH AND DUE FROM BANKS -- The carrying value approximates fair value.
INVESTMENT SECURITIES -- Fair values of available-for-sale securities
have been estimated using quoted market prices. The carrying value of
held-to-maturity securities and FHLB stock approximates fair value.
LOANS -- For variable rate loans, loans with balloon maturities, loans
with relatively near-term maturities (such as consumer installment loans)
carrying values approximate fair values. The fair value of long-term fixed
rate loans has been estimated using present value cash flows, discounted at
a rate approximating current market rates and giving consideration to
estimated prepayment risk and credit loss factors. The estimated fair value
of loans held for sale is based on quoted market prices of similar
instruments trading in the secondary market.
LOAN SERVICING RIGHTS -- Fair value is estimated at 1.7 times carrying
value.
ACCRUED INTEREST -- The carrying amount approximates fair value.
LIFE INSURANCE POLICIES -- Cash value of the policies approximates
fair value.
F-39
<PAGE> 140
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEPOSIT LIABILITIES -- The fair values of demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed term money market accounts and certificates of deposits approximate
their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregate expected monthly maturities on time
deposits.
SHORT-TERM BORROWINGS -- The carrying amounts of advances from the
Federal Home Loan Bank (FHLB) of Des Moines maturing within 90 days
approximate their fair values. Advance payments by borrowers for taxes and
insurance approximate fair value.
LONG-TERM BORROWINGS -- The carrying amounts of amounts of long-term
borrowings are estimated using discounted cash flow analysis based on the
Bank's current incremental borrowing rates for similar types of borrowing
arrangements.
OFF-BALANCE-SHEET ITEMS -- Fair value for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. The carrying value and fair value of
commitments to extend credit are not considered material for disclosure.
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost and approximate fair values of investment securities are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Available-for-Sale:
U.S. Government Agencies.............. $1,498,111 $ -0- $21,861 $1,476,250
Corporate Debt Securities............. 549,552 -0- 2,716 546,836
---------- ------- ------- ----------
2,047,663 -0- 24,577 2,023,086
Mortgage-Backed Securities............ 2,481,516 4,412 7,683 2,478,245
---------- ------- ------- ----------
Total Debt Securities.............. $4,529,179 $ 4,412 $32,260 $4,501,331
========== ======= ======= ==========
Held-to-Maturity:
Certificates of Deposit............... $ 20,000 $ -0- $ -0- $ 20,000
State & Political Subdivisions........ 3,340 -0- -0- 3,340
---------- ------- ------- ----------
Total Debt Securities.............. $ 23,340 $ -0- $ -0- $ 23,340
========== ======= ======= ==========
</TABLE>
F-40
<PAGE> 141
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Available-for-Sale:
U.S. Government Agencies.............. $ -0- $ -0- $ -0- $ -0-
Corporate Debt Securities............. 1,325,552 -0- 7,581 1,317,971
---------- ------- ------- ----------
1,325,552 -0- 7,581 1,317,971
Mortgage-Backed Securities............ 4,707,947 38,946 16,778 4,730,115
---------- ------- ------- ----------
Total Debt Securities.............. $6,033,499 $38,946 $24,359 $6,048,086
========== ======= ======= ==========
Held-to-Maturity:
Certificates of Deposit............... $ 30,000 $ -0- $ -0- $ 30,000
State & Political Subdivisions........ 73,792 -0- -0- 73,792
---------- ------- ------- ----------
Total Debt Securities.............. $ 103,792 $ -0- $ -0- $ 103,792
========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of debt securities at September
30, 1999, by contractual maturity, are shown below. Mortgage-backed securities
have been aggregated and disclosed separately, rather than allocated over
several maturity groupings, since they lack a single maturity date and because
borrowers retain the right to prepay the obligations.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- --------- -------
<S> <C> <C> <C> <C>
Due in one year or less.................. $ 150,192 $ 150,168 $23,340 $23,340
Due from one to five years............... 1,897,471 1,872,918 -0- -0-
Due from five to ten years............... -0- -0- -0- -0-
Due after ten years...................... -0- -0- -0- -0-
---------- ---------- ------- -------
2,047,663 2,023,086 23,340 23,340
Mortgage-Backed Securities............... 2,481,516 2,478,245 -0- -0-
---------- ---------- ------- -------
$4,529,179 $4,501,331 $23,340 $23,340
========== ========== ======= =======
</TABLE>
Mortgage-Backed Securities pledged against public deposits were $394,526
(fair value of $396,982) at September 30, 1999 and $688,818 (fair value of
$699,870) at September 30, 1998.
Tax-exempt interest income earned was $223 and $9,917 for the years ended
September 30, 1999 and 1998.
F-41
<PAGE> 142
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS RECEIVABLE
Loans receivable at September 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial........................................... $ 2,775,286 $ 2,533,083
Residential Construction............................. 287,616 176,575
Commercial Real Estate............................... 3,111,840 3,325,301
Residential Real Estate.............................. 18,939,373 19,350,424
Real Estate Sold on Contract......................... 113,912 111,819
Non-Mortgage Agricultural............................ 4,130,590 3,342,419
Loans on Deposit Accounts............................ 320,717 274,332
Home Improvement..................................... 31,539 43,236
Educational.......................................... 33,895 35,229
Auto................................................. 7,988,328 6,041,455
Mobile Home.......................................... 1,578 3,428
Consumer............................................. 7,805,341 5,568,176
Demand Deposit....................................... 79,467 60,941
Overdrafts........................................... 35,559 8,885
----------- -----------
Total Loans Receivable............................. 45,655,041 40,875,303
Less:
Allowance For Loan Losses.......................... (527,398) (474,332)
Deferred Loan Costs (net of deferred fees)......... 45,704 36,305
Deferred Gain on Sale of Loans..................... (10,080) (16,051)
----------- -----------
Loans Receivable, Net................................ $45,163,267 $40,421,225
=========== ===========
</TABLE>
The following is an analysis of the allowance for loan losses for the years
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Beginning Balance......................................... $474,332 $504,180
Provision Charged to Operations........................... 2,000 12,000
Charge Offs............................................... (23,692) (48,808)
Recoveries................................................ 74,758 6,960
-------- --------
Ending Balance.......................................... $527,398 $474,332
======== ========
</TABLE>
The Bank had no loans classified as impaired at September 30, 1999, and
1998.
The Bank has granted loans to certain directors and executive officers.
Such loans were made in the ordinary course of business of the Bank and do not
involve more than the normal risk of
F-42
<PAGE> 143
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collectibility and do not exceed the loan amount which would be available to
members of the general public of similar credit status applying for such loans.
Loan activity in these related-party accounts for the years ended September
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Beginning Balance.................................... $ 472,008 $ 362,699
New Loans............................................ 2,021,797 1,134,100
Repayments........................................... (1,448,574) (1,024,791)
----------- -----------
Ending Balance..................................... $ 1,045,231 $ 472,008
=========== ===========
</TABLE>
NOTE 4 -- ACCRUED INTEREST RECEIVABLE
Accrued Interest Receivable consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Loans.................................................... $ 961,173 $836,325
Investment Securities.................................... 34,316 11,885
Mortgage-Backed Securities............................... 40,906 52,287
---------- --------
Total.................................................. $1,036,395 $900,497
========== ========
</TABLE>
Non-accrual loans totaled $132,102 and $364,597 at September 30, 1999 and
1998, respectively. The effect of these non-accruing loans on revenues were
$8,933 and $52,538 for the years ending September 30, 1999 and 1998,
respectively.
NOTE 5 -- LOAN SERVICING RIGHTS
The following is a summary of servicing rights activity:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Beginning Balance......................................... $129,093 $ 50,447
New Loan Servicing Rights................................. 49,347 104,478
Amortization.............................................. (25,259) (25,832)
-------- --------
Ending Balance.......................................... $153,181 $129,093
======== ========
</TABLE>
Loans serviced for others are not included in the accompanying consolidated
statements of balance sheets. The unpaid principal balances of loans serviced
for others was $21,358,123 and $23,270,386 at September 30, 1999 and 1998,
respectively.
NOTE 6 -- FORECLOSED REAL ESTATE
On July 6, 1998 the Company repossessed residential property valued at
$31,600. The property was subsequently resold on October 8, 1998, at a loss of
$2,642.
F-43
<PAGE> 144
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- PREMISES AND EQUIPMENT
The schedule of premises and equipment as of September 30, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land................................................... $ 89,360 $ 89,360
Buildings and Improvements............................. 726,668 726,668
Furniture and Equipment................................ 852,238 637,294
---------- ----------
Cost................................................. 1,668,266 1,453,322
Accumulated Depreciation............................... (916,224) (875,139)
---------- ----------
Net Book Value....................................... $ 752,042 $ 578,183
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1999 and 1998
totaled $51,719 and $29,995, respectively.
The Company has entered into a three-year lease agreement for premises in
Edina, Minnesota. The minimum annual rental commitments under this lease is as
follows:
<TABLE>
<S> <C>
September 30, 2000................................... $24,090
2001.............................................. 24,090
2002.............................................. 19,071
2003.............................................. -0-
2004.............................................. -0-
2005 and Thereafter............................... -0-
-------
$67,251
=======
</TABLE>
The Company has the option to renew the lease at the end of the term. The
Company has also entered into an operating lease agreement with a director of
the Company for premises in Morris, Minnesota. The agreement is month-to-month,
resulting in no minimum annual rental commitments.
Total rent expense under operating leases was $10,062 and $100 for the
years ended September 30, 1999 and 1998.
NOTE 8 -- COST OF EXCESS OF BOOK VALUE
In prior years, the Company has purchased stock from minority shareholders
of the Bank. The purchase price of this stock exceeded its book value. This
excess is being amortized on the straight-line method over fifteen years. Annual
amortization expense was $8,484 for the years ended September 30, 1999 and 1998.
F-44
<PAGE> 145
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- DEPOSITS
Deposits at September 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Demand Deposits...................... $11,603,134 $12,134,004
Savings Deposits..................... 5,339,250 5,770,458
----------- -----------
16,942,384 17,904,462
Certificates of Deposit.............. 31,541,785 32,023,831
----------- -----------
Total Deposits..................... $48,484,169 $49,928,293
=========== ===========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $1,215,717 and $1,105,614 at September 30, 1999 and 1998.
Deposited amounts in excess of $100,000 per account holder are not insured by
the Federal Deposit Insurance Company.
At September 30, 1999, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
September 30, 2000................................. $23,070,786
2001............................................. 6,362,369
2002............................................. 1,215,614
2003............................................. 452,644
2004............................................. 440,372
-----------
Total......................................... $31,541,785
===========
</TABLE>
Deposits by related parties were $2,017,415 and $2,146,341 at September 30,
1999 and 1998.
NOTE 10 -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
<TABLE>
<CAPTION>
INTEREST
DATED MATURITY RATE 1999 1998
- ----- -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
07-06-94.......................... 07-06-01 7.06% $ 35,715 $ 53,572
02-22-95.......................... 02-22-00 7.75% 261,836 277,585
08-15-96.......................... 08-15-11 7.10% -0- 915,997
01-27-99.......................... 01-28-02 4.94% 2,000,000 -0-
02-12-99.......................... 02-14-00 5.85% 300,000 -0-
---------- ----------
$2,597,551 $1,247,154
========== ==========
</TABLE>
F-45
<PAGE> 146
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The advances are secured under a Blanket Security Agreement with qualifying
mortgage loans of the Bank. The interest on the advances is paid monthly. The
principal is to be repaid as follows:
<TABLE>
<S> <C>
September 30, 2000.................................. $1,079,693
2001.............................................. 517,858
2002.............................................. 1,000,000
2003.............................................. -0-
2004.............................................. -0-
2005 and Thereafter............................... -0-
----------
Total.......................................... $2,597,551
==========
</TABLE>
At September 30, 1999 the Company can borrow an additional $4,000,000 from
FHLB. With sufficient collateral, the total borrowing limit is approximately
$8,600,000.
NOTE 11 -- NOTES PAYABLE
FIRST NATIONAL BANK IN WINNEBAGO
The Company has a multiple advance note payable to the First National Bank
in Winnebago dated September 19, 1996. The note is a demand loan with a total
available credit line of $925,000. The note requires semiannual interest and
annual principal payments. If no demand is made, the note is scheduled to be
paid off by April 1, 2009. The interest rate is variable at 1% below the
lender's base rate, and is currently at 8.25%. The interest is subject to change
annually on September 1. The note is secured by 95,454 shares of the common
stock of the Bank and the personal guarantees of the common stockholders of the
Company.
At the present 8.25% interest rate, scheduled principal payments are due as
follows:
<TABLE>
<S> <C>
September 30, 2000.................................... $ 52,847
2001................................................ 55,027
2002................................................ 57,297
2003................................................ 59,661
2004................................................ 62,121
2005 and Thereafter................................. 351,226
--------
Total............................................ $638,179
========
</TABLE>
Interest expense was $56,094 and $70,625 for the years ended September 30,
1999 and 1998, respectively.
SHAREHOLDERS
The Company entered into loan agreements with its shareholders on January
23, 1997 and March 18, 1998. The loans are secured by the Bank stock and are due
on demand. The interest rate on the loans is 10%. Interest expense on the loans
for the years ended September 30, 1999 and 1998 was $47,999 and $27,845,
respectively.
F-46
<PAGE> 147
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- INCOME TAXES
The consolidated provision for income taxes consisted of the following for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
CURRENT TAX PROVISION
Federal................................................ $167,440 $ 320,269
State.................................................. 52,896 104,545
-------- ---------
Total Current Provision............................. 220,336 424,814
DEFERRED TAX PROVISION (BENEFIT)
-------- ---------
Federal................................................ (1,067) (92,660)
State.................................................. 1,025(a) (31,314)
-------- ---------
Total Deferred Provision............................ (42) (123,974)
-------- ---------
Total Income Tax Provision............................... $220,294 $ 300,840
======== =========
</TABLE>
- -------------------------
(a) State provision is an expense due to the decrease in the state net operating
loss carryforward.
The reconciliation of income taxes computed at the federal statutory income
tax rate to total income taxes for the years ended September 30, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Book income before tax.................................... $590,569 $892,083
======== ========
Income tax computed at federal statutory tax rate of
34%..................................................... 200,793 303,308
State income taxes, net of federal tax benefit (effective
rate of 6.468%)......................................... 38,198 57,700
Amortization of acquisition benefit of $111,934 (effective
rate of 40.468%)........................................ (45,297) (45,297)
Other, net................................................ 26,600 (14,871)
-------- --------
Total Income Tax Provision................................ $220,294 $300,840
======== ========
</TABLE>
F-47
<PAGE> 148
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities included in liabilities at September 30
consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Liabilities:
Accumulated depreciation................................ $ 24,931 $ 29,615
FHLB stock dividend..................................... 73,854 73,854
Section 481(a) adjustment............................... 58,895 78,527
Accrued interest on life insurance...................... 25,375 -0-
Investment in Homeland Mortgage, LLC.................... 8,455 -0-
Net unrealized gain on Available-for-Sale Securities.... -0- 5,903
-------- --------
Total Deferred Tax Liabilities....................... 191,510 187,899
Deferred Tax Assets:
Allowance for loan losses............................... 75,856 75,047
Salary Continuation Payable............................. 11,977 -0-
Discount on mortgage loans purchased.................... 4,079 6,495
Net unrealized loss on Available-for-Sale Securities.... 11,269 -0-
State net operating loss carryforward................... 201 1,015
-------- --------
Total Deferred Tax Assets............................ 103,382 82,557
-------- --------
Net Deferred Tax Liability................................ $ 88,128 $105,342
======== ========
</TABLE>
The net operating loss (NOL) carryforward is scheduled to expire on
September 30, 2005. The NOL is anticipated to be used prior to expiration,
therefore, no valuation allowance has been established.
NOTE 13 -- REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At September 30, 1999,
approximately $368,850 of retained earnings were available for dividend
declaration without prior regulatory approval.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly 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 judgments 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 table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
F-48
<PAGE> 149
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average assets (as defined) and Tangible capital (as defined) to adjusted total
assets. Management believes, as of September 30, 1999 and 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 30, 1999 and 1998, the most recent notifications from the
Office of Thrift Supervision 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 I risk-based,
Tier I leverage, and Tangible Capital ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category. The Bank's actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital
(to Risk Weighted
Assets).............. $5,493,185 11.53% $3,812,763 8% $4,765,954 10%
Tier I Capital
(to Risk Weighted
Assets).............. $4,983,928 10.46% $1,906,381 4% $2,859,572 6%
Tier I Capital
(to Average
Assets).............. $4,983,928 8.70% $2,290,698 4% $2,863,372 5%
As of September 30, 1998:
Total Capital
(to Risk Weighted
Assets).............. $5,046,334 11.89% $3,396,556 8% $4,245,695 10%
Tier I Capital
(to Risk Weighted
Assets).............. $4,572,002 10.77% $1,698,278 4% $2,547,417 6%
Tier I Capital
(to Average
Assets).............. $4,572,002 8.15% $2,245,232 4% $2,806,540 5%
</TABLE>
The Bank's tangible capital ratios were 8.70% and 8.15% as of September 30,
1999 and 1998, respectively. Every thrift is required to maintain a tangible
capital ratio equal to or greater than 1.5%.
NOTE 14 -- EMPLOYEE BENEFITS
SALARY CONTINUATION PLAN (DEFINED BENEFIT)
On December 28, 1998, the Bank established a nonqualified salary
continuation plan for all officers and directors. The Plan provides fixed
payments for a specified number of years during retirement (ten to fifteen
years). The estimated liability under the Plan is charged to income over the
expected remaining years of employment. The Bank's policy is to fund the costs
accrued with
F-49
<PAGE> 150
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance contracts. Salary continuation expense amounted to $29,597 for the
year ended September 30, 1999.
401(k) PLAN (DEFINED CONTRIBUTION)
The employees of the Bank are covered under a 401(k) defined contribution
plan that was established in January, 1993. All employees of the Bank with
service of over one year are eligible to participate in the plan. The Bank pays
an amount equal to the employee's contribution to the plan, up to 3% of the
employee's salary. The expense of the Bank including administrative costs was
$15,873 and $18,341 for the years ended September 30, 1999 and 1998,
respectively.
COMPENSATED ABSENCES
Full time, year round employees are entitled to paid vacation depending on
the length of service and other factors. Accrued vacation pay at September 30,
1999 and 1998 was deemed immaterial and not accrued.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities that are not reflected in the accompanying
financial statements. The Company does not anticipate any material losses as a
result of these commitments and contingent liabilities.
Commitments to originate loans were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Loans Secured by 1 - 4 Dwelling Units.................. $ 270,000 $1,407,000
Loans Secured by 5 or more Dwelling Units.............. -0- -0-
Loans Secured by Other Real Estate..................... 462,000 871,000
---------- ----------
Total Commitments to Originate Loans................... $ 732,000 $2,278,000
========== ==========
Commitments To Sell Loans.............................. $1,516,000 $2,337,000
========== ==========
</TABLE>
NOTE 16 -- SUBSEQUENT EVENTS
On November 5, 1999, the Bank purchased a building in Big Lake, Minnesota
for $394,000. The Bank plans to modify the building to house a new branch.
Earnest money of $5,000 was paid prior to September 30, 1999, and is included in
prepaid expenses and other assets.
The purchase price will be allocated as follows:
<TABLE>
<S> <C>
Land.................................................. $100,000
Building.............................................. 244,000
Equipment............................................. 50,000
--------
$394,000
========
</TABLE>
F-50
<PAGE> 151
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
After September 30, 1999, the Bank reached an agreement with directors
Edward Morrison and Leonard Wulf. The agreement will pay each director $25,000
up front, in lieu of the salary continuation plan available to the other
directors.
NOTE 17 -- 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 include commitments to extend credit and commercial
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statement of financial
position. The contract or notional amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
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 and
commercial letters of credit is represented by the contractual notional amount
of these instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Financial Instruments Whose Contract Amounts Represent
Credit Risk:
Commitments to Extend Credit
Open-End Consumer Lines................................ $ 241,000 $ 211,000
Commercial Lines....................................... 2,591,000 2,807,000
Letters of Credit...................................... 23,500 13,500
---------- ----------
$2,855,500 $3,031,500
========== ==========
</TABLE>
Commitments to extend credit and commercial letters of credit are
agreements to lend to a customer. Commitments and letters of credit generally
have fixed expiration dates or other termination clauses. Since many of the
commitments and letters of credit are expected to expire without being drawn
upon, the amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is based on
Management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income producing commercial properties. The credit risk involved in issuing
commitments and letters of credit is essentially the same as that involved in
extending loans to customers.
F-51
<PAGE> 152
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Financial Assets:
Cash and Due from Banks............................ $ 2,180,409 $ 2,180,409
Available-for-Sale Securities...................... 4,501,331 4,501,331
Held-to-Maturity Securities........................ 46,926 46,926
FHLB Stock......................................... 211,200 211,200
Loans Held for Sale................................ 1,516,300 1,516,300
Loans Receivable, Net.............................. 45,163,267 44,792,000
Accrued Interest Receivable........................ 1,036,395 1,036,395
Loan Servicing Rights.............................. 153,181 260,408
Cash Surrender Value of Life Insurance............. 1,702,705 1,702,705
----------- -----------
Total Financial Assets.......................... $56,511,714 $56,247,674
=========== ===========
Financial Liabilities:
Deposits........................................... $48,484,169 $48,408,000
Advances from FHLB................................. 2,597,551 2,561,000
Notes Payable -- FNB in Winnebago.................. 638,179 643,000
Notes Payable -- Shareholders...................... 364,300 364,300
Accrued Interest Payable........................... 32,209 32,209
Advance Payments by Borrowers...................... 51,740 51,740
----------- -----------
Total Financial Liabilities..................... $52,168,148 $52,060,249
=========== ===========
</TABLE>
F-52
<PAGE> 153
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- PARENT ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and Due from Banks..................................... $ 80,853 $ 55,507
Due from Affiliates......................................... 30,542 34,625
Investment in Bank Subsidiary............................... 4,483,526 4,247,877
Investment in Non-Bank Subsidiary........................... 27,040 45,237
Cost in Excess of Book Value................................ 102,740 111,224
---------- ----------
Total Assets.............................................. $4,724,701 $4,494,470
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note Payable -- FNB in Winnebago............................ $ 638,179 $ 698,057
Notes Payable -- Shareholders............................... 364,300 364,300
Accrued Interest Payable.................................... 32,209 -0-
Net Assets Acquired in Excess of Cost..................... -0- 111,934
---------- ----------
Total Liabilities......................................... 1,034,688 1,174,291
Stockholders' Equity(a)..................................... 3,690,013 3,320,179
---------- ----------
Total Liabilities and Stockholders' Equity................ $4,724,701 $4,494,470
========== ==========
</TABLE>
- -------------------------
(a) The stockholders' equity of the Parent Company exceeds the consolidated
stockholders' equity by $23,795 at September 30, 1999. This represents the
intercompany gain on the transfer of future servicing rights from West
Central Service Corp. to Homeland Mortgage, LLC.
F-53
<PAGE> 154
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
INCOME
Interest Income:
Bank Subsidiary........................................... $ 1,573 $ 1,751
Loans..................................................... -0- 8,461
-------- --------
1,573 10,212
Dividends................................................... 135,442 135,442
Acquisition Benefit......................................... 111,934 111,932
-------- --------
Total Income........................................... 248,949 257,586
EXPENSES
Interest Expense:
Bank Subsidiary........................................... -0- 1,230
Notes Payable............................................. 104,093 98,470
-------- --------
104,093 99,700
Non-Interest Expenses..................................... 57,064 62,383
Income Tax (Benefit)...................................... (64,590) (62,993)
-------- --------
Total Expenses......................................... 96,567 99,090
-------- --------
Income Before Equity in Undistributed Earnings of
Subsidiaries.............................................. 152,382 158,496
Equity in Undistributed Earnings (Losses) of Subsidiaries:
Bank Subsidiary........................................... 258,460 373,144
Non-Bank Subsidiary....................................... (18,197) 4,937
-------- --------
240,263 378,081
-------- --------
NET INCOME.................................................. $392,645 $536,577
======== ========
</TABLE>
F-54
<PAGE> 155
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................ $392,645 $536,577
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Acquisition Benefit....................................... (111,934) (111,932)
Amortization of Cost in Excess............................ 8,484 8,484
Equity in Undistributed Earnings of Subsidiaries.......... (240,263) (378,081)
Decrease in Accrued Interest Receivable................... -0- 918
Increase (Decrease) in Accrued Interest Payable........... 32,209 (3,952)
-------- --------
Net Cash Provided by Operating Activities.............. 81,141 52,014
Cash Flows from Investing Activities:
(Increase) Decrease in Due from Affiliates................ 4,083 (9,365)
Net Decrease in Loans..................................... -0- 137,893
-------- --------
Net Cash Provided by Investing Activities.............. 4,083 128,528
Cash Flows from Financing Activities:
Principal Payments on Notes Payable....................... (59,878) (173,523)
Proceeds from Shareholder Debt............................ 204,000 132,000
Principal Payments on Shareholder Debt.................... (204,000) -0-
Purchase of Treasury Stock................................ -0- (132,000)
-------- --------
Net Cash Used in Financing Activities.................. (59,878) (173,523)
-------- --------
Net Increase in Cash and Due from Banks................... 25,346 7,019
Cash and Due from Banks, Beginning of Year.................. 55,507 48,488
-------- --------
Cash and Due from Banks, Ending Balance..................... $ 80,853 $ 55,507
======== ========
</TABLE>
F-55
<PAGE> 156
ANNEX A
AGREEMENT
AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") entered into as
of the 30th day of September, 1999, by and between FIRST FEDERAL HOLDING COMPANY
OF MORRIS, a Minnesota corporation ("MORRIS"), and NORTHERN STAR FINANCIAL,
INC., a Minnesota corporation ("NORTHERN").
WHEREAS, the parties hereto desire to effect a reorganization whereby
Morris will merge with and into Northern (the "MERGER") pursuant to an agreement
and plan of merger (the "MERGER AGREEMENT") in substantially the form attached
hereto as Exhibit A, which provides, among other things, for the conversion and
exchange of the shares of Common Stock of Morris of the par value of $100 per
share (the "MORRIS COMMON STOCK") outstanding immediately prior to the time the
Merger becomes effective in accordance with the provisions of the Merger
Agreement into shares of Common Stock of Northern of the par value of $.01 per
share (the "NORTHERN COMMON Stock").
NOW, THEREFORE, to effect such reorganization and in consideration of
the premises and the mutual covenants and agreements contained herein, the
parties hereto do hereby represent, warrant, covenant and agree as follows:
1. BASIC PLAN OF REORGANIZATION
(A) MERGER. Subject to the terms and conditions contained herein,
Morris will be merged by statutory merger with and into Northern pursuant to the
Merger Agreement, with Northern as the surviving corporation (as such, the
"Surviving Corporation"), in which each share of Morris Common Stock outstanding
immediately prior to the Effective Time of the Merger (as defined below) (other
than shares as to which statutory dissenters' appraisal rights have been
exercised) will be converted into and exchanged for the number of shares of
Northern Common Stock determined by dividing the Merger Consideration (as
defined below) by the number of shares of Morris Common Stock outstanding.
(i) Articles of Incorporation of Surviving Corporation. At the
Effective Time of the Merger, the Articles of Incorporation of Northern
then in effect shall constitute and be the Articles of Incorporation of
the Surviving Corporation until amended or changed as provided therein
or by law.
(ii) Bylaws of Surviving Corporation. At the Effective Time of
the Merger, the Bylaws of Northern then in effect shall constitute and
be the Bylaws of the Surviving Corporation until amended or changed as
provided therein or by law.
(iii) Board of Directors of Surviving Corporation. At the
Effective Time of the Merger, the members of the Board of Directors of
the Surviving Corporation shall be comprised of the individuals listed
on Schedule 1(a)(iii), until such directors may be
1
<PAGE> 157
changed as provided by the Articles of Incorporation or Bylaws of the
Surviving Corporation, or by law.
(iv) Officers of Surviving Corporation. At the Effective Time
of the Merger, the individuals holding officer positions in the
Surviving Corporation shall be as listed on Schedule 1(a)(iv), until
such officers may be changed as provided by the Articles of
Incorporation or Bylaws of the Surviving Corporation, or by law.
(v) Certain Effects of the Merger. At the Effective Time of
the Merger, the Surviving Corporation shall succeed to and possess all
the rights, privileges, powers, franchises and immunities of a public
as well as of a private nature, and be subject to all liabilities,
restrictions, disabilities, and duties of both of Northern and Morris;
and all and singular, the rights, privileges, powers, franchises and
immunities of both of Northern and Morris and all properties, real,
personal and mixed, and all other things in action of or belonging to
either of Northern and Morris on whatever account, shall be vested in
the Surviving Corporation; and all properties, assets, rights,
privileges, powers, franchises, immunities and all and every other
interest shall be thereafter as effectively the property of the
Surviving Corporation as they were or would be of Northern and Morris
or either of them; and title to any real estate or any interest therein
vested by deed or otherwise in either of Northern and Morris shall not
revert or be in any way impaired by any reason of the Merger; provided,
however, that all rights of creditors and all liens upon any property
of either of Northern and Morris shall be preserved unimpaired, limited
in lien to the property affected by such liens at the Merger Effective
Time, and all debts, liabilities and duties of either of Northern and
Morris shall thenceforth become those of the Surviving Corporation and
may be enforced against the Surviving Corporation to the same extent as
if such debts, liabilities and duties had been incurred or contracted
by the Surviving Corporation.
(B) MERGER CONSIDERATION. The total merger consideration for all
of the Morris Common Stock (the "MERGER CONSIDERATION") shall be expressed in
shares of Northern Common Stock and shall equal (i) the Valuation (defined
below) divided by (ii) the Northern Share Price (defined below). Immediately
preceding the Closing, the parties will cooperate in good faith to calculate the
Merger Consideration.
(C) VALUATION. As used herein, "VALUATION" shall be the sum of:
(i) 1.80588 multiplied by the sum of the amounts reflected as
shareholders' equity and loan loss reserves on the balance sheet of
First Federal Savings Bank of Morris dated as of September 30, 1999,
calculated in accordance with GAAP, consistently applied;
(ii) Morris' total assets (excluding amounts reflected in
Morris' September 30, 1999 balance sheet as Investment in Subsidiary)
less Morris' total liabilities as of September 30, 1999, but excluding
the net unrealized gains or losses on available-for-sale securities
(recorded under the provisions of FASB 115), calculated in accordance
with GAAP, consistently applied;
2
<PAGE> 158
(iii) Any increase (decrease) in Morris' book value from
October 1, 1999 to the Determination Date, but excluding the net
unrealized gains or losses on available-for-sale securities (recorded
under the provisions of FASB 115), calculated in accordance with GAAP,
consistently applied.
As soon as practicable, and in any case within 5 days after the Determination
Date, Morris shall deliver to Northern a copy of Morris' balance sheet as of
September 30, 1999 and a copy of Morris' income statement for the period from
October 1, 1999 to the Determination Date. As soon as practicable, and in any
case within 5 days after the Determination Date, Northern shall deliver to
Morris a copy of Northern's balance sheet as of September 30, 1999 and a copy of
Northern's income statement for the period from October 1, 1999 to the
Determination Date. Any objection to such balance sheets or income statements
must be raised in a written notice delivered to the other party within 5 days
after the receipt of such balance sheet/income statement. In the event any such
objection is raised, the parties will work together in good faith to resolve the
dispute as promptly as possible. For purposes of this Section, "Determination
Date" means the last day of the month preceding the mailing of the Proxy
Statement/Prospectus (the "Mailing"), unless the Mailing occurs within 21 days
after the end of a month, in which case, the Determination Date means the last
day of the penultimate month preceding the Mailing.
(D) NORTHERN SHARE PRICE. As used herein, "Northern Share Price"
shall be sum of (i) $10.50, plus (ii) Northern's earnings (losses) from
October 1, 1999 to the Determination Date divided by the number of shares of
Northern Common Stock outstanding on the date immediately preceding the Closing
Date.
(E) FRACTIONAL SHARES. No fractional shares of Northern Common
Stock and no certificates or scrip certificates therefor shall be issued to
represent any such fractional interest, and any holder thereof shall be paid an
amount of cash equal to the product obtained by multiplying the fractional share
interest to which such holder is entitled by the Northern Share Price. Northern
shall deposit with the Transfer Agent (defined below), sufficient cash to make
all payments for fractional share interests.
(F) MECHANICS OF CLOSING MERGER. Subject to the terms and
conditions set forth herein, the Merger Agreement shall be executed and Articles
of Merger shall be filed with Secretary of State of the State of Minnesota
within ten (10) business days following the satisfaction or waiver of all
conditions precedent set forth in Sections 6 and 7 of this Agreement or on such
other date as may be agreed to by the parties (the "CLOSING DATE"). Each of the
parties agrees to use its best efforts to cause the Merger to be completed as
soon as practicable after the receipt of final regulatory approval of the Merger
and the expiration of all required waiting periods. The time that the filing
referred to in the first sentence of this Section 1(f) is made is herein
referred to as the "TIME OF FILING". The day on which such filing is made and
accepted is herein referred to as the "EFFECTIVE DATE OF THE MERGER". The
"EFFECTIVE TIME OF THE MERGER" shall be 11:59 p.m. on the Effective Date of the
Merger. At the Effective Time of the Merger on the Effective Date of the Merger,
the separate existence of Morris shall cease and Morris will be merged with and
into Northern pursuant to the Merger Agreement.
3
<PAGE> 159
Prior to the Effective Time of the Merger, Morris shall cause the
holders of Morris Common Stock to deliver the certificates representing such
Morris Common Stock to Northern. When the conversion ratio in Section 1(a) is
computed and agreed to by the parties and after the Effective Time of the
Merger, Northern shall cause Continental Stock Transfer Company or such other
transfer agent as Northern shall designate to distribute certificates evidencing
the Northern Common Stock issuable in exchange for the certificates representing
the Morris Common Stock.
The closing of the transactions contemplated by this Agreement and the
Merger Agreement (the "CLOSING") shall take place on the Closing Date at the
offices of Fredrikson & Byron, P.A.
2. REPRESENTATIONS AND WARRANTIES OF MORRIS. Morris represents and
warrants to Northern as follows:
(A) ORGANIZATION AND AUTHORITY. Morris is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and failure to be so qualified would
have a material adverse effect on Morris and the Morris Subsidiaries (defined
below) taken as a whole and has the corporate power and authority to own its
properties and assets and to carry on its business as it is now being conducted.
Morris is registered as a federal savings bank holding company with the Office
of Thrift Supervision (the "OTS"). Morris has furnished Northern true and
correct copies of its Articles of Incorporation and Bylaws, as amended.
(B) MORRIS' SUBSIDIARIES. Schedule 2(b) sets forth a complete and
correct list of all of Morris' subsidiaries as of the date hereof (individually
a "MORRIS SUBSIDIARY" and collectively the "MORRIS SUBSIDIARIES"), all shares of
the outstanding capital stock of each of which, except as set forth on Schedule
2(b), are owned directly or indirectly by Morris. Except as set forth on
Schedule 2(b), no equity security of any Morris Subsidiary is or may be required
to be issued to any person or entity other than Morris by reason of any option,
warrant, scrip, preemptive right, right to subscribe to, call or commitment of
any character whatsoever relating to, or security or right convertible into,
shares of any capital stock of such Morris Subsidiary, and there are no
contracts, commitments, understandings or arrangements by which any Morris
Subsidiary is bound to issue additional shares of its capital stock, or any
option, warrant or right to purchase or acquire any additional shares of its
capital stock. Except as set forth on Schedule 2(b), all of such shares so owned
by Morris are fully paid and nonassessable and are owned by it free and clear of
any lien, claim, charge, option, encumbrance or agreement with respect thereto.
Each Morris Subsidiary is a corporation or federal savings bank duly organized,
validly existing, duly qualified to do business and in good standing under the
laws of its jurisdiction of incorporation, and has the corporate power and
authority to own or lease its properties and assets and to carry on its business
as it is now being conducted. Except as set forth on Schedule 2(b), Morris does
not own beneficially, directly or indirectly, more than 5% of any class of
equity securities or similar interests of any corporation, bank, business trust,
association or similar organization, and is not, directly or indirectly, a
partner in any partnership or party to any joint venture.
4
<PAGE> 160
(C) CAPITALIZATION. The authorized capital stock of Morris consists
of 5,000 shares of common stock, of a par value of $100 per share, of which as
of the close of business on September 30, 1999, 1017 shares were outstanding and
25 shares were held in the treasury. The maximum number of shares of Morris
Common Stock (assuming for this purpose that phantom shares and other
share-equivalents constitute Morris Common Stock) that would be outstanding as
of the Effective Date of the Merger if all options, warrants, conversion rights
and other rights with respect thereto were exercised is 1017. All of the
outstanding shares of capital stock of Morris have been duly and validly
authorized and issued and are fully paid and nonassessable. Except as set forth
in Schedule 2(c), there are no outstanding subscriptions, contracts, conversion
privileges, options, warrants, calls, preemptive rights or other rights
obligating Morris to issue, sell or otherwise dispose of, or to purchase, redeem
or otherwise acquire, any shares of capital stock of Morris. Except as set forth
on Schedule 2(c), since September 30, 1997, no shares of Morris capital stock
have been purchased, redeemed or otherwise acquired, directly or indirectly, by
Morris or any Morris Subsidiary and, except as set forth on Schedule 2(c), no
dividends or other distributions have been declared, set aside, made or paid to
the shareholders of Morris.
(D) AUTHORIZATION. Morris has the corporate power and corporate
authority to enter into this Agreement and the Merger Agreement and, subject to
any required approvals of its shareholders, to carry out its obligations
hereunder and thereunder. The execution, delivery and performance of this
Agreement and the Merger Agreement by Morris and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by the
Board of Directors of Morris. Subject to such approvals of shareholders and of
government agencies and other governing boards having regulatory authority over
Morris as may be required by statute or regulation, this Agreement and the
Merger Agreement are valid and binding obligations of Morris enforceable against
Morris in accordance with their respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors and contracting parties generally
and except as enforceability may be subject to general principles of equity.
Except as set forth on Schedule 2(d), neither the execution, delivery and
performance by Morris of this Agreement or the Merger Agreement, nor the
consummation of the transactions contemplated hereby and thereby, nor compliance
by Morris with any of the provisions hereof or thereof, will (i) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Morris or any Morris Subsidiary under
any of the terms, conditions or provisions of (x) its Articles of Incorporation
or Bylaws or (y) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Morris or
any Morris Subsidiary is a party or by which it may be bound, or to which Morris
or any Morris Subsidiary or any of the properties or assets of Morris or any
Morris Subsidiary may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next sentence, to the best knowledge
of Morris, violate any judgment, ruling, order, writ, injunction, decree,
statute, rule or regulation applicable to Morris or any Morris Subsidiary or any
of their respective properties or assets. Except as set forth on Schedule 2(d),
other than in connection with or in compliance with the provisions of the
Securities Act of 1933 and the rules and regulations thereunder (the "SECURITIES
ACT"), the Securities Exchange Act of 1934 and the
5
<PAGE> 161
rules and regulations thereunder (the "EXCHANGE ACT"), the securities or blue
sky laws of the various states or filings, consents, reviews, authorizations,
approvals or exemptions required under the BHC Act, and filings required to
effect the Merger under Minnesota law, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Morris of the transactions
contemplated by this Agreement and the Merger Agreement.
(E) MORRIS FINANCIAL STATEMENTS. The consolidated balance sheets of
Morris and the Morris Subsidiaries as of September 30, 1998, 1997 and 1996 and
related consolidated statements of income, shareholders' equity and cash flows
for the three years ended September 30, 1998, and the unaudited consolidated
statements of financial condition of Morris and the Morris Subsidiaries as of
August 31, 1999 and the related unaudited consolidated statements of income,
shareholders' equity and cash flows for the 11 months then ended (collectively,
the "MORRIS FINANCIAL STATEMENTS"), present fairly (subject, in the case of
financial statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Morris and the Morris Subsidiaries at the
dates and the consolidated results of operations and cash flows of Morris and
the Morris Subsidiaries for the periods stated therein.
(F) REPORTS. Since September 30, 1992, Morris and each Morris
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file, if any, with (i)
the Securities and Exchange Commission ("SEC"), including, but not limited to,
Forms 10-K, Forms 10-Q and proxy statements, (ii) the Federal Reserve Board,
(iii) the Federal Deposit Insurance Corporation (the "FDIC"), (iv) the United
States Comptroller of the Currency (the "COMPTROLLER"), (v) the OTS, and (vi)
any applicable state securities or banking authorities. All such reports and
statements filed with any such regulatory body or authority are collectively
referred to herein as the "MORRIS REPORTS". As of their respective dates, the
Morris Reports complied in all material respects with all the rules and
regulations promulgated by the SEC, the Federal Reserve Board, the FDIC, the
Comptroller, the OTS and applicable state securities or banking authorities, as
the case may be, and did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Copies of all the Morris Reports have been made
available to Northern by Morris.
(G) PROPERTIES AND LEASES. Except as may be reflected in the Morris
Financial Statements and except for any lien for current taxes not yet
delinquent, Morris and each Morris Subsidiary have good title free and clear of
any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Morris'
consolidated balance sheet as of August 31, 1999, and all real and personal
property acquired since such date, except such real and personal property as has
been disposed of in the ordinary course of business. All leases of real property
and all other leases material to Morris or any Morris Subsidiary pursuant to
which Morris or such Morris Subsidiary, as lessee, leases personal property,
which leases are described on Schedule 2(g), are valid and effective in
accordance with their respective terms, and there is not, under any such lease,
any material existing default by Morris or such Morris Subsidiary or any event
which, with notice or lapse of time or both, would constitute such a material
default. Substantially all Morris' and each Morris Subsidiary's
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buildings and equipment in regular use have been well maintained and are in good
and serviceable condition, reasonable wear and tear excepted.
(H) TAXES. Each of Morris and the Morris Subsidiaries has filed all
federal, state, county, local and foreign tax returns, including information
returns, required to be filed by it, and, except as set forth on Schedule 2(h),
paid all taxes owed by it, including those with respect to income, withholding,
social security, unemployment, workers compensation, franchise, ad valorem,
premium, excise and sales taxes, and no taxes shown on such returns to be owed
by it or assessments received by it are delinquent. The federal income tax
returns of Morris and the Morris Subsidiaries for the fiscal year ended
September 30, 1992, and for all fiscal years prior thereto, are for the purposes
of routine audit by the Internal Revenue Service closed because of the statute
of limitations, and no claims for additional taxes for such fiscal years are
pending. Except only as set forth on Schedule 2(h), (i) neither Morris nor any
Morris Subsidiary is a party to any pending action or proceeding, nor to Morris'
knowledge is any such action or proceeding threatened by any governmental
authority, for the assessment or collection of taxes, interest, penalties,
assessments or deficiencies and (ii) no issue has been raised by any federal,
state, local or foreign taxing authority in connection with an audit or
examination of the tax returns, business or properties of Morris or any Morris
Subsidiary which has not been settled, resolved and fully satisfied. Each of
Morris and the Morris Subsidiaries has paid all taxes owed or which it is
required to withhold from amounts owing to employees, creditors or other third
parties. The consolidated balance sheet as of August 31, 1999, referred to in
Section 2(e) hereof, includes adequate provision for all accrued but unpaid
federal, state, county, local and foreign taxes, interest, penalties,
assessments or deficiencies of Morris and the Morris Subsidiaries with respect
to all periods through the date thereof.
(I) ABSENCE OF CERTAIN CHANGES. Since August 31, 1999, except as
set forth on Schedule 2(i), there has been no change in the business, financial
condition or results of operations of Morris or any Morris Subsidiary which has
had, or may reasonably be expected to have, a material adverse effect on the
business, financial condition or results of operations of Morris and the Morris
Subsidiaries taken as a whole.
(J) COMMITMENTS AND CONTRACTS. Except as set forth on Schedule
2(j), neither Morris nor any Morris Subsidiary is a party or subject to any of
the following (whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination
pay liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable
at will by Morris or such Morris Subsidiary);
(ii) any plan, contract or understanding providing for any
bonus, pension, option, deferred compensation, retirement payment,
profit sharing or similar arrangement with respect to any present or
former officer, director, employee or consultant;
(iii) any labor contract or agreement with any labor union;
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(iv) any contract not made in the ordinary course of business
containing covenants which limit the ability of Morris or any Morris
Subsidiary to compete in any line of business or with any person or
which involve any restriction of the geographical area in which, or
method by which, Morris or any Morris Subsidiary may carry on its
business (other than as may be required by law or applicable regulatory
authorities);
(v) any other contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K;
(vi) any lease with annual rental payments aggregating $10,000
or more;
(vii) any agreement or commitment with respect to the
Community Reinvestment Act with any state or federal bank regulatory
authority or any other party or any other agreement or commitment with
any state or federal bank or bank holding company regulatory authority;
or
(viii) any current or past agreement, contract or
understanding with any current or former director, officer, employee,
consultant, financial adviser, broker, dealer, or agent providing for
any rights of indemnification in favor of such person or entity.
(K) LITIGATION AND OTHER PROCEEDINGS. Morris has furnished Northern
a written list of pending legal and regulatory proceedings filed against Morris
or any Morris Subsidiary. There is no pending or, to the best knowledge of
Morris, threatened, claim, action, suit, investigation or proceeding against
Morris or any Morris Subsidiary, nor is Morris or any Morris Subsidiary subject
to any order, judgment or decree, except for matters which, in the aggregate,
will not have, or cannot reasonably be expected to have, a material adverse
effect on the business, financial condition or results of operations of Morris
and the Morris Subsidiaries taken as a whole.
(L) INSURANCE. Morris and each Morris Subsidiary is presently
insured, and during each of the past five calendar years (or during such lesser
period of time as Morris has owned such Morris Subsidiary) has been insured, for
reasonable amounts with financially sound and reputable insurance companies
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured and has
maintained all insurance required by applicable law and regulation; provided,
however, Morris does not currently carry directors' and officers' liability
insurance or employer liability insurance. All insurance policies under which
Morris is the "Named Insured" are listed on Schedule 2(l).
(M) COMPLIANCE WITH LAWS. Morris and each Morris Subsidiary has all
permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties and assets and to carry on its business as presently
conducted and that are material to the business of Morris or such Morris
Subsidiary; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to the best knowledge of Morris, no
suspension or cancellation of any of them is threatened; and all such filings,
applications and registrations are current. The conduct by Morris
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and each Morris Subsidiary of its business and the condition and use of its
properties does not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Morris nor any Morris
Subsidiary is in default under any order, license, regulation or demand of any
federal, state, municipal or other governmental agency or with respect to any
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application and except as set forth on
Schedule 2(m), no federal, state, municipal or other governmental authority has
placed any restriction on the business or properties of Morris or any Morris
Subsidiary which reasonably could be expected to have a material adverse effect
on the business or properties of Morris and the Morris Subsidiaries taken as a
whole.
(N) LABOR. No work stoppage involving Morris or any Morris
Subsidiary is pending or, to the best knowledge of Morris, threatened. Neither
Morris nor any Morris Subsidiary is involved in, or threatened with or affected
by, any labor dispute, arbitration, lawsuit or administrative proceeding which
could materially and adversely affect the business of Morris or such Morris
Subsidiary. Employees of Morris and the Morris Subsidiaries are not represented
by any labor union nor are any collective bargaining agreements otherwise in
effect with respect to such employees.
(O) MATERIAL INTERESTS OF CERTAIN PERSONS. Except as set forth on
Schedule 2(o), to the best knowledge of Morris no officer or director of Morris
or any Morris Subsidiary, or any "associate" (as such term is defined in Rule
14a-1 under the Exchange Act) of any such officer or director, has any interest
in any material contract or property (real or personal), tangible or intangible,
used in or pertaining to the business of Morris or any Morris Subsidiary.
Schedule 2(o) sets forth (i) a correct and complete list of any loan from Morris
or any Morris Subsidiary to any present officer, director, employee or any
associate or related interest of any such person which was required under
Regulation O of the Federal Reserve Board to be approved by or reported to
Morris' or such Morris Subsidiary's Board of Directors; (ii) all currently
outstanding loans made by Morris; (iii) all pledges of the capital stock of any
Morris Subsidiary; and (iv) all loans made by any Morris Subsidiary to any
shareholder of Morris or the Affiliates, to any relatives of such shareholder or
to any entity controlled by such shareholder or such shareholder's relative.
(P) MORRIS BENEFIT PLANS.
(i) The only "employee benefit plans" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), for which Morris or any Morris Subsidiary acts as
the plan sponsor as defined in ERISA Section 3(16)(B), and with respect
to which any liability under ERISA or otherwise exists or may be
incurred by Morris or any Morris Subsidiary are those set forth on
Schedule 2(p) (the "PLANS"). No Plan is a "multi-employer plan" within
the meaning of Section 3(37) of ERISA.
(ii) Each Plan is and has been in all material respects
operated and administered in accordance with its provisions and
applicable law. Except as set forth on Schedule 2(p), Morris or the
Morris Subsidiaries have received favorable determination
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letters from the Internal Revenue Service under the provisions of the
Tax Reform Act of 1986 ("TRA '86") for each of the Plans to which the
qualification requirements of Section 401(a) of the Code apply. Morris
knows of no reason that any Plan subject to the qualification
provisions of Section 401(a) of the Code is not "qualified" within the
meaning of Section 401(a) of the Code and knows of no reason that each
related trust is not exempt from taxation under Section 501(a) of the
Code.
(iii) The present value of all benefits vested and all
benefits accrued under each Plan which is subject to Title IV of ERISA
did not, in each case, as determined for purposes of reporting on
Schedule B to the Annual Report on Form 5500 of each such Plan as of
the end of the most recent Plan year, exceed the value of the assets of
the Plan allocable to such vested or accrued benefits.
(iv) Except as disclosed in Schedule 2(p), and to the best
knowledge of Morris, no Plan or any trust created thereunder, nor any
trustee, fiduciary or administrator thereof, has engaged in a
"prohibited transaction", as such term is defined in Section 4975 of
the Code or Section 406 of ERISA or violated any of the fiduciary
standards under Part 4 of Title I of ERISA, which could subject, to the
best knowledge of Morris, such Plan or trust, or any trustee, fiduciary
or administrator thereof, or any party dealing with any such Plan or
trust, to the tax or penalty on prohibited transactions imposed by
Section 4975 of the Code or would result in material liability to
Morris and the Morris Subsidiaries taken as a whole.
(v) No Plan which is subject to Title IV of ERISA or any trust
created thereunder has been terminated, nor have there been any
"reportable events" as that term is defined in Section 4043 of ERISA
with respect to any Plan, other than those events which may result from
the transactions contemplated by this Agreement and the Merger
Agreement.
(vi) No Plan or any trust created thereunder has incurred any
"accumulated funding deficiency", as such term is defined in Section
412 of the Code (whether or not waived), since the effective date of
ERISA.
(vii) Except as disclosed in Schedule 2(p), neither the
execution and delivery of this Agreement and the Merger Agreement nor
the consummation of the transactions contemplated hereby and thereby
will (i) result in any payment in excess of $5,000 for any individual
or $40,000 in the aggregate (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due
to any director or employee or former employee of Morris or any Morris
Subsidiary under any Plan or otherwise, (ii) materially increase any
benefits otherwise payable under any Plan or (iii) result in the
acceleration of the time of payment or vesting of any such benefits to
any material extent.
(Q) REGULATORY FILINGS. None of the information regarding Morris,
the holders of Morris' capital stock, or the Morris Subsidiaries, supplied or to
be supplied by Morris for inclusion in any documents to be filed with any
regulatory authority in connection with the
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transactions contemplated hereby or by the Merger Agreement including, without
limitation, any information supplied specifically for inclusion or incorporation
by reference in the Registration Statement (defined below) or any of Northern's
press releases, periodic reports pursuant to Sections 13 and 15(d) of the
Exchange Act, or other Northern registration statements (collectively, the
"OTHER NORTHERN PUBLIC DOCUMENTS"), will, at the respective times such documents
are filed with any regulatory authority and/or disclosed to the public, and at
any time they are amended or supplemented and at the time they become effective
under the Securities Act, as applicable, contain an untrue statement of material
fact or omit to state a material fact required to be stated therein as necessary
in order to make the statement therein, in light of the circumstances under
which they are made not misleading. All documents which Morris and the Morris
Subsidiaries are responsible for filing with any regulatory authority in
connection with the Merger will comply as to form in all material respects with
the provisions of applicable law.
(R) REGISTRATION OBLIGATIONS. Except as set forth on Schedule 2(r),
neither Morris nor any Morris Subsidiary is under any obligation, contingent or
otherwise, which will survive the Merger by reason of any agreement to register
any of its securities under the Securities Act.
(S) BROKERS AND FINDERS. Neither Morris nor any Morris Subsidiary nor
any of their respective officers, directors or employees has employed any broker
or finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finder's fees, and no broker or finder has acted directly
or indirectly for Morris or any Morris Subsidiary in connection with this
Agreement and the Merger Agreement or the transactions contemplated hereby and
thereby.
(T) ADMINISTRATION OF TRUST ACCOUNTS. Morris and each Morris Subsidiary
has properly administered in all respects material and which could reasonably be
expected to be material to the financial condition of Morris and the Morris
Subsidiaries taken as a whole all accounts for which it acts as a fiduciary,
including but not limited to accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor,
in accordance with the terms of the governing documents and applicable state and
federal law and regulation and common law. Neither Morris, any Morris
Subsidiary, nor any director, officer or employee of Morris or any Morris
Subsidiary has committed any breach of trust with respect to any such fiduciary
account which is material to or could reasonably be expected to be material to
the financial condition of Morris and the Morris Subsidiaries taken as a whole,
and the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account.
(U) NO DEFAULTS. Except as set forth on Schedule 2(u), Neither Morris
nor any Morris Subsidiary is in default, nor has any event occurred which, with
the passage of time or the giving of notice, or both, would constitute a
default, under any material agreement, indenture, loan agreement or other
instrument to which it is a party or by which it or any of its assets is bound
or to which any of its assets is subject, the result of which has had or could
reasonably be expected to have a material adverse effect upon Morris and the
Morris Subsidiaries taken as a whole. To the best of Morris' knowledge, all
parties with whom Morris or any Morris Subsidiary has material leases,
agreements or contracts or who owe to Morris or any Morris Subsidiary material
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obligations other than with respect to those arising in the ordinary course of
the banking business of the Morris Subsidiaries are in compliance therewith in
all material respects.
(V) ENVIRONMENTAL LIABILITY. There is no legal, administrative, or
other proceeding, claim, or action of any nature seeking to impose, or that
could result in the imposition, on Morris or any Morris Subsidiary of any
liability relating to the release of hazardous substances as defined under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), pending or to the
best of Morris' knowledge, threatened against Morris or any Morris Subsidiary,
the result of which has had or could reasonably be expected to have a material
adverse effect upon Morris and Morris' Subsidiaries taken as a whole; to the
best of Morris' knowledge there is no reasonable basis for any such proceeding,
claim or action; and to the best of Morris' knowledge neither Morris nor any
Morris Subsidiary is subject to any agreement, order, judgment, or decree by or
with any court, governmental authority or third party imposing any such
environmental liability. Morris has provided Northern with copies of all
environmental assessments, reports, studies and other related information in its
or any Morris Subsidiary's possession with respect to each bank facility and
each non-residential OREO property.
(W) INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps,
caps, floors and option agreements (if any) to which Morris or any Morris
Subsidiary is a party or by which any of their respective properties may be
bound, are set forth on Schedule 2(w); and (i) were entered into in the ordinary
course of business and, to Morris' best knowledge, in accordance with prudent
banking practice and applicable rules, regulations and policies of all
regulatory authorities to which Morris and the Morris Subsidiaries are subject
and with counterparties believed to be financially responsible at the time, (ii)
are legal, valid and binding obligations enforceable in accordance with their
terms, and (iii) are in full force and effect. Morris and the Morris
Subsidiaries have duty performed in all material respects all of their material
obligations thereunder to the extent that such obligations to perform have
accrued; and, to Morris' best knowledge, there are no material breaches,
violations or defaults or allegations or assertions of such by any party
thereunder. Morris has delivered or made available to Northern true, correct and
complete copies of all such interest rate risk management agreements and
arrangements.
(X) CORPORATE RECORDS. Morris has provided to Northern a list of all
minutes of meetings of the Board of Directors, committees of the Board of
Directors and shareholders of Morris and each of the Morris Subsidiaries
certified by the Secretary of Morris or such Morris Subsidiary and true and
correct copies of such minutes signed by the Secretary or the Chairman of such
meeting are contained in the minute books of Morris or such Morris Subsidiary.
(Y) UNFUNDED COMMITMENTS. Schedule 2(y) sets forth a true and complete
list of all unfunded commitments by borrower, date and amount of commitment as
of August 31, 1999, and such schedule will be updated as of the end of the month
immediately preceding the Closing Date.
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3. REPRESENTATIONS AND WARRANTIES OF NORTHERN. Northern represents and
warrants to Morris as follows:
(A) ORGANIZATION AND AUTHORITY. Northern is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and failure to be so qualified would
have a material adverse effect on Northern and its subsidiaries taken as a whole
and has the corporate power and authority to own its properties and assets and
to carry on its business as it is now being conducted. Northern is registered as
a bank holding company with the Board of Governors of the Federal Reserve (the
"FEDERAL RESERVE BOARD") under the Bank Holding Company Act of 1956, as amended
(the "BHC ACT"). Northern has furnished Morris true and correct copies of its
Articles of Incorporation and Bylaws, as amended.
(B) NORTHERN SUBSIDIARIES. Schedule 3(b) sets forth a complete and
correct list of all of Northern's subsidiaries as of the date hereof
(individually a "NORTHERN SUBSIDIARY" and collectively the "NORTHERN
SUBSIDIARIES"), all shares of the outstanding capital stock of each of which,
except as set forth in Schedule 3(b), are owned directly or indirectly by
Northern. Except as set forth on Schedule 3(b), no equity security of any
Northern Subsidiary is or may be required to be issued to any person or entity
other than Northern by reason of any option, warrant, scrip, preemptive right,
right to subscribe to, call or commitment of any character whatsoever relating
to, or security or right convertible into, shares of any capital stock of such
Northern Subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Northern Subsidiary is bound to issue additional
shares of its capital stock, or any option, warrant or right to purchase or
acquire any additional shares of its capital stock. Except as set forth on
Schedule 3(b), all of such shares so owned by Northern are fully paid and
nonassessable and are owned by it free and clear of any lien, claim, charge,
option, encumbrance or agreement with respect thereto. Each Northern Subsidiary
is a corporation or banking association duly organized, validly existing, duly
qualified to do business and in good standing under the laws of its jurisdiction
of incorporation, and has corporate power and authority to own or lease its
properties and assets and to carry on its business as it is now being conducted.
Except as set forth on Schedule 3(b), Northern does not own beneficially,
directly or indirectly, more than 5% of any class of equity securities or
similar interests of any corporation, bank, business trust, association or
similar organization, and is not, directly or indirectly, a partner in any
partnership or party to any joint venture.
(C) NORTHERN CAPITALIZATION. The authorized capital stock of Northern
consists of 15,000,000 shares of common stock, of a par value of $.01 per share,
of which as of the close of business on September 30, 1999, 425,600 shares of
common stock were outstanding and no shares were held in treasury. All of the
outstanding shares of capital stock of Northern have been duly and validly
authorized and issued and are fully paid and nonassessable. Except as set forth
in Schedule 3(c), there are no outstanding subscriptions, contracts, conversion
privileges, options, warrants, calls, preemptive rights or other rights
obligating Northern to issue, sell or otherwise dispose of, or to purchase,
redeem or otherwise acquire, any shares of capital stock of
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Northern. No shares of Northern capital stock have been purchased, redeemed or
otherwise acquired, directly or indirectly, by Northern or any Northern
Subsidiary and no dividends or other distributions have been declared, set
aside, made or paid to the shareholders of Northern.
(D) AUTHORIZATION. Northern has the corporate power and authority to
enter into this Agreement and the Merger Agreement and, subject to any required
approvals of its shareholders, to carry out its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and the
Merger Agreement by Northern and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Northern. Subject to such approvals of shareholders and of
government agencies and other governing boards having regulatory authority over
Northern as may be required by statute or regulation, this Agreement and the
Merger Agreement are valid and binding obligations of Northern enforceable
against Northern in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors and
contracting parties generally and except as enforceability may be subject to
general principles of equity. Except as set forth on Schedule 3(d), neither the
execution, delivery and performance by Northern of this Agreement or the Merger
Agreement, nor the consummation of the transactions contemplated hereby and
thereby, nor compliance by Northern with any of the provisions hereof or
thereof, will (i) violate, conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration of, or result in the creation of, any lien, security interest,
charge or encumbrance upon any of the properties or assets of Northern or any
Northern Subsidiary under any of the terms, conditions or provisions of (x) its
Articles of Incorporation or Bylaws or (y) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Northern or any Northern Subsidiary is a party or by which
it may be bound, or to which Northern or any Northern Subsidiary or any of the
properties or assets of Northern or any Northern Subsidiary may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in the
next sentence, to the best knowledge of Northern, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to
Northern or any Northern Subsidiary or any of their respective properties or
assets. Except as set forth on Schedule 3(d), other than in connection with or
in compliance with the provisions of the Securities Act, the Exchange Act, the
securities or blue sky laws of the various states or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHC Act, and filings
required to effect the Merger under Minnesota law, no notice to, filing with,
exemption or review by, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Northern of the
transactions contemplated by this Agreement and the Merger Agreement.
(E) NORTHERN FINANCIAL STATEMENTS. The consolidated balance sheets of
Northern and Northern's Subsidiaries as of June 30, 1999 and related
consolidated statements of income, stockholders' equity and cash flows for the
fiscal year ended June 30, 1999, and the unaudited statements of financial
condition of Northern and the Northern Subsidiaries as of August 31, 1999 and
the related unaudited consolidated statements of income, shareholders' equity
and cash flows for the two months then ended (collectively, the "NORTHERN
FINANCIAL STATEMENTS"),
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present fairly (subject, in the case of financial statements for interim
periods, to normal recurring adjustments) the consolidated financial position of
Northern and the Northern Subsidiaries at the dates and the consolidated results
of operations and cash flows of Northern and the Northern Subsidiaries for the
periods stated therein.
(F) REPORTS. Since December 31, 1998, Northern and each Northern
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file, if any, with (i)
the SEC, including, but not limited to, Forms 10-KSB, Forms 10-QSB and proxy
statements, (ii) the Federal Reserve Board, (iii) the FDIC, (iv) the
Comptroller, (v) the OTS, and (vi) any applicable state securities or banking
authorities. All such reports and statements filed with any such regulatory body
or authority are collectively referred to herein as the "NORTHERN REPORTS." As
of their respective dates, the Northern Reports complied in all material
respects with all the rules and regulations promulgated by the SEC, the Federal
Reserve Board, the FDIC, the Comptroller, the OTS and applicable state
securities or banking authorities, as the case may be, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Copies of all
the Northern Reports have been made available to Morris by Northern.
(G) PROPERTIES AND LEASES. Except as may be reflected in the Northern
Financial Statements and except for any lien for current taxes not yet
delinquent, Northern and each Northern Subsidiary have good title free and clear
of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Northern's
consolidated balance sheet as of June 30, 1999, and all real and personal
property acquired since such date, except such real and personal property as has
been disposed of in the ordinary course of business. All leases of real property
and all other leases material to Northern or any Northern Subsidiary pursuant to
which Northern or such Northern Subsidiary, as lessee, leases personal property,
are valid and effective in accordance with their respective terms, and there is
not, under any such lease, any material existing default by Northern or such
Northern Subsidiary or any event which, with notice or lapse of time or both,
would constitute such a material default. Substantially all Northern's and each
Northern Subsidiary's buildings and equipment in regular use have been well
maintained and are in good and serviceable condition, reasonable wear and tear
excepted.
(H) TAXES. Each of Northern and the Northern Subsidiaries has filed all
federal, state, county, local and foreign tax returns, including information
returns, required to be filed by it, and, except as set forth on Schedule 3(h),
paid all taxes owed by it, including those with respect to income, withholding,
social security, unemployment, workers compensation, franchise, ad valorem,
premium, excise and sales taxes, and no taxes shown on such returns to be owed
by it or assessments received by it are delinquent. The first federal income tax
return of Northern and the Northern Subsidiaries is for the fiscal year ended
June 30, 1999. Except only as set forth on Schedule 3(h), (i) neither Northern
nor any Northern Subsidiary is a party to any pending action or proceeding, nor
to Northern's knowledge is any such action or proceeding threatened by any
governmental authority, for the assessment or collection of taxes, interest,
penalties, assessments or deficiencies and (ii) no issue has been raised by any
federal, state, local or foreign taxing authority in connection with an audit or
examination of the tax returns, business or properties of
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Northern or any Northern Subsidiary which has not been settled, resolved and
fully satisfied. Each of Northern and the Northern Subsidiaries has paid all
taxes owed or which it is required to withhold from amounts owing to employees,
creditors or other third parties. The consolidated balance sheet as of June 30,
1999, referred to in Section 3(e) hereof, includes adequate provision for all
accrued but unpaid federal, state, county, local and foreign taxes, interest,
penalties, assessments or deficiencies of Northern and the Northern Subsidiaries
with respect to all periods through the date thereof.
(I) ABSENCE OF CERTAIN CHANGES. Since June 30, 1999, there has been no
change in the business, financial condition or results of operations of Northern
or any Northern Subsidiary which has had, or may reasonably be expected to have,
a material adverse effect on the business, financial condition or results of
operations of Northern and the Northern Subsidiaries taken as a whole.
(J) COMMITMENTS AND CONTRACTS. Except as set forth on Schedule 3(j),
neither Northern nor any Northern Subsidiary is a party or subject to any of the
following (whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination
pay liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable
at will by Northern or such Northern Subsidiary);
(ii) any plan, contract or understanding providing for any
bonus, pension, option, deferred compensation, retirement payment,
profit sharing or similar arrangement with respect to any present or
former officer, director, employee or consultant;
(iii) any labor contract or agreement with any labor union.
(iv) any contract not made in the ordinary course of business
containing covenants which materially limit the ability of Northern or
any Northern Subsidiary to compete in any line of business or with any
person or which involve any material restriction of the geographical
area in which, or method by which, Northern or any Northern Subsidiary
may carry on its business (other than as may be required by law or
applicable regulatory authorities);
(v) any other contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K; and
(vi) any current or past agreement, contract or understanding
with any current or former director, officer, employee, consultant,
financial adviser, broker, dealer, or agent providing for any rights of
indemnification in favor of such person or entity.
(K) LITIGATION AND OTHER PROCEEDINGS. There is no pending or, to the
best knowledge of Northern, threatened, claim, action, suit, investigation or
proceeding against Northern or any Northern Subsidiary, nor is Northern or any
Northern Subsidiary subject to any
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order, judgment or decree, except for matters which, in the aggregate, will not
have, or cannot reasonably be expected to have, a material adverse effect on the
business, financial condition or results of operations of Northern and the
Northern Subsidiaries taken as a whole.
(L) INSURANCE. Northern and each Northern Subsidiary is presently
insured, and during each of the past five calendar years (or during such lesser
period of time as Northern has owned such Northern Subsidiary) has been insured,
for reasonable amounts with financially sound and reputable insurance companies
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured and has
maintained all insurance required by applicable law and regulation.
(M) COMPLIANCE WITH LAWS. Northern and each Northern Subsidiary has all
permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties or assets and to carry on its business as presently
conducted and that are material to the business of Northern or such Northern
Subsidiary; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to the best knowledge of Northern,
no suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current. The conduct by Northern and
each Northern Subsidiary of its business and the condition and use of its
properties does not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Northern nor any Northern
Subsidiary is in default under any order, license, regulation or demand of any
federal, state, municipal or other governmental agency or with respect to any
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application and except as set forth on
Schedule 3(m), no federal, state, municipal or other governmental authority has
placed any restriction on the business or properties of Northern or any Northern
Subsidiary which reasonably could be expected to have a material adverse effect
on the business or properties of Northern and the Northern Subsidiaries taken as
a whole.
(N) LABOR. No work stoppage involving Northern or any Northern
Subsidiary is pending or, to the best knowledge of Northern, threatened. Neither
Northern nor any Northern Subsidiary is involved in, or threatened with or
affected by, any labor dispute, arbitration, lawsuit or administrative
proceeding which could materially and adversely affect the business of Northern
or such Northern Subsidiary. Employees of Northern and the Northern Subsidiaries
are not represented by any labor union nor are any collective bargaining
agreements otherwise in effect with respect to such employees.
(O) NORTHERN BENEFIT PLANS.
(i) The only "employee benefit plans" within the meaning of
Section 3(3) of ERISA for which Northern or any Northern Subsidiary
acts as the plan sponsor as defined in ERISA Section 3(16)(B), and with
respect to which any liability under ERISA or otherwise exists or may
be incurred by Northern or any Northern Subsidiary are those
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set forth on Schedule 3(o) (the "NORTHERN PLANS"). No Northern Plan is
a "multi-employer plan" within the meaning of Section 3(37) of ERISA.
(ii) Each Northern Plan is and has been in all material
respects operated and administered in accordance with its provisions
and applicable law. Except as set forth on Schedule 3(o), Northern or
the Northern Subsidiaries have received favorable determination letters
from the Internal Revenue Service under the provisions of TRA '86 for
each of the Northern Plans to which the qualification requirements of
Section 401(a) of the Code apply. Northern knows of no reason that any
Northern Plan subject to the qualification provisions of Section 401(a)
of the Code is not "qualified" within the meaning of Section 401(a) of
the Code and knows of no reason that each related trust is not exempt
from taxation under Section 501(a) of the Code.
(iii) The present value of all benefits vested and all
benefits accrued under each Northern Plan which is subject to Title IV
of ERISA did not, in each case, as determined for purposes of reporting
on Schedule B to the Annual Report on Form 5500 of each such Northern
Plan as of the end of the most recent Plan year, exceed the value of
the assets of the Northern Plans allocable to such vested or accrued
benefits.
(iv) Except as set forth on Schedule 3(o), and to the best
knowledge of Northern, no Northern Plan or any trust created
thereunder, nor any trustee, fiduciary or administrator thereof, has
engaged in a "prohibited transaction", as such term is defined in
Section 4975 of the Code or Section 406 of ERISA or violated fiduciary
standards under Part 4 of Title I of ERISA, which could subject, to the
best knowledge of Northern, such Northern Plan or trust, or any
trustee, fiduciary or administrator thereof, or any party dealing with
any such Northern Plan or trust, to the tax or penalty on prohibited
transactions imposed by Section 4975 of the Code or would result in
material liability to Northern and the Northern Subsidiaries taken as a
whole.
(v) No Northern Plan which is subject to Title IV of ERISA or
any trust created thereunder has been terminated, nor have there been
any "reportable events" as that term is defined in Section 4043 of
ERISA with respect to any Northern Plan, other than those events which
may result from the transactions contemplated by this Agreement and the
Merger Agreement.
(vi) No Northern Plan or any trust created thereunder has
incurred any "accumulated funding deficiency", as such term is defined
in Section 412 of the Code (whether or not waived), since the effective
date of ERISA.
(vii) Neither the execution and delivery of this Agreement and
the Merger Agreement nor the consummation of the transactions
contemplated hereby and thereby will (i) result in any payment in
excess of $5,000 for any individual or $40,000 in the aggregate
(including, without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due to any director or employee
or former employee of Northern or any Northern Subsidiary under any
Northern Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any Northern Plan or (iii) result
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in the acceleration of the time of payment or vesting of any such
benefits to any material extent.
(P) REGULATORY FILINGS. None of the information regarding Northern and
the Northern Subsidiaries supplied or to be supplied by Northern for inclusion
in any documents to be filed with any regulatory authority in connection with
the transactions contemplated hereby or by the Merger Agreement will, at the
respective times such documents are filed with any regulatory authority, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading.
All documents which Northern and the Northern Subsidiaries are responsible for
filing with any regulatory authority in connection with the Merger will comply
as to form in all material respects with the provisions of applicable law.
(Q) BROKERS AND FINDERS. Neither Northern nor any Northern Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for Northern or any Northern Subsidiary in connection
with this Agreement and the Merger Agreement or the transactions contemplated
hereby and thereby.
(R) NO DEFAULTS. Neither Northern nor any Northern Subsidiary is in
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default under any material
agreement, indenture, loan agreement or other instrument to which it is a party
or by which it or any of its assets is bound or to which any of its assets is
subject, the result of which has had or could reasonably be expected to have a
material adverse effect upon Northern and the Northern Subsidiaries taken as a
whole. To the best of Northern's knowledge, all parties with whom Northern or
any Northern Subsidiary has material leases, agreements or contracts or who owe
to Northern or any Northern Subsidiary material obligations other than with
respect to those arising in the ordinary course of the banking business of the
Northern Subsidiaries are in compliance therewith in all material respects.
(S) ENVIRONMENTAL LIABILITY. There is no legal, administrative, or
other proceeding, claim, or action of any nature seeking to impose, or that
could result in the imposition, on Northern or any Northern Subsidiary of any
liability relating to the release of hazardous substances as defined under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, CERCLA, pending or to the best of Northern's
knowledge, threatened against Northern or any Northern Subsidiary, the result of
which has had or could reasonably be expected to have a material adverse effect
upon Northern and the Northern Subsidiaries taken as a whole; to the best of
Northern's knowledge there is no reasonable basis for any such proceeding, claim
or action; and to the best of Northern's knowledge neither Northern nor any
Northern Subsidiary is subject to any agreement, order, judgment, or decree by
or with any court, governmental authority or third party imposing any such
environmental liability. Northern has provided Morris with copies of all
environmental assessments, reports, studies and other related information in its
or any Northern Subsidiary's possession.
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(T) NO INTENTION TO DISPOSE OF ASSETS. Northern has no plan or
intention to sell or otherwise dispose of any of the assets of Morris to be
acquired in the Merger, except for dispositions in the ordinary course of
business or transfers to controlled subsidiaries.
4. COVENANTS OF MORRIS. Morris covenants and agrees with Northern as
follows:
(a) Except as otherwise permitted or required by this Agreement, from
the date hereof until the Effective Time of the Merger, Morris, and each Morris
Subsidiary will: maintain its corporate existence in good standing; maintain the
general character of its business and conduct its business in its ordinary and
usual manner; extend credit in accordance with existing lending policies, except
that it shall not, without the prior written consent of Northern (which consent
requirement shall be deemed to be waived as to any loan approval request to
which Northern has not responded by the end of the next business day following
the day of receipt of the written request by the designated Northern employee
identified in Schedule 4(a) hereto, as such Schedule 4(a) may be changed by
Northern from time to time upon five (5) days advance written notice to Morris),
make any new loan (except pursuant to commitments made prior to the date of this
Agreement) to any borrower if the amount of the resulting loan, when aggregated
with all other loans or extensions of credit to such person, would be in excess
of $250,000, or modify, restructure or renew any existing loan (except pursuant
to commitments made prior to the date of this Agreement) to any borrower if the
amount of the resulting loan, when aggregated with all other loans or extensions
of credit to such person, would be in excess of $250,000; maintain all books and
records of it and the Morris Subsidiaries, including all financial statements,
in accordance with the accounting principles and practices consistent with those
used for the Morris Financial Statements, except for changes in such principles
and practices required under generally accepted accounting principles; maintain
its properties in good repair and condition, ordinary wear and tear excepted;
maintain in all material respects presently existing insurance coverage; use its
best efforts to preserve its business organization intact, to keep the services
of its present principal employees and to preserve its good will and the good
will of its suppliers, customers and others having business relationships with
it; use its best efforts to obtain any approvals or consents required to
maintain existing leases and other contracts in effect following the Merger;
comply in all material respects with all laws, regulations, ordinances, codes,
orders, licenses and permits applicable to the properties and operations of
Morris and each Morris Subsidiary the noncompliance with which reasonably could
be expected to have a material adverse effect on Morris and the Morris
Subsidiaries taken as a whole; and permit Northern and its representatives to
examine its and its subsidiaries' books, records and properties and to interview
officers, employees and agents at all reasonable times when it is open for
business. No such examination by Northern or its representatives either before
or after the date of this Agreement shall in any way affect, diminish or
terminate any of the representations, warranties or covenants of Morris herein
expressed.
(b) Except as otherwise contemplated or required by this Agreement,
from the date hereof until the Effective Time of the Merger, Morris and each
Morris Subsidiary will not (without the prior written consent of Northern):
amend or otherwise change its articles or certificate of incorporation or
by-laws; issue or sell or authorize for issuance or sale, or grant any options
or make other agreements with respect to the issuance or sale or conversion of,
any shares of its capital stock, phantom shares or other share-equivalents, or
any other of its
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securities; authorize or incur any long-term debt (other than deposit
liabilities); mortgage, pledge or subject to lien or other encumbrance any of
its properties, except in the ordinary course of business; enter into any
agreement, contract or commitment in excess of $5,000 except banking
transactions in the ordinary course of business and in accordance with policies
and procedures in effect on the date hereof; make any investments except
investments made by bank subsidiaries in the ordinary course of business for
terms of up to one year and in amounts of $1,000,000 or less; amend or terminate
any Plan except as required by law; make any contributions to any Plan except as
required by the terms of such Plan in effect as of the date hereof; declare, set
aside, make or pay any dividend or other distribution with respect to its
capital stock except: (i) any dividend declared by a Morris Subsidiary's Board
of Directors in accordance with applicable law and regulation or (ii) dividends
declared by Morris which (x) are consistent with Morris' past practices and (y)
aggregate to no more than $300,000; redeem, purchase or otherwise acquire,
directly or indirectly, any of the capital stock of Morris or any Morris
Subsidiary; increase the compensation of any officers, directors or executive
employees, except pursuant to existing compensation plans and practices; sell or
otherwise dispose of any shares of the capital stock of any Morris Subsidiary;
or sell or otherwise dispose of any of its assets or properties other than in
the ordinary course of business.
(c) Morris shall promptly take all action necessary in accordance with
Minnesota law and Morris' articles of incorporation, as amended, and bylaws to
cause a meeting of Morris shareholders (the "SHAREHOLDERS MEETING") to be duly
called and held as soon as reasonably practicable following the date upon which
the Registration Statement (as defined below) becomes effective for the purpose
of voting upon the Merger, and, subject to fiduciary duties, shall use all
reasonable efforts to obtain Morris shareholder approval of this Agreement and
the Merger. In accordance therewith, Morris shall cooperate with Northern in the
preparation and filing, as soon as reasonably practicable, of a Proxy
Statement/Prospectus to be included as part of the Registration Statement (such
Proxy Statement/Prospectus together with Notice of Meeting, form of Proxy and
any letter or other materials to the Morris shareholders included therein are
referred to in this Agreement as the "PROXY STATEMENT/PROSPECTUS"). Morris shall
use all reasonable efforts to cause the Proxy Statement/Prospectus to be mailed
to the shareholders of Morris as soon as reasonably practicable following its
effectiveness, with the date of mailing as mutually determined by Morris and
Northern.
If at any time prior to the Shareholders Meeting, any event should
occur relating to Morris or Morris' officers or directors that is required to be
described in an amendment or supplement to the Proxy Statement/Prospectus or the
Registration Statement, Morris shall promptly inform Northern. Whenever any
event that occurs that should be described in an amendment of, or supplement to,
the Proxy Statement/Prospectus or the Registration Statement, Morris, shall,
upon learning of such event, promptly notify Northern and consult and cooperate
with Northern in connection with the preparation of a mutually acceptable
amendment or supplement, and shall cooperate with Northern to promptly file such
amendment or supplement with the SEC and mail such amendment or supplement as
soon as practicable after it is cleared by the SEC.
(d) None of the information supplied or to be supplied by Morris
specifically for inclusion or incorporation by reference in the Proxy
Statement/Prospectus will, at the date it is
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first mailed to Morris' shareholders and at the time of the Shareholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement/Prospectus will comply as to form in all
material respects with the requirements of the Securities Act and the rules and
regulations thereunder, except that no representation is made by Morris with
respect to statements made or incorporated by reference therein based on
information supplied by Northern specifically for inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement/Prospectus.
(e) Morris will take all necessary corporate and other action and use
its best efforts to obtain all approvals of regulatory authorities, consents and
other approvals required of Morris to carry out the transactions contemplated by
this Agreement and will cooperate with Northern to obtain all such approvals and
consents required of Northern.
(f) Morris will use its best efforts to cause its counsel to deliver to
Northern a favorable opinion as of the Closing Date in form and substance
customary for transactions of this type and satisfactory to counsel for
Northern;
(g) Morris will hold in confidence all documents and information
concerning Northern and Northern's Subsidiaries furnished to it and its
representatives in connection with the transactions contemplated by this
Agreement (the "NORTHERN EVALUATION MATERIAL") and will not release or disclose
the Northern Evaluation Material to any other person, except, in the opinion of
Morris' counsel, as required by law and except to its directors, officers,
employees and representatives in connection with this Agreement, who shall be
directed to treat the Northern Evaluation Material confidentially. If disclosure
of the Northern Evaluation Material is required by law, other than pursuant to
obtaining regulatory approvals pursuant to the terms of this Agreement, Morris
will, unless prohibited by law, in advance of such disclosure provide Northern
to the extent reasonably practicable with prompt notice of such requirement(s).
In such event, Morris will, unless prohibited by law, use commercially
reasonable efforts to provide Northern, in advance of any such disclosure, with
copies of any Northern Evaluation Material Morris intends to disclose (and, if
applicable, the text of the disclosure language itself) and, to the extent
reasonably practicable, to cooperate with Northern at Northern's expense to the
extent it may seek to limit such disclosure. If the transactions contemplated by
this Agreement shall not be consummated, such confidence shall be maintained and
the Northern Evaluation Material shall not be used in competition with Northern
(except to the extent that it can be shown to be previously known to Morris and
not known to Morris to be subject to a confidentiality obligation to Northern,
in the public domain other than as a result of disclosure by Morris or its
representatives, or later acquired by Morris from other legitimate sources not
known to Morris to be subject to a confidentiality obligation to Northern) and,
upon request, all such documents, copies thereof or extracts therefrom shall
immediately thereafter be destroyed (except for Morris Board of Directors
minutes, regulatory applications and similar documents) and such destruction
shall be certified in writing.
(h) Neither Morris, nor any Morris Subsidiary, nor any director,
officer, representative or agent thereof, will, directly or indirectly, solicit,
authorize the solicitation of or
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enter into any discussions with any corporation, partnership, person or other
entity or group (other than Northern) concerning any offer or possible offer (i)
to purchase any shares of common stock, any option or warrant to purchase any
shares of common stock, any securities convertible into any shares of such
common stock, or any other equity security of Morris or any Morris Subsidiary,
(ii) to make a tender or exchange offer for any shares of such common stock or
other equity security, (iii) to purchase, lease or otherwise acquire the assets
of Morris or any Morris Subsidiary except in the ordinary course of business, or
(iv) to merge, consolidate or otherwise combine with Morris or any Morris
Subsidiary. If any corporation, partnership, person or other entity or group
makes an offer or inquiry to Morris or any Morris Subsidiary concerning any of
the foregoing, Morris or such Morris Subsidiary will (i) promptly disclose to
Northern the fact that such offer or inquiry was made and the terms of such
offer (if any), and (ii) perform the transaction under the terms of such offer
with Northern rather than the offeror at Northern's option. If Morris breaches
this Section 4(g) or if Northern chooses not to match the terms of a competing
offer as contemplated in the previous sentence, Morris will promptly pay to
Northern an amount equal to all reasonable and documented out-of-pocket expenses
and fees incurred by Northern prior to the notice of the breach or the competing
offer (including, without limitation, all fees and expenses of counsel and
accountants to Northern) actually incurred or accrued by Northern or on their
behalf in connection with the Merger plus $200,000.
(i) Morris shall consult with Northern before issuing any press release
or making any public statement with respect to this Agreement and the
transactions contemplated hereby and, except as may be required by applicable
law, will not issue any such press release or make any such public statement
prior to such consultation and the consent of Northern. The parties have agreed
on the text of a press release by which Northern and Morris will announce the
execution of this Agreement.
(j) Morris and each Morris Subsidiary will take all action necessary or
required (i) to terminate or amend, if requested by Northern, all qualified
pension and welfare benefit plans and all non-qualified benefit plans and
compensation arrangements as of the Effective Date of the Merger, and (ii) to
submit application to the Internal Revenue Service for a favorable determination
letter for each of the Plans which is subject to the qualification requirements
of Section 401(a) of the Code prior to the Effective Date of the Merger.
(k) Morris will and will cause the Morris Subsidiaries to do anything
reasonably requested of it by Northern to qualify the Merger as a "pooling of
interests" for accounting purposes and neither Morris nor any Morris Subsidiary
shall take any action which Northern has advised Morris would disqualify the
transaction as a pooling transaction.
(l) Morris shall use its best efforts to obtain and deliver at least 32
days prior to the Effective Date of the Merger signed representations
substantially in the form attached hereto as Exhibit B to Northern by each
executive officer, director or shareholder of Morris who may reasonably be
deemed an "affiliate" of Morris within the meaning of such term as used in Rule
145 under the Securities Act.
(m) Morris shall establish, no earlier than two days prior to the
Closing Date, such additional accruals and reserves as may be necessary (i) to
conform Morris' accounting and
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credit loss reserve practices and methods to those of Northern and Northern's
plans with respect to the conduct of Morris' business following the Merger,
provided, however, that no change made by Morris solely based on Northern's
direction under this Section will, in and of itself, affect the Valuation, and
(ii) to the extent permitted by generally accepted accounting principles, to
provide for the costs and expenses relating to the consummation by Morris of the
Merger and the other transactions contemplated by this Agreement.
(n) Morris shall obtain, at its sole expense, Phase I environmental
assessments for each parcel of owned real property, excluding only residential
OREO property. Oral reports of such environmental assessments shall be delivered
to Northern no later than four weeks and written reports shall be delivered to
Northern no later than eight weeks from the date of this Agreement. Morris shall
obtain, at its sole expense, Phase II environmental assessments for properties
identified by Northern on the basis of the results of such Phase I environmental
assessments. Morris shall obtain a survey and assessment of all potential
asbestos containing material in owned or leased properties (other than OREO
property) and a written report of the results shall be delivered to Northern
within four weeks of execution of this Agreement.
(o) Morris shall obtain, at its sole expense, commitments for title
insurance and boundary surveys for each parcel of owned real property, excluding
only OREO property, which shall be delivered to Northern no later than four
weeks from the date of this Agreement.
(p) Morris agrees that effective with the Closing Date, all policies,
as set forth on Schedule 2(l), issued to the "Named Insured" as defined on the
policies, will be canceled and become the assets of Northern. To the extent that
any such policies provide defense and/or indemnity for claims or losses which
occurred prior to the Closing Date, Northern will have the right to manage such
claims or losses associated with the liabilities assumed under this Agreement.
(q) At all times prior to the Closing Date, Morris will permit Northern
and its representatives to examine its books, records and properties and
interview officers, employees and agents of Morris at all reasonable times when
it is open for business. No such examination by Northern or its representatives
shall in any way affect, diminish or terminate any of the representations,
warranties or covenants of Morris herein expressed.
(r) Morris shall furnish or cause to be furnished to Northern all
information concerning Morris, the holders of its capital stock and the Morris
Subsidiaries and shall take all such other action and otherwise cooperate with
Northern as Northern may request (i) in satisfying Northern's obligations to
publicly disclose information regarding Morris and this Agreement in the
Registration Statement, or the Other Northern Public Documents and (ii) for
inclusion in any other statement or application made by Northern to any
governmental body in connection with the transactions contemplated by this
Agreement.
(s) Morris shall use all reasonable efforts to cause Michael Anderson &
Associates ("Morris' Accountant"), its independent auditors, to deliver a letter
dated as of the date of the Proxy Statement/Prospectus, and addressed to itself
and Northern and their respective Boards of Directors, consenting to the use of
its audit reports in connection with the Registration Statement
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and the Proxy Statement/Prospectus and otherwise in form and substance
reasonably satisfactory to Northern.
(t) Morris shall use all reasonable efforts to cause the Merger to
qualify, and shall not take, and shall use all reasonable efforts to prevent any
affiliate of such party from taking, any actions which could prevent the Merger
from qualifying, as a reorganization under the provisions of Section 368(a) of
the Code.
5. COVENANTS OF NORTHERN. Northern covenants and agrees with Morris as
follows:
(a) From the date hereof until the Effective Time of the Merger,
Northern will maintain its corporate existence in good standing; conduct, and
cause the Northern Subsidiaries to conduct, their respective businesses in
compliance with all material obligations and duties imposed on them by all laws,
governmental regulations, rules and ordinances, and judicial orders, judgments
and decrees applicable to Northern or the Northern Subsidiaries, their
businesses or their properties; maintain all books and records of it and the
Northern Subsidiaries, including all financial statements, in accordance with
the accounting principles and practices consistent with those used for the
Northern Financial Statements, except for changes in such principles and
practices required under generally accepted accounting principles.
(b) Northern shall, with the cooperation of Morris, prepare and file,
as soon as reasonably practicable, a registration statement under the Securities
Act registering the shares of Northern Common Stock to be issued in the Merger
or an offering memorandum to take advantage of an available exemption from
registration (provided that the holders of Morris Common Stock shall be granted
registration rights with respect to any shares distributed to them on the basis
of any exemption from registration) (the "REGISTRATION STATEMENT"), which
Registration Statement shall include the Proxy Statement/Prospectus. Northern
will use all reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly thereafter as practicable. Northern shall also
take any action required to be taken under state blue sky or securities laws in
connection with the issuance of Northern Common Stock pursuant to the Merger. In
the event Northern is not permitted by the SEC to file a registration statement
registering the shares of Northern Common Stock to be issued in the Merger,
Northern agrees to file as soon as practicable following written notice from no
fewer than three (3) of the former Morris shareholders, a registration statement
on Form S-3 with the SEC registering the shares of Northern Common stock to be
issued in the Merger. Northern agrees to use its best efforts to file all
documents and to take all other steps possible in order to have such
registration declared effective within 90 days following date of notice.
Northern further agrees that once the S-3 registration statement has been
declared effective, it will use its best efforts to keep such S-3 registration
statement effective for a period of not less than two (2) years after the
Closing Date, or when the shareholders giving notice have sold the Northern
shares registered on the S-3 registration statement, whichever occurs first. For
a period of two (2) years following the Closing Date, Morris shareholders shall
have piggyback registration rights to register Northern shares received in the
Merger in any registration statement filed by Northern (other than Forms S-8 or
S-4).
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(c) None of the information supplied or to be supplied by Northern
specifically for inclusion or incorporation by reference in the Proxy
Statement/Prospectus or the Registration Statement will, at the time the
Registration Statement or Proxy Statement/Prospectus is filed with the SEC, at
any time it is amended or supplemented and at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Registration Statement and Proxy
Statement/Prospectus will comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations thereunder,
except that no representation is made by Northern with respect to statements
made or incorporated by reference therein based on information supplied by
Morris specifically for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement/Prospectus.
(d) Northern shall call and hold a stockholders meeting for the purpose
of voting on the approval of the Merger as soon as practicable after the date on
which the Registration Statement becomes effective. Unless otherwise required
under the applicable fiduciary duties of the board of directors of Northern, as
determined by such directors in good faith after consultation with and based
upon the advice of independent legal counsel, Northern shall solicit from its
stockholders proxies in favor of adoption of this Agreement and approval of the
transactions contemplated hereby, and shall take all other action necessary or
advisable to secure the vote or consent of stockholders to obtain such approval.
If, as a result of Northern's secondary offering, one or more persons acting in
concert, which persons are not currently shareholders of Northern, obtain
control (meaning the power to vote a majority of Northern's outstanding shares)
of Northern and vote against the Merger, Northern will promptly pay to Morris an
amount equal to all reasonable and documented out-of-pocket expenses and fees
incurred by Morris prior to the negative vote (including, without limitation,
all fees and expenses of counsel and accountants to Morris) actually incurred or
accrued by Morris or on their behalf in connection with the Merger plus
$200,000.
(e) For a period of one year beginning on the Closing Date, Northern
will continue to file all reports under Sections 13 and 15(d) of the Exchange
Act necessary to permit persons formerly holding Morris Common Stock to sell
their Northern Common Stock under Rules 144 and 145(d).
(f) Northern will file all documents required to be filed to permit the
Northern Common Stock to be quoted on the OTS Bulletin Board.
(g) The shares of Northern Common Stock to be issued by Northern to the
shareholders of Morris pursuant to this Agreement and the Merger Agreement will,
upon such issuance and delivery to the shareholders of Morris pursuant to the
Merger Agreement, be duly authorized, validly issued, fully paid and
nonassessable. The shares of Northern Common Stock to be delivered to the
shareholders of Morris pursuant to the Merger Agreement are and will be free of
any preemptive rights of the stockholders of Northern.
(h) Northern will take all necessary corporate and other action and
file all documents required to obtain and will use its best efforts to obtain
all approvals of regulatory authorities,
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consents and approvals required of it to carry out the transactions contemplated
by this Agreement and will cooperate with Morris to obtain all such approvals
and consents required by Morris, including, without limitation, actions required
to comply with any of the following laws (if any are required) the provisions of
the Securities Act, the Exchange Act, the securities or blue sky laws of the
various states or filings, consents, reviews, authorizations, approvals or
exemptions required under the BHC Act, and filings required to effect the Merger
under Minnesota law.
(i) Northern will hold in confidence all documents and information
concerning Morris and Morris' Subsidiaries furnished to it and its
representatives in connection with the transactions contemplated by this
Agreement (the "MORRIS EVALUATION MATERIAL") and will not release or disclose
the Morris Evaluation Material to any other person, except, in the opinion of
Northern's counsel, as required by law and except to its directors, officers,
employees and representatives in connection with this Agreement, who shall be
directed to treat the Morris Evaluation Material confidentially. If disclosure
of the Morris Evaluation Material is required by law, other than pursuant to
obtaining regulatory approvals pursuant to the terms of this Agreement, Northern
will, unless prohibited by law, in advance of such disclosure provide Morris to
the extent reasonably practicable with prompt notice of such requirement(s). In
such event, Northern will, unless prohibited by law, use commercially reasonable
efforts to provide Morris, in advance of any such disclosure, with copies of any
Morris Evaluation Material Northern intends to disclose (and, if applicable, the
text of the disclosure language itself) and, to the extent reasonably
practicable, to cooperate with Morris at Morris' expense to the extent it may
seek to limit such disclosure. If the transactions contemplated by this
Agreement shall not be consummated, such confidence shall be maintained and the
Morris Evaluation Material shall not be used in competition with Morris (except
to the extent that it can be shown to be previously known to Northern and not
known to Northern to be subject to a confidentiality obligation to Morris, in
the public domain other than as a result of disclosure by Northern or its
representatives, or later acquired by Northern from other legitimate sources not
known to Northern to be subject to a confidentiality obligation to Morris) and,
upon request, all such documents, copies thereof or extracts therefrom shall
immediately thereafter be destroyed (except for Northern Board of Directors
minutes, regulatory applications and similar documents) and such destruction
shall be certified in writing.
(j) Northern will file any documents or agreements required to be filed
in connection with the Merger under the Minnesota Business Corporation Act.
(k) Northern will use its best efforts to cause its counsel to deliver
to Morris a favorable opinion as of the Closing Date in form and substance
customary for transactions of this type and satisfactory to counsel for Morris;
(l) Northern shall consult with Morris before issuing any press release
or making any public statement with respect to this Agreement and the
transactions contemplated hereby and, except as may be required by applicable
law, will not issue any such press release or make any such public statement
prior to such consultation and the consent of Morris. The parties have agreed on
the text of a press release by which Northern and Morris will announce the
execution of this Agreement.
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<PAGE> 183
(m) Northern shall give Morris notice of receipt of the regulatory
approvals referred to in Section 7(f) and shall provide Morris with copies,
immediately prior to filing and as filed, of the non-confidential portions of
the applications required to be filed in connection with such approvals.
(n) Neither Northern nor any Northern Subsidiary shall take any action
which with respect to Northern would disqualify the Merger as a "pooling of
interests" for accounting purposes. Northern shall use its best efforts to
obtain and deliver to Morris, prior to the Effective Date of the Merger, signed
representations from the directors and executive officers of Northern to the
effect that, except for de minimum dispositions which will not disqualify the
Merger as a pooling of interests, they will not dispose of shares of Northern or
Morris during the period commencing 30 days prior to the Effective Date and
ending upon publication by Northern of financial results including at least 30
days of combined operations of Morris and Northern.
(o) At all times prior to the Closing Date, Northern will permit Morris
and its representatives to examine its books, records and properties and
interview officers, employees and agents of Northern at all reasonable times
when it is open for business. No such examination by Morris or its
representatives shall in any way affect, diminish or terminate any of the
representations, warranties or covenants of Northern herein expressed.
(p) Northern shall use all reasonable efforts to cause the Merger to
qualify, and shall not take, and shall use all reasonable efforts to prevent any
affiliate of such party from taking, any actions which could prevent the Merger
from qualifying, as a reorganization under the provisions of Section 368(a) of
the Code.
6. CONDITIONS PRECEDENT TO OBLIGATION OF MORRIS. The obligation of
Morris to effect the Merger shall be subject to the satisfaction at or before
the Time of Filing of the following further conditions, which may be waived in
writing by Morris:
(a) Except as they may be affected by transactions contemplated by this
Agreement and except to the extent such representations and warranties are by
their express provisions made as of a specified date and except for activities
or transactions after the date of this Agreement made in the ordinary course of
business and not expressly prohibited by this Agreement, the representations and
warranties contained in Section 3 hereof shall be true and correct in all
respects material to Northern and its subsidiaries taken as a whole or material
to the Merger as if made at the Time of Filing.
(b) Northern shall have, or shall have caused to be, performed and
observed in all respects material to Northern and its subsidiaries taken as a
whole or material to the Transaction all covenants, agreements and conditions
contained herein to be performed or observed by it at or before the Time of
Filing.
(c) Morris shall have received a favorable certificate, dated as of the
Effective Date of the Merger, signed by the Chairman, the President or any
Executive Vice President or Senior
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<PAGE> 184
Vice President and by the Secretary or Assistant Secretary of Northern, as to
the matters set forth in Subsections (a) and (b) of this Section 6.
(d) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of Morris required for approval of a plan of merger in accordance with the
provisions of Morris' Articles of Incorporation and the Minnesota Business
Corporation Act.
(e) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of Northern required for approval of a plan of merger in accordance with the
provisions of Northern's Articles of Incorporation and the Minnesota Business
Corporation Act.
(f) Northern shall have received approval by the Federal Reserve Board
and by such other governmental agencies as may be required by law of the
transactions contemplated by this Agreement and the Merger Agreement and all
waiting and appeal periods prescribed by applicable law or regulation shall have
expired.
(g) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(h) The Registration Statement shall have been declared effective by
the SEC, and shall not be subject to any stop order, and no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness of the
Registration Statement shall have been initiated and be continuing, or have been
threatened and be unresolved. Northern shall have received all state securities
law or blue sky authorizations necessary to carry out the transactions
contemplated by this Agreement.
(i) The shares of Northern Common Stock to be delivered to the
stockholders of Morris pursuant to this Agreement and the Merger Agreement shall
have been authorized for quotation on the OTC Bulletin Board and shall be freely
tradable subject only to such limitations as may be applicable pursuant to Rule
145 under the Securities Act.
(j) Morris shall have received an opinion, dated the Closing Date, of
counsel to Morris, substantially to the effect that, for federal income tax
purposes: (i) the Merger will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) of the Code; (ii) no gain or loss will be recognized by
the holders of Morris Common Stock upon receipt of Northern Common Stock except
for cash received in lieu of fractional shares; (iii) the basis of the Northern
Common Stock received by the shareholders of Morris will be the same as the
basis of Morris Common Stock exchanged therefor; and (iv) the holding period of
the shares of Northern Common Stock received by the shareholders of Morris will
include the holding period of the Morris Common Stock, provided such shares of
Morris Common Stock were held as a capital asset as of the Effective Time of the
Merger.
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<PAGE> 185
(k) At least 350,000 shares of Northern Common Stock shall have been
sold in the secondary offering planned by Northern at a price not less than $10
per share.
(l) The execution and delivery of an employment agreement between
Northern and Allan R. Thoren to be effective as of the Closing Date.
(m) The Merger shall qualify as a "pooling of interests" for accounting
purposes and Northern shall have received from Bertram Cooper & Co., LLP and
Morris' Accountant opinions to that effect.
(n) Since June 30, 1999, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of Northern and the Northern Subsidiaries taken as a whole
(other than changes in banking laws or regulations, or interpretations thereof,
that affect the banking industry generally or changes in the general level of
interest rates).
7. CONDITIONS PRECEDENT TO OBLIGATION OF NORTHERN. The obligation of
Northern to effect the Merger shall be subject to the satisfaction at or before
the Time of Filing of the following conditions, which may be waived in writing
by Northern:
(a) Except as they may be affected by transactions contemplated by this
Agreement and except to the extent such representations and warranties are by
their express provisions made as of a specified date and except for activities
or transactions occurring after the date of this Agreement made in the ordinary
course of business and not expressly prohibited by this Agreement, the
representations and warranties contained in Section 2 hereof shall be true and
correct in all respects material to Morris and the Morris Subsidiaries taken as
a whole or material to the Merger as if made at the Time of Filing.
(b) Morris, and the Morris Subsidiaries shall have, or shall have
caused to be, performed and observed in all respects material to Morris and the
Morris Subsidiaries taken as a whole or material to the Merger, all covenants,
agreements and conditions contained herein to be performed or observed by them
at or before the Time of Filing.
(c) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of Morris required for approval of a plan of merger in accordance with the
provisions of Morris' Articles of Incorporation and the Minnesota Business
Corporation Act and no shareholder shall have taken any action to exercise
dissenters' appraisal rights.
(d) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of Northern required for approval of a plan of merger in accordance with the
provisions of Northern's Articles of Incorporation and the Minnesota Business
Corporation Act.
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<PAGE> 186
(e) Northern shall have received a favorable certificate dated as of
the Effective Date of the Merger signed by the Chairman or President and by the
Secretary or Assistant Secretary of Morris, as to the matters set forth in
Subsections (a) through (c) of this Section 7.
(f) Northern shall have received approval by all governmental agencies
as may be required by law of the transactions contemplated by this Agreement and
the Merger Agreement and all waiting and appeal periods prescribed by applicable
law or regulation shall have expired. No approvals, licenses or consents granted
by any regulatory authority shall contain any condition or requirement relating
to Morris or any Morris Subsidiary that, in the good faith judgment of Northern,
is unreasonably burdensome to Northern.
(g) Morris and the Morris Subsidiaries shall have obtained any and all
consents or waivers from other parties to loan agreements, leases or other
contracts required for the consummation of the Merger, and any and all permits,
authorizations, consents, waivers and approvals required for the lawful
consummation by Morris of the Merger except to the extent that such permits,
authorizations, consents, waivers and approvals are not material to the business
of Morris and the Morris Subsidiaries taken as a whole or material to the
Merger.
(h) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(i) The Merger shall qualify as a "pooling of interests" for accounting
purposes and Northern shall have received from Bertram Cooper & Co., LLP and
Morris' Accountant opinions to that effect.
(j) At any time since the date hereof the total number of shares of
Morris Common Stock outstanding and subject to issuance upon exercise (assuming
for this purpose that phantom shares and other share-equivalents constitute
Morris Common Stock) of all warrants, options, conversion rights, phantom shares
or other share-equivalents, other than any option held by Northern, shall not
have exceeded 1017.
(k) The Registration Statement shall have been declared effective by
the SEC, and shall not be subject to any stop order, and no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness of the
Registration Statement shall have been initiated and be continuing, or have been
threatened or be unresolved. Northern shall have received all state securities
law or blue sky authorizations necessary to carry out the transactions
contemplated by this Agreement.
(l) Morris and the Morris Subsidiaries considered as a whole shall not
have sustained since June 30, 1999 any material loss or interference with their
business from any civil disturbance or any fire, explosion, flood or other
calamity, whether or not covered by insurance.
(m) There shall be no reasonable basis for any proceeding, claim or
action of any nature seeking to impose, or that could result in the imposition
on Morris or any Morris Subsidiary, any liability relating to the release of
hazardous substances as defined under any
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local, state or federal environmental statute, regulation or ordinance
including, without limitation, CERCLA, which has had or could reasonably be
expected to have a material adverse effect upon Morris and the Morris
Subsidiaries taken as a whole.
(n) Since September 30, 1998, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of Morris and the Morris Subsidiaries taken as a whole
(other than changes in banking laws or regulations, or interpretations thereof,
that affect the banking industry generally or changes in the general level of
interest rates).
(o) Intentionally Omitted.
(p) The agreements set forth on Schedule 7(p) shall have been
terminated without penalty and Morris shall have terminated such other contracts
as Northern shall reasonably request.
(q) Intentionally Omitted.
(r) Morris shall deliver to Northern at the Closing, original stock
certificates evidencing all of the outstanding capital stock it owns of the
Morris Subsidiaries free and clear of any lien, claim, charge, pledge, option,
encumbrance or agreement with respect thereto (including any pledges set forth
on Schedule 2(o)).
(s) Morris shall fully fund or accrue the retirement plans for Leonard
Wulf, Edward Morrison and Terry Singsaas prior to Closing.
(t) At least 350,000 shares of Northern Common Stock shall have been
sold in the secondary offering planned by Northern at a price not less than $10
per share.
(u) The execution and delivery of an employment agreement between
Northern and Allan R. Thoren.
8. EMPLOYEE BENEFIT PLANS. Morris' Subsidiaries will continue to
maintain and administer the Plans. Northern Subsidiaries will continue to
maintain and administer the Northern Plans.
9. TERMINATION OF AGREEMENT.
(a) This Agreement may be terminated at any time prior to the Time of
Filing:
(i) by mutual written consent of the parties hereto;
(ii) by either of the parties hereto upon 10 business days advance
written notice to the other party if the Merger shall not have been
consummated by June 30, 2000, unless the Merger is consummated on or
before the end of such 10-day period, or
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<PAGE> 188
unless such failure of consummation shall be due to the failure of the
party seeking to terminate to perform or observe in all material
respects the covenants and agreements hereof to be performed or
observed by such party; provided, that, the party giving such notice
shall identify with particularity each of the other party's
representations, covenants or agreements that have not been satisfied
and that the notifying party has not waived as a condition to Closing.
The notifying party shall proceed with the Closing to the extent
required herein if the other party cures each of such matters prior to
the expiration of the 10-day notice period;
(iii) by Morris or Northern upon written notice to the other party
if any court or governmental authority of competent jurisdiction shall
have issued a final order restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement;
(iv) by either Morris or Northern upon the occurrence of any event
which constitutes a material adverse change in the business or
financial condition of the other party;
(v) by Northern if Northern chooses not to match the terms of a
competing offer under Section 4(g).
(b) Termination of this Agreement under this Section 9 shall not
release, or be construed as so releasing, either party hereto from any liability
or damage to the other party hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or willful
and material failure in performance of any of its covenants, agreements, duties
or obligations arising hereunder, and the obligations under Sections 4(f), 5(g),
this 9(b), and Morris' obligation to pay costs, expenses and fees under Section
4(g) shall survive such termination.
10. EXPENSES. All expenses in connection with this Agreement and the
transactions contemplated hereby, including without limitation legal and
accounting fees, incurred by Morris and Morris Subsidiaries shall be borne by
Morris, and all such expenses incurred by Northern shall be borne by Northern.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by either party hereto without the prior
written consent of the other party hereto.
12. THIRD PARTY BENEFICIARIES. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto.
13. NOTICES. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be in writing and shall be delivered in
person or shall be mailed by first class registered or certified mail, postage
prepaid, addressed as follows:
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If to Northern:
Northern Star Financial, Inc.
410 Jackson Street
Mankato, MN 56001
Attention: Tom Stienessen
With a copy to:
Robert B. Whitlock, Esq.
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
If to Morris:
First Federal Holding Company of Morris, Inc.
532 Atlantic Avenue, P.O Box 656
Morris, MN 56267-0656
Attention: Allan R. Thoren
With a copy to:
Steven J. Johnson, Esq.
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
14. COMPLETE AGREEMENT. This Agreement and the exhibits and schedules
hereto contain the complete agreement between the parties hereto with respect to
the Merger and other transactions contemplated hereby and supersede all prior
agreements and understandings between the parties hereto with respect thereto,
including, without limitation, the Reciprocal Confidentiality Agreement dated
July 27, 1999.
15. CAPTIONS. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement. The
summaries of the representations and warranties and other terms of this
Agreement contained in the Schedules are for convenience of reference only and
do not form a part of this Agreement or the Schedules and do not, in any way,
modify the representations and warranties, or any of the other terms, of this
Agreement.
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<PAGE> 190
16. WAIVER AND OTHER ACTION. Either party hereto may, by a signed
writing, give any consent, take any action pursuant to Section 9 hereof or
otherwise, or waive any inaccuracies in the representations and warranties by
the other party and compliance by the other party with any of the covenants and
conditions herein.
17. AMENDMENT. At any time before the Time of Filing, the parties
hereto, by action taken by their respective Boards of Directors or pursuant to
authority delegated by their respective Boards of Directors, may amend this
Agreement; provided, however, that no amendment after approval by the
shareholders of Morris shall be made which changes in a manner adverse to such
shareholders the consideration to be provided to the shareholders of Morris
pursuant to this Agreement and the Merger Agreement.
18. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
19. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representation
or warranty contained in the Agreement or the Merger Agreement shall survive the
Merger or except as set forth in Section 9(b), the termination of this
Agreement. Section 10 shall survive the Merger.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NORTHERN STAR FINANCIAL, INC.
By /s/ THOMAS STIENESSEN
Its President/CEO
FIRST FEDERAL HOLDING COMPANY
OF MORRIS
By /s/ KENNETH E. JOHNSON
Its Chairman
/s/ ALLEN R. THOREN
Director
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<PAGE> 191
EXHIBIT A TO MERGER AGREEMENT
PLAN OF MERGER
OF
FIRST FEDERAL HOLDING COMPANY OF MORRIS
INTO
NORTHERN STAR FINANCIAL, INC.
ARTICLE 1.
THE MERGER
1.1) Surviving Corporation. In accordance with the provisions of this
Plan and the applicable laws of the State of Minnesota, at the Effective Time
(as defined in Section 1.2), First Federal Holding Company of Morris ("Morris")
shall be merged with and into Northern Star Financial, Inc. ("Northern"), and
Northern shall be the Surviving Corporation and shall continue its corporate
existence and organization under the laws of the State of Minnesota, and the
separate existence of Morris shall thereupon cease. The name of the Surviving
Corporation shall be Northern Star Financial, Inc.
1.2) Effective Time. As used in this Agreement, the term "Effective
Time" shall be the close of business on the date of filing of the Articles of
Merger with the Minnesota Secretary of State in the manner described in
Minnesota Statutes Section 302A.011, Subd. 11 and Section 302A.615, Subd. 2.
1.3) Articles of Incorporation. At the Effective Time, the Articles of
Incorporation of Northern then in effect shall constitute and be the Articles of
Incorporation of the Surviving Corporation until amended or changed as provided
therein or by law.
1.4) Bylaws. At the Effective Time, the Bylaws of Northern then in
effect shall constitute and be the Bylaws of the Surviving Corporation until
amended or changed as provided therein or by law.
1.5) Board of Directors. The Board of Directors of the Surviving
Corporation shall consist of eight members as follows: Allan R. Thoren, Tom
Stienessen, _____________, ________________, ________________,
_________________, ______________ and ______________. Such directors shall serve
until such board may be changed or reconstituted as provided by the Articles of
Incorporation or Bylaws of the Surviving Corporation, or by law.
1.6) Officers. The officers of the Surviving Corporation shall consist
of: Tom Stienessen as Chairman; Allan R. Thoren as Vice Chairman;
________________as Chief Financial Officer; ________________as Vice President;
and ________________ as Secretary. Such officers shall serve until such officers
may be changed as provided by the Articles of Incorporation or Bylaws of the
Surviving Corporation, or by law.
1.7) Certain Effects of the Merger. At the Effective Time, the
Surviving Corporation shall succeed to and possess all the rights, privileges,
powers, franchises and immunities of a public as well as of a private nature,
and be subject to all liabilities, restrictions, disabilities, and
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<PAGE> 192
duties of both of Morris and Northern (collectively the "Constituent
Corporations"); and all and singular, the rights, privileges, powers, franchises
and immunities of both of the Constituent Corporations and all properties, real,
personal and mixed, and all other things in action of or belonging to either of
the Constituent Corporations on whatever account, shall be vested in the
Surviving Corporation; and all properties, assets, rights, privileges, powers,
franchises, immunities and all and every other interest shall be thereafter as
effectively the property of the Surviving Corporation as they were or would be
of the Constituent Corporations or either of them; and title to any real estate
or any interest therein vested by deed or otherwise in either of the Constituent
Corporations shall not revert or be in any way impaired by any reason of the
Merger; provided, however, that all rights of creditors and all liens upon any
property of either of the Constituent Corporations shall be preserved
unimpaired, limited in lien to the property affected by such liens at the
Effective Time, and all debts, liabilities and duties of either of the
Constituent Corporations shall thenceforth become those of the Surviving
Corporation and may be enforced against the Surviving Corporation to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by the Surviving Corporation.
1.8) Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any instruments of
further assurance are desirable in order to evidence the vesting in it of the
title of either of the Constituent Corporations to any of the property rights of
the Constituent Corporations, the appropriate officers or directors of Morris or
of Northern, as the case may be, are hereby authorized to execute, acknowledge
and deliver all such instruments of further assurance and to do all other acts
or things, either in the name of Morris, in the name of Northern, or in the name
of the Surviving Corporation, as may be requisite or desirable to carry out the
provisions of this Plan.
ARTICLE 2.
MANNER AND BASIS OF CONVERTING SHARES
2.1) Northern Shares. At the Effective Time, each share of Common Stock
of Northern then outstanding shall, by virtue of the Merger and without any
further action on the part of the holder thereof, be converted into and
thereafter shall constitute one issued and outstanding share of Common Stock of
the Surviving Corporation.
2.2) Morris Shares. At the Effective Time, each share of Common Stock
of Morris then outstanding shall, by virtue of the Merger and without any
further action on the part of the holder thereof, be converted into and
thereafter shall constitute the right to receive a number of shares of Northern
Common Stock ___________.*
* TO BE COMPLETED FOLLOWING THE CALCULATION OF THE MERGER
CONSIDERATION AS SET FORTH IN THE AGREEMENT AND PLAN OF REORGANIZATION.
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<PAGE> 193
ARTICLES OF MERGER
OF
FIRST FEDERAL HOLDING COMPANY OF MORRIS
INTO
NORTHERN STAR FINANCIAL, INC.
Pursuant to the provisions of Minnesota Statutes Section 302A.615,
Subd. 1, the following Articles of Merger are executed on the date hereinafter
set forth:
FIRST: The names of the corporations which are parties to the merger
are First Federal Holding Company of Morris ("Morris"), and Northern Star
Financial, Inc. ("Northern").
SECOND: The Plan of Merger attached hereto has been duly approved by
each of Morris and Northern pursuant to Section 302A.613 of Minnesota Statutes.
The undersigned swears that the foregoing is true and accurate and that
they have the authority to sign these Articles of Merger on behalf of Morris and
Northern.
Dated: __________________, 1999 FIRST FEDERAL HOLDING COMPANY OF MORRIS
By __________________________________
Its Chief Executive Officer
NORTHERN STAR FINANCIAL, INC.
By __________________________________
Its Chief Executive Officer
<PAGE> 194
EXHIBIT B
AFFILIATE'S LETTER
Northern Star Financial, Inc.
410 Jackson Street
Mankato, MN 56001
Attention: Tom Stienessen
Ladies and Gentlemen:
The undersigned officer and/or director of First Federal Holding Company of
Morris, Inc. (the "Company") has been advised that the undersigned may be deemed
by the Company to be an "affiliate" of the Company, as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act") (such rule, as amended or replaced by any successor rule,
referred to herein as "Rule 145") and for purposes of Accounting Series Releases
130 and 135, as amended, of the Securities and Exchange Commission (the "SEC").
Pursuant to the terms of the Agreement and Plan of Reorganization dated on or
about the date hereof (the "Merger Agreement"), among Northern Star Financial
("Northern") and the Company, the Company will be merged with and into Northern
(the "Merger"). As a result of the Merger, outstanding shares of common stock,
$___ par value per share, of the Company ("Company Common Stock") will be
converted into the right to receive shares of common stock, $.01 par value per
share, of Northern ("Northern Common Stock"), as determined pursuant to the
Merger Agreement.
In order to induce Northern and the Company to enter into the Merger Agreement,
the undersigned (referred to herein as "Affiliate") represents, warrants and
agrees as follows:
1. Affiliate will not directly or indirectly take any action that would
have the effect of jeopardizing the treatment of the Merger as a
"pooling of interests," sell, transfer, pledge, dispose of, or
otherwise reduce Affiliate's risk relative to, any Northern Common
Stock or Company Common Stock during the period commencing 30 days
prior to the effective time of the Merger and ending at such time as
financial results covering at least 30 days of the post-Merger combined
operations of Northern and the Company have been published by Northern,
in the form of a quarterly earnings report, an effective registration
statement filed with the SEC, a report to the SEC on Form 10-K, 10-Q or
8-K, or any other public filing or announcement which includes the
combined results of operations.
2. Affiliate has been advised that the issuance of the Northern Common
Stock, if any, to Affiliate pursuant to the Merger is being registered
with the SEC under the Securities Act and the rules and regulations
promulgated thereunder on a Registration Statement on Form S-4.
However, Affiliate has also been advised that, because Affiliate may be
deemed to be an "affiliate" of the Company (as that term is used in
paragraphs (c) and (d) of Rule 145), any sale, transfer or other
disposition by Affiliate of any Northern Common Stock issued pursuant
to the Merger will, under current law, require either (a) further
registration under the Securities Act of the Northern Common Stock to
be sold,
1
<PAGE> 195
transferred, or otherwise disposed of, (b) compliance with
Rule 145, or (c) the availability of another exemption from such
registration.
3. Affiliate will not offer to sell, sell, or otherwise dispose of any
Northern Common Stock issued pursuant to the Merger except pursuant to
an effective registration statement or in compliance with Rule 145 or
another exemption from the registration requirements of the Securities
Act (the compliance with Rule 145 or the availability of such other
exemption to be established by Affiliate to the reasonable satisfaction
of Northern's counsel).
4. Affiliate consents to the placement of a stop transfer order with the
Company's and Northern's stock transfer agent and registrar, and to the
placement of the following legend on certificates representing the
Company Common Stock and Northern Common Stock issued or to be issued
to Affiliate:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH AN AFFILIATE'S
LETTER FROM THE UNDERSIGNED TO NORTHERN STAR FINANCIAL, INC.
AND PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN
COMPLIANCE WITH RULE 145 OF THE SECURITIES ACT OF 1933 OR
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
5. Affiliate has carefully read this letter and has discussed with counsel
for Affiliate or counsel for the Company, to the extent Affiliate felt
necessary, the requirements of this letter and other applicable
limitations on the Affiliate's ability to sell, transfer, or otherwise
dispose of Company Common Stock and Northern Common Stock.
6. The Company agrees to take all reasonable actions up to the date of the
Merger, including but not limited to the placement of a stop transfer
order with the Company's stock transfer agent and registrar, to ensure
compliance by Affiliate with the provisions of this letter.
7. Execution of this letter should not be considered an admission on the
part of Affiliate that Affiliate is an "affiliate" of the Company as
described in the first paragraph of this letter, nor as a waiver of any
rights that Affiliate may have to object to any claim that Affiliate is
such an affiliate on or after the date of this letter.
8. By Northern's acceptance of this letter, Northern hereby agrees with
Affiliate as follows:
(A) For so long as and to the extent necessary to permit Affiliate
to sell Northern Common Stock pursuant to Rule 145 and, to the
extent applicable, Rule 144 under the Act, and to enable
Affiliate to sell Northern Common Stock pursuant to the
restrictions set forth in paragraph 1 above, Northern shall
(a) use its reasonable efforts to (i) file, on a timely basis,
all reports and data required to be filed with the SEC by it
pursuant to Section 13 of the Securities Exchange Act of
2
<PAGE> 196
1934, as amended (the "1934 Act"), and (ii) furnish to
Affiliate upon request a written statement as to whether
Northern has complied with such reporting requirements during
the 12 months preceding any proposed sale of Northern Common
Stock by Affiliate under Rule 145, and (b) otherwise use its
reasonable efforts to permit such sales pursuant to Rule 145
and Rule 144. Northern hereby represents to Affiliate that it
has filed all reports required to be filed with the SEC under
Section 13 of the 1934 Act during the preceding 12 months.
(B) It is understood and agreed that certificates bearing the
legends set forth in paragraph 4 above will be substituted by
delivery of certificates without such legends if (i) one year
shall have elapsed from the date the undersigned acquired the
Northern Common Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to the
undersigned, (ii) two years shall have elapsed from the date
the undersigned acquired the Northern Common Stock received in
the Merger and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) Northern has received
either an opinion of counsel, which opinion of counsel shall
be reasonably satisfactory to Northern, or a "no action"
letter obtained by the undersigned from the staff of the SEC,
to the effect that the restrictions imposed by Rule 145 under
the Act no longer apply to the undersigned.
Very truly yours,
September ___, 1999
-----------------------------------
(Signature)
-----------------------------------
(Name) (Please Print)
FIRST FEDERAL HOLDING COMPANY
OF MORRIS, INC.
By:
--------------------------------
Its:
---------------------------
3
<PAGE> 197
ACCEPTANCE
Northern Star Financial, Inc. hereby accepts the foregoing Affiliate's
Letter delivered pursuant to Section 4(l) of the Agreement and Plan of
Reorganization dated ___________, 1999, by and among Northern Star Financial,
Inc. and First Federal Holding Company of Morris, Inc.
NORTHERN STAR FINANCIAL, INC.
By:
--------------------------------
Tom Stienessen, President
4
<PAGE> 198
ANNEX B
MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or rights
to purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting
rights; except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a constituent organization, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to vote on the plan; or
<PAGE> 199
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
<PAGE> 200
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
<PAGE> 201
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account
<PAGE> 202
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which the
fair value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
<PAGE> 203
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires Northern
Star Financial, Inc. (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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
2 Agreement and Plan of Reorganization, dated September 30, 1999, by and
among Northern Star Financial, Inc. and First Federal Holding Company
of Morris, Inc., including the Exhibits thereto. (The Agreement and
Plan of Reorganization and Exhibits thereto are furnished as Annex A
to the Proxy Statement/Prospectus forming a part of this Registration
Statement.) Upon the request of the Commission, Northern Star agrees
to furnish supplementally to the Commission a copy of any disclosure
schedules to the Agreement and Plan of Reorganization.
5 Form of Opinion and Consent of Fredrikson & Byron, P.A. regarding
validity of shares.
8.1 Opinion and Consent of Lindquist & Vennum P.L.L.P. regarding certain
tax matters (to be filed by amendment).
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
23.2 Consent of Lindquist & Vennum P.L.L.P. regarding certain tax matters
(included in Exhibit 8.1).
23.3 Consent of Bertram Cooper & Co., LLP, independent accountants for
Northern Star Financial, Inc.
23.4 Consent of Michael L. Anderson & Associates, PLLC, independent
auditors for First Federal Holding Company of Morris, Inc.
24 Power of Attorney.
99.1 Form of Proxy to be used by Northern Star Financial, Inc.
shareholders.
99.2 Form of Proxy to be used by First Federal Holding Company of Morris,
Inc. shareholders.
II-1
<PAGE> 204
(b) Financial Statement Schedules.
Not applicable.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(b) (i) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(ii) The registrant undertakes that every prospectus [a] that is
filed pursuant to paragraph (b)(i) immediately preceding, or [b] that purports
to meet the requirements of Section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) 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 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 whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 205
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on May 11, 2000.
NORTHERN STAR FINANCIAL, INC.
By /s/ Thomas P. Stienessen
-----------------------------------------
Thomas P. Stienessen, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on May 11, 2000 by the following persons
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Thomas P. Stienessen President, Chief Executive Officer and Director
- ------------------------------------ (principal executive officer)
Thomas P. Stienessen
/s/ Frank L. Gazzola Chief Financial Officer, Treasurer, Secretary and
- ------------------------------------ Director
Frank L. Gazzola (principal financial and accounting officer)
/s/ Robert H. Dittrich
- ------------------------------------ Director
Robert H. Dittrich
/s/ Dean M. Doyscher
- ------------------------------------ Director
Dean M. Doyscher
- ------------------------------------ Director
Steven A. Loehr
/s/ Michael P. Reynolds
- ------------------------------------ Director
Michael P. Reynolds
- ------------------------------------ Director
Thomas J. Reynolds
</TABLE>
II-3
<PAGE> 206
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
EXHIBIT INDEX
TO
FORM S-4 REGISTRATION STATEMENT
-----------
- --------------------------------------------------------------------------------
NORTHERN STAR FINANCIAL, INC.
- --------------------------------------------------------------------------------
EXHIBIT DESCRIPTION
- ------- -----------
2 Agreement and Plan of Reorganization, dated September 30, 1999, by and
among Northern Star Financial, Inc. and First Federal Holding Company
of Morris, Inc., including the Exhibits thereto. (The Agreement and
Plan of Reorganization and Exhibits thereto are furnished as Annex A
to the Proxy Statement/Prospectus forming a part of this Registration
Statement.) Upon the request of the Commission, Northern Star agrees
to furnish supplementally to the Commission a copy of any disclosure
schedules to the Agreement and Plan of Reorganization.
5 Form of Opinion and Consent of Fredrikson & Byron, P.A. regarding
validity of shares.
8.1 Opinion and Consent of Lindquist & Vennum P.L.L.P. regarding certain
tax matters (to be filed by amendment).
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5).
23.2 Consent of Lindquist & Vennum P.L.L.P. regarding certain tax matters
(included in Exhibit 8.1).
23.3 Consent of Bertram Cooper & Co., LLP, independent accountants for
Northern Star Financial, Inc.
23.4 Consent of Michael L. Anderson & Associates, PLLC, independent
auditors for First Federal Holding Company of Morris, Inc.
24 Power of Attorney.
99.1 Form of Proxy to be used by Northern Star Financial, Inc.
shareholders.
99.2 Form of Proxy to be used by First Federal Holding Company of Morris,
Inc. shareholders.
II-4
<PAGE> 1
Exhibit 5
FREDRIKSON & BYRON, P.A.
Attorneys at Law
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402-3397
(612) 347-7000
FAX: (612) 347-7077
May , 2000
Northern Star Financial, Inc.
1650 Madison Avenue
Mankato, Minnesota 56001
Re: Registration Statement on Form S-4
Ladies/Gentlemen:
We are acting as counsel for Northern Star Financial, Inc. (the
"Company"), a Minnesota corporation, in connection with the registration by the
Company of shares of the Company's Common Stock, par value $.01
(the "Shares"), pursuant to the Company's Registration Statement on Form S-4
being filed with the Securities and Exchange Commission (the "Registration
Statement"). The Shares are to be issued in connection with the merger of First
Federal Holding Company of Morris, Inc. ("First Federal") with and into the
Company, pursuant to the Agreement and Plan of Reorganization dated as of
September 30, 1999 by and between the Company and First Federal (the "Merger
Agreement").
In connection with rendering this opinion, we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, agreements and other instruments, certificates of
officers, certificates of public officials and other documents as we have deemed
necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination, we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of all natural persons and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Based on, and subject to, the foregoing, it is our opinion that:
1. The Company has the corporate authority to issue the Shares in the
manner and under the terms set forth in the Registration Statement.
2. The Shares have been duly authorized and, when issued and
delivered to holders of First Federal common stock in accordance with the Merger
Agreement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement, to its use as a part of the Registration Statement and
to the use of our name under the caption "Legal Matters" in the Proxy
Statement/Prospectus constituting a part of the Registration Statement.
Very truly yours,
<PAGE> 1
Exhibit 23.3
CONSENT OF BERTRAM COOPER & CO., LLP,
INDEPENDENT ACCOUNTANTS
We consent to the use of our report dated August 5, 1999, relating to the
consolidated statements of financial condition of Northern Star Financial, Inc.
and Subsidiary as of June 30, 1999 and 1998 and the related consolidated
statements of operation, changes in shareholders' equity, and cash flows for the
year ended June 30, 1999 and for the period from inception, January 22, 1998, to
June 30, 1998 and to the use of our name under the caption of "Experts" in the
Form S-4 registration statement and prospectus of Northern Star Financial, Inc.
/s/ Bertram Cooper & Co., LLP
Bertram Cooper & Co., LLP
Waseca, Minnesota
May 11, 2000
<PAGE> 1
Exhibit 23.4
CONSENT OF MICHAEL L. ANDERSON & ASSOCIATES, INC.
INDEPENDENT ACCOUNTANTS
We consent to the use of our report dated October 21, 1999, relating to the
consolidated balance sheets of First Federal Holding Company of Morris, inc. and
subsidiaries as of September 30, 1999 and 1998 and the related consolidated
statements of operation, changes in stockholders' equity, and cash flows for the
years then ended and to the use of our name under the caption of "Experts" in
the Form S-4 registration statement and prospectus of Northern Star Financial,
Inc.
/s/ Michael L. Anderson & Associates
Michael L. Anderson & Associates, PLLC
May 11, 2000
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each of the undersigned directors and
officers of Northern Star Financial, Inc., a Minnesota corporation ("Northern
Star"), hereby constitutes and appoints THOMAS P. STIENESSEN and FRANK L.
GAZZOLA, or either of them, their true and lawful attorneys-in-fact and agents,
each with full power and authority to act as such without the other, with full
power of substitution and resubstitution, for the undersigned and in the
undersigned's name, place and stead, in any and all capacities, to do any and
all acts and things and to execute any and all instruments that any of said
attorneys and agents may deem necessary or advisable in connection with Northern
Star's acquisition of First Federal Holding Company of Morris, Inc., to enable
Northern Star to comply with the Securities Act of 1933, as amended, with any
regulations, rules or requirements of the Securities and Exchange Commission
thereunder, and with any state Blue Sky laws or regulations in connection
therewith, including specifically, but without limiting the generality of the
foregoing, power and authority to sign the names of the undersigned to the
Registration Statement on Form S-4, to any amendment to such Registration
Statement, and to any other registration statement, prospectus, instrument or
document filed with said Commission as a part of or in connection with such
Registration Statement or any amendment thereto, including but not limited to
registration statements on Form S-8; and the undersigned hereby ratify and
confirm all that said attorneys and agents, or their substitutes or
resubstitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents
effective as of the 9th day of May, 2000.
/s/ Frank L. Gazzola
- ---------------------------------
Frank L. Gazzola
/s/ Robert H. Dittrich
- ---------------------------------
Robert H. Dittrich
/s/ Dean M. Doyscher
- ---------------------------------
Dean M. Doyscher
- ---------------------------------
Steven A. Loehr
/s/ Michael P. Reynolds
- ---------------------------------
Michael P. Reynolds
- ---------------------------------
Thomas J. Reynolds
<PAGE> 1
Exhibit 99.1
NORTHERN STAR FINANCIAL, INC.
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned shareholder hereby appoints Thomas P. Stienessen and
Frank L. Gazzola and each of them as proxies, each with full power of
substitution, to vote as designated below all shares of common stock of Northern
Star Financial, Inc. held of record as of , 2000, which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders to be held on , 2000, at ,
local time, at the Company's corporate headquarters, located at 1650 Madison
Avenue, Mankato, Minnesota 56001, and at any adjournment or adjournments
thereof, upon the following matters:
Proposal to approve the Plan of Merger and the Agreement and
Plan of Reorganization providing for the merger of First Federal Holding Company
of Morris, Inc. into Northern Star Financial, Inc., with Northern Star
Financial, Inc. to be the surviving corporation, copies of which Plan of Merger
and Agreement and Plan of Reorganization are attached as Annex A to the Proxy
Statement/Prospectus for the Special Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed and dated on the other side)
This proxy will be voted as specified by the shareholder, but
if no choice is specified, this proxy will be voted FOR approval of the Plan of
Merger and Agreement and Plan of Reorganization. If this proxy is not returned,
the effect will be a vote against the Merger. The persons acting as proxies will
have discretion to vote on any other matters properly presented for
consideration at the Special Meeting or any adjournment or adjournments thereof
in accordance with their best judgment.
IMPORTANT: Please sign exactly as name or names appear on this
Proxy. Joint owners should each sign personally. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title as
such. When signing as a corporation or a partnership, please sign in the name of
the entity by an authorized person.
Dated:
-------------------------
-----------------------------------------------
(Please sign name exactly as it appears hereon)
-----------------------------------------------
(Signature of joint owner, if any)
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY
IN THE ENCLOSED PROXY RETURN ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF AN ENVELOPE IS NOT ENCLOSED OR HAS
BEEN MISPLACED, PLEASE RETURN THIS COMPLETED
PROXY TO NORTHERN STAR FINANCIAL, INC., 1650
MADISON AVENUE, MANKATO, MINNESOTA 56001,
ATTENTION: THOMAS P. STIENESSEN.
<PAGE> 1
Exhibit 99.2
FIRST FEDERAL HOLDING COMPANY OF MORRIS, INC.
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned shareholder hereby appoints Allan R. Thoren and Neil
Schmidgall and each of them as proxies, each with full power of substitution, to
vote as designated below all shares of common stock of First Federal Holding
Company of Morris, Inc. held of record as of , 2000, which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders to be held on , 2000, at ,
local time, at the Company's corporate headquarters, located at 532 Atlantic
Avenue, Morris, Minnesota 56267, and at any adjournment or adjournments thereof,
upon the following matters:
Proposal to approve the Plan of Merger and the Agreement and
Plan of Reorganization providing for the merger of First Federal Holding Company
of Morris, Inc. into Northern Star Financial, Inc., with Northern Star
Financial, Inc. to be the surviving corporation, copies of which Plan of Merger
and Agreement and Plan of Reorganization are attached as Annex A to the Proxy
Statement/Prospectus for the Special Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed and dated on the other side)
This proxy will be voted as specified by the shareholder, but
if no choice is specified, this proxy will be voted FOR approval of the Plan of
Merger and Agreement and Plan of Reorganization. If this proxy is not returned,
the effect will be a vote against the Merger. The persons acting as proxies will
have discretion to vote on any other matters properly presented for
consideration at the Special Meeting or any adjournment or adjournments thereof
in accordance with their best judgment.
IMPORTANT: Please sign exactly as name or names appear on this
Proxy. Joint owners should each sign personally. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title as
such. When signing as a corporation or a partnership, please sign in the name of
the entity by an authorized person.
Dated:
--------------------------
-----------------------------------------------
(Please sign name exactly as it appears hereon)
-----------------------------------------------
(Signature of joint owner, if any)
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY
IN THE ENCLOSED PROXY RETURN ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF AN ENVELOPE IS NOT ENCLOSED OR HAS
BEEN MISPLACED, PLEASE RETURN THIS COMPLETED
PROXY TO FIRST FEDERAL HOLDING COMPANY OF
MORRIS, INC., 532 ATLANTIC AVENUE, P.O. BOX
656, MORRIS, MINNESOTA 56267, ATTENTION: ALLAN
R. THOREN.
