As filed with the Securities and Exchange Commission on September __, 1998
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
First Star Bancorp, Inc.
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(Exact name of Small Business Issuer as specified in charter)
Pennsylvania 6035 23-2753108
- ---------------------------- ----------------- ----------------
(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
418 West Broad Street, Bethlehem, Pennsylvania 18018
(610) 691-2233
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(Address, including zip code, and telephone number, including area code,
of principal executive offices and principal place of business)
Mr. Joseph T. Svetik
President
First Star Bancorp, Inc.
418 West Broad Street, Bethlehem, Pennsylvania 18018
(610) 691-2233
---------------------------------------------------------
(Name, address and telephone number of agent for service)
Please send copies of all communications to:
John J. Spidi, Esq.
Gregory A. Gehlmann, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration 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(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
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Title of Proposed Proposed Amount
Each Class of Shares Maximum Maximum Aggregate of
Securities to be Offering Price Offering Registration
To Be Registered Registered Per Unit Price(1) Fee
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Common Stock,
$1.00 Par Value 68,594 $48.20 $3,306,250 $975.35
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(1) Estimated solely for purposes of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
Up to 53,688 Shares of Common Stock
(Anticipated Maximum)
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
================================================================================
Nesquehoning Savings Bank is converting from the mutual to the stock
form of organization. As part of the conversion, Nesquehoning Savings Bank will,
pursuant to a merger conversion agreement, merge with and into First Star
Savings Bank, a wholly owned subsidiary of First Star Bancorp, Inc. Furthermore,
in connection with the conversion, the common stock of First Star Bancorp, Inc.
is being offered for sale to the public in accordance with a plan of conversion.
The merger conversion agreement and the plan of conversion must be approved by
the Pennsylvania Department of Banking and by a majority of the votes eligible
to be cast by qualifying depositors of Nesquehoning Savings Bank. Furthermore,
the Federal Deposit Insurance Corporation must not object to the merger and
conversion. No common stock will be sold if Nesquehoning Savings Bank does not
receive these approvals or if First Star Bancorp, Inc. does not receive orders
for at least the minimum number of shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted Nesquehoning Savings Bank to be between $2,125,000 and $2,875,000
which establishes the number of shares to be offered. Based on these estimates,
we are making the following offering of shares of common stock:
<TABLE>
<CAPTION>
<S> <C> <C>
o Estimated Price Per Share: $48.20
o Number of Shares
Minimum/Midpoint/Maximum: 39,683 to 46,685 to 53,688
o Underwriting Commissions and Other Expenses
Minimum/Midpoint/Maximum: $350,000
o Net Proceeds to First Star Bancorp, Inc.
Minimum/Midpoint/Maximum: $1,775,000 to $2,150,000 to $2,525,000
o Net Proceeds per Share $44.73 to $46.05 to $47.03
Minimum/Maximum/Maximum:
</TABLE>
Please refer to "Risk Factors" beginning on page 10 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
None of the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Pennsylvania Department of Banking, or any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
For information on how to subscribe,
call the Stock Information Center at (610) ________
-------------------------
______________, 1998
<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering...........................
Summary..................................................................
Selected Financial and Other Data........................................
Recent Developments .....................................................
Risk Factors.............................................................
Proposed Purchases by Trustees and Officers of Nesquehoning Savings Bank.
Use of Proceeds..........................................................
Dividends................................................................
Market for the Common Stock..............................................
Capitalization...........................................................
Historical and Pro Forma Regulatory Capital Compliance...................
Pro Forma Data...........................................................
The Merger Conversion....................................................
Management's Discussion and Analysis ....................................
Business of First Star Bancorp, Inc......................................
Business of First Star Savings Bank......................................
Regulation...............................................................
Principal Security Holders...............................................
Management of First Star Bancorp, Inc....................................
Restrictions on Acquisition of First Star Bancorp, Inc...................
Description of Capital Stock.............................................
Indemnification of Officers and Directors................................
Legal and Tax Matters....................................................
Experts..................................................................
Registration Requirements................................................
Where You Can Find Additional Information................................
Index to Consolidated Financial Statements...............................
This document contains forward-looking statements which involve risks
and uncertainties. First Star Bancorp, Inc.'s actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 10 of this document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What are the Nesquehoning Depositors being asked to vote on?
A: Nesquehoning Depositors are being asked to vote upon the Merger Conversion.
Q: What is the Merger Conversion?
A: As explained below, the First Star Directors and the Nesquehoning Trustees
have determined that it is in the best interests of First Star and
Nesquehoning for Nesquehoning to merge with and into First Star. However,
in order for First Star and Nesquehoning to merge, Nesquehoning must first
convert from a mutual to a stock form of ownership. Concurrently with this
conversion, Nesquehoning will merge with and into First Star. After the
Merger Conversion, Nesquehoning will operate as the downtown Nesquehoning
office of First Star.
Q: Why should I vote for the Merger Conversion?
A: Nesquehoning Depositors should vote for the Merger Conversion because, in
today's highly competitive banking environment, the parties believe a
small, single branch savings bank simply cannot compete effectively (or
possibly even survive) with larger institutions with greater capital
resources and depth of management and offering more diversified financial
products and services. Among the alternatives considered by the trustees of
Nesquehoning was a standard mutual to stock conversion. However, a standard
mutual to stock conversion would not significantly increase Nesquehoning's
ability to compete or to survive. A successful conversion would result in
Nesquehoning's being overcapitalized, without the resources necessary to
expand the range of its financial products and utilize its additional
capital. An unsuccessful conversion would result in a significant and
perhaps crippling charge to earnings. After considering all the
alternatives to the Merger Conversion, the Trustees of Nesquehoning decided
that the most desirable alternative for Nesquehoning was to identify and
pursue a combination with a well capitalized, conservatively managed
community savings bank that shared Nesquehoning's operating philosophy and
commitment to its community. The Trustees believe that First Star is such a
bank. First Star offers a great variety of financial products and services
as well as the convenience of a bank with six offices in the Pennsylvania
counties of Lehigh and Northhampton. The Trustees believe that, in the
event the Merger Conversion is not consummated, it will be difficult, if
not impossible, to continue to successfully run a small, single branch
savings bank.
In short, the Board of Trustees of Nesquehoning and the Directors of First
Star believe that the Nesquehoning Depositors should vote for the Merger
Conversion because it is in the best interests of both institutions, First
Star's shareholders, Nesquehoning's depositors and the communities which
they serve.
Q: What effect will the Merger Conversion have on my existing accounts at
Nesquehoning?
A: The Merger Conversion will have no effect on the balance, maturity or
withdrawability of your existing deposits at Nesquehoning or your
obligations as a borrow from Nesquehoning. Your deposits will become
deposits of First Star Savings Bank and will continue to be insured by the
FDIC to the maximum limits available under federal law.
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1
<PAGE>
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Q: If the Merger Conversion is approved, what am I entitled to as a
Nesquehoning Depositor?
A: In addition to the full range of services and products that will be
available to you as a First Star Savings Bank depositor, eligible
Nesquehoning Depositors will be entitled to subscribe for shares of First
Star Common Stock at a 10% discount to the market price in the Subscription
Offering.
Q: What happens if the Merger Conversion is not approved?
A: Nesquehoning would not convert to a stock form of ownership and the merger
would not take place. Because the factors that led the Board of Trustees to
seek an appropriate merger partner have not changed, the Board of Trustees
would necessarily reconsider all alternatives.
Q: How many votes are required for the Nesquehoning Depositors to approve the
Merger Conversion?
A: A majority of the outstanding votes eligible to be cast by Nesquehoning
Depositors is required to approve the Merger Conversion. Each Nesquehoning
Depositor who is a depositor will receive one vote and one additional vote
for each $100 in his or her Nesquehoning accounts, up to a maximum of 1,000
votes.
Q: What happens if I do not vote?
A: Not voting will have the same effect as voting against the Merger
Conversion.
Q: Is First Star's Common Stock listed on a stock exchange?
A: No. First Star's Common Stock has always traded in privately negotiated
transactions.
Q: What do I need to do now?
A: First, plan to attend the Special Meeting or complete and mail your proxy
approving the Merger Conversion. Then, when you receive the information
relating to the Offerings, if you wish to take advantage of the opportunity
to purchase shares of First Star's Common Stock, complete your stock order
form and submit it together with the applicable purchase price.
Q: What changes will I notice after the Merger Conversion?
A: In some respects, there will be little change. Like, Nesquehoning, First
Star emphasizes personal, individualized service and a high degree of
personal contact. First Star's management and employees are extensively
involved in a wide variety of civic, charitable and community affairs in
the Eastern Pennsylvania area.
In some respects, everything will change. First Star intends to increase
the types of services and products available. For example, Nesquehoning's
hours of operation will be expanded and you will have access to Automatic
Teller Machines and possibly safe deposit boxes. Personal and business
checking accounts and commercial and small business loans will be
available. In addition, First Star intends to renovate and update
Nesquehoning's office to bring it in line with First Star's other offices.
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2
<PAGE>
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Q: If I have any questions about the Merger Conversion, what should I do?
A: In order to make an informed decision, you should read this entire
document. In addition, if you have any questions you should contact the
Stock Information Center at (610) ________.
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3
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the consolidated financial statements
of First Star Bancorp, Inc. References in this document to "we", "us", and "our"
refer to First Star Bancorp, Inc. In certain instances where appropriate, "we",
"us", or "our" refers collectively to First Star Bancorp, Inc. and First Star
Savings Bank. References in this document to the "Company" refer to First Star
Bancorp, Inc. and references to "Nesquehoning" refer to Nesquehoning Savings
Bank. Furthermore, references in this document to the "Merger Conversion" refer
to the entire proposed transaction.
The Companies
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
First Star Bancorp, Inc. a bank holding company, organized under the
corporation laws of Pennsylvania in March, 1993. Its principal activity is
holding all of the stock of First Star Savings Bank. At June 30, 1998, we had
total assets of $316.1 million, deposits of $145.1 million, and total
stockholders' equity of $15.1 million.
First Star Savings Bank
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
First Star Savings Bank is a Pennsylvania-chartered stock savings bank
which was established in 1969 as a result of the merger of two
Pennsylvania-chartered mutual savings associations, one of which traces its
origins to 1893. First Star's principal business consists of attracting deposits
from the general public and originating loans secured by residential properties.
First Star's business is conducted through its main office located in Bethlehem,
Pennsylvania and five branch offices. See pages ___ to ___.
The Stock Offering
We are offering between 39,683 and 53,688 shares of common stock at
$48.20 per share. Any increase over 53,688 shares would require the approval of
the Pennsylvania Department of Banking (the "Department") and Non-Objection from
the Federal Deposit Insurance Corporation ("FDIC").
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4
<PAGE>
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Stock Purchases
The shares of common stock will be offered on the basis of priorities.
If you are a depositor or borrower member, you will receive subscription rights
to purchase the shares. The shares will be offered first to persons with
subscription rights in a subscription offering, and any remaining shares may be
offered in a community offering or syndicated community offering. See pages ___
to ___.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated market value of the common stock by Feldman Financial Advisors, Inc.
an appraisal firm experienced in appraisals of savings institutions. Feldman
Financial Advisors, Inc. has estimated that in its opinion as of September ____,
1998, the estimated valuation range of the common stock was between $2,125,000
and $2,875,000 (with a midpoint of $2,500,000). The estimated valuation range of
the shares is our estimated market value after giving effect to the sale of
shares in this offering.
The appraisal was based both upon Nesquehoning's financial condition
and operations and upon the effect of the additional capital we will raise in
this offering. The $48.20 price per share was determined by our board of
directors. The independent appraisal will be updated before we complete the
Merger Conversion. If the estimated valuation range of the common stock is
either below $2,125,000 or above $2,875,000, you will be notified and will have
the opportunity to modify or cancel your order.
See pages __ to __.
Termination of the Offering
The subscription offering will terminate at 12:00 noon, Bethlehem,
Pennsylvania Time, on December __, 1998. Any community offering or syndicated
community offering may terminate at any time without notice, but no later than
______________, 2000, without approval by the Department and non-objection from
the FDIC.
Benefits to Management from the Offering
Nesquehoning's employees will participate in the offering through
individual purchases. We also intend to implement a stock option plan, which may
benefit the President and other officers and directors of Nesquehoning. The
stock option plan may not be adopted until after the Merger Conversion and is
subject to stockholder approval and compliance with Department and FDIC
regulations.
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5
<PAGE>
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Use of the Proceeds Raised from the Sale of Common Stock
The net proceeds the Company receives from the sale of its common stock
will initially be placed in short-term investments. These funds may later be
used for stock repurchases or for the payment of dividends.
Dividends
First Star Bancorp, Inc. currently does not pay cash dividends on its common
stock. We may however, at a later time reexamine our dividend policy. See page
__.
Market for the Common Stock
Our common stock is not traded on any exchange and there is no active
or liquid trading market. Investors should have a long-term investment intent.
Persons purchasing shares may not be able to sell their shares when they desire
or sell them at a price equal to or above the price sold in the Merger
Conversion. See page ____.
Important Risks in Owning First Star Bancorp, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages ___ to ___ of this document.
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6
<PAGE>
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We are providing the following summary consolidated financial
information about us for your benefit. This information is derived from our
audited consolidated financial statements. The following information is only a
summary and you should read it in conjunction with our consolidated financial
statements and notes beginning on page F-1.
Selected Financial Data
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total Amount of:
Assets............................................ $316,102 $270,899 $181,582
Loans receivable, net(1).......................... 195,124 149,476 144,299
Mortgage-backed securities........................ 76,035 74,736 19,417
Investment securities............................. 27,898 28,535 5,279
Cash and cash equivalents......................... 2,242 3,310 3,680
Deposits.......................................... 145,096 118,662 114,266
FHLB advances..................................... 144,485 129,400 50,571
Subordinated debentures........................... 5,480 5,480 1,480
Stockholders' equity.............................. 15,113 12,015 10,570
Number of:
Real estate loans outstanding..................... 2,928 2,812 2,738
Deposit accounts.................................. 15,922 14,394 14,102
Offices........................................... 6 6 5
Tangible book value per share, fully
diluted(2)........................................ 26.79 22.93 21.08
</TABLE>
- -----------------------------
(1) Does not include loans available for sale of $1,388,000, $1,468,000 and
$1,654,000, respectively.
(2) Adjusted for two 20% stock dividends declared during fiscal year ended June
30, 1998.
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7
<PAGE>
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Summary of Operations
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income................................................. $21,240 $16,193 $13,379
Interest expense................................................ 14,610 10,406 8,907
------ ------ -----
Net interest income........................................... 6,630 5,787 4,472
Provision for loan losses....................................... 385 220 244
------ ------ -----
Net interest income after provision for loan losses........... 6,245 5,567 4,228
Non-interest income............................................. 1,759 720 548
Non-interest expenses........................................... 3,581 4,036(1) 2,848
------ ------ -----
Income before income taxes...................................... 4,423 2,251 1,928
------ ------ ------
Provision for income taxes...................................... 1,607 741 658
------ ------ ------
Net income.................................................... 2,816 1,510 1,270
------ ------ ------
Less Preferred dividends........................................ (45) (44) (45)
------ ------ ------
Net income applicable to common stockholder..................... $ 2,771 $ 1,465 $ 1,225
====== ====== ======
Earnings per common share....................................... $ 5.04 $ 3.55 $ 3.02
Earnings per common share -- assuming full dilution............. $ 4.90 $ 3.44 $ 2.94
</TABLE>
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(1) Includes a non-recurring expense of $745,000 for the year ended June 30,
1997 for a one-time deposit insurance premium to recapitalize the SAIF.
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8
<PAGE>
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Key Operating Ratios
<TABLE>
<CAPTION>
At or For the Year Ended
June 30,
-------------------------------------------------
1998 1997(2) 1996
-------------- -------------- ---------------
Return on average assets (net income
<S> <C> <C> <C>
divided by average total assets)............................ .96% .67% .69%
Return on average equity (net income
divided by average equity).................................. 20.76 13.37 12.91
Average stockholders' equity to average
assets ratio................................................ 4.62 4.99 5.35
Equity to assets at period end................................ 4.78 4.44 5.82
Net interest rate spread...................................... 2.09 2.33 2.57
Net yield on average interest-earnings assets(1).............. 7.59 7.71 7.72
Non-performing loans to total assets.......................... .98 1.41 2.24
Average interest-earning assets to average
interest-bearing liabilities................................ 105.28 104.95 104.81
Net interest income after provision for loan
losses, to total other expenses............................. 174.39 137.93 148.46
Non-performing loans to total loans........................... 1.58 2.56 2.81
</TABLE>
- ----------------------
(1) Net interest income as a percentage of average interest-earning assets.
(2) For 1997, return on total assets, return on total equity and the ratio
of noninterest expense to average total assets, excluding the effect of
the special assessment to recapitalize the SAIF (see footnote 1 on page
7), were .88%, 17.21 and 1.45%, respectively.
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9
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between what we earn on our
interest-earning assets (such as mortgage loans and investment securities) and
what we pay on our interest-bearing liabilities (such as deposits and
borrowings). Given the current interest rate environment, most of our mortgage
loans have rates of interest which are fixed and are generally originated with
terms of up to 30 years, while our deposit accounts have significantly shorter
terms to maturity. Fixed-rate loans with terms of over 15 years are sold in the
secondary market. Some of our interest-earning assets have fixed-rates of
interest and have longer effective maturities than our interest-bearing
liabilities, which results in the yield on our interest-earning assets generally
adjusting more slowly to changes in interest rates than the cost of our
interest-bearing liabilities. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates. In
addition, rising interest rates may result in a lack of customer demand for
loans, which would adversely affect our earnings. See "Management's Discussion
and Analysis -- Asset/Liability Management."
Changes in interest rates can also affect the average life of loans and
mortgage-backed securities. Historically a reduction in interest rates has
resulted in increased prepayments of loans and mortgage-backed securities, as
borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Lack of Active Market for Common Stock
The Company's common stock is not traded on any exchange, and there is no
established public trading market. An active trading market may not develop or
be maintained. If an active market does not develop, you may not be able to sell
your shares promptly or at a price equal to or above the price you paid for
them. See "Market for the Common Stock."
Extensive Governmental Regulation of the Financial Institution Industry
We are subject to extensive regulation by the FDIC and are periodically
examined by the FDIC to test compliance with various regulatory requirements.
Such supervision and regulation is intended primarily for the protection of
depositors and the deposit insurance fund, and not for the maximization of
shareholder value. Our lending and savings activities are also subject to
various "consumer protection" laws that impose significant liability for
noncompliance, whether intentional or not. Accordingly, the operations and
profitability of financial institutions and their holding companies are
significantly affected by legislation and the policies of the various federal
banking agencies. Since 1989, numerous legislation has been enacted that imposes
increased regulatory restrictions and obligations on the operations of financial
institutions and mandates the development of regulations designed to empower
regulators to take prompt corrective action with respect to institutions that
fall below certain capital standards.
10
<PAGE>
The Possible Decline in the Market for Common Stocks After the Offering
Because the Adjusted Price Per Share may be less than the market price
of our Common Stock on the date the Merger Conversion is completed, purchasers
may be inclined to immediately sell their shares of stock purchased in the
Merger Conversion, purchased at the discounted price, in order to attempt to
realize any such profit. In addition, it is possible that the receipt, exercise,
or lapse of subscription rights may result in tax liability for certain Eligible
Account Holders. In such case, Eligible Account Holders may also be inclined to
sell Common Stock to realize sufficient cash to pay the tax liability resulting
therefrom. Any such sales, depending on the volume and timing, could cause the
market price of Common Stock to decline. You should consider these possibilities
in determining whether to purchase our stock and, the timing of any sale of such
stock. See "Market Information" and the Merger Conversion--Stock Pricing and
Number of Shares to be Issued," "--The Independent Valuation" and "--Certain
Federal Income Tax Consequences."
Inability to Resell the Common Stock Until the Issuance and Receipt of
Certificates
Except for shares issued to a person who is deemed an affiliate of
Nesquehoning Savings Bank or the Company for purposes of the federal securities
laws, the Common Stock purchased in the Merger Conversion will be freely
transferable under the federal securities laws. However, until certificates for
Common Stock are delivered to purchasers, purchasers may not be able to sell the
shares of Common Stock for which they subscribe. Accordingly, during such period
subscribers will bear the risk of any decline in the market price in the Common
Stock. We intend to mail the certificates representing Common Stock in the
Merger Conversion promptly following completion of the Merger Conversion. See
"The Merger Conversion--Procedure for Purchasing Shares in Subscription and
Community Offering."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Company's articles of incorporation and bylaws, the
general corporation code of Pennsylvania, and certain federal regulations may
make it difficult for someone to pursue a tender offer, change in control or
takeover attempt which is opposed by our management and board of directors.
These provisions include: restrictions on the acquisition of the Company's
equity securities and limitations on voting rights; the classification of the
terms of the members of the board of directors; certain provisions relating to
meetings of stockholders; denial of cumulative voting to stockholders in the
election of directors; the ability to issue additional shares of preferred stock
and common stock without shareholder approval; and supermajority provisions for
the approval of certain business combinations. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current board of
directors or management of the Company more difficult. In addition, the effect
of these provisions could be to limit the trading price potential of our stock.
See "Restrictions on Acquisition of First Star Bancorp, Inc" and "--Voting
Control by Directors and Officers."
Voting Control by Directors and Officers
Based upon the midpoint of the estimated valuation range, officers and
trustees of Nesquehoning intend to purchase approximately ____% of the common
stock offered in the Merger Conversion. These purchases together with common
stock and common stock equivalents currently owned by our officers
11
<PAGE>
and directors (341,872 shares), as well as the potential acquisition of common
stock through the stock option plan and our employee stock ownership plan,
together with the votes of a few supporters, could make it difficult for a
stockholder to obtain majority support for stockholder proposals which are
opposed by our management and board of directors. In addition, the voting of
those shares could block the approval of transactions (i.e., business
combinations and amendments to our articles of incorporation and bylaws)
requiring the approval of 66 2/3% of the stockholders under the Company's
articles of incorporation. See "Proposed Purchases by Directors and Officers of
Nesquehoning Savings Bank," "Management of First Star Bancorp, Inc. -- Executive
Compensation," "Description of Capital Stock," and "Restrictions on Acquisition
of First Star Bancorp, Inc."
Possible Dilutive Effect of Stock Options
Upon completion of the Merger Conversion, shareholders will be asked to
approve the stock option plan. If approved, we will issue options to purchase
stock to Nesquehoning officers and directors through this plan. If the shares
for the stock options are issued from our authorized but unissued stock, your
voting interests may be diluted by up to approximately _____% and the trading
price of our stock may be potentially limited. See "Pro Forma Data," "Management
of First Star Bancorp, Inc. -- Proposed Future Stock Benefit Plans."
Possible Year 2000 Computer Problems
A great deal of information has been disseminated about the widespread
computer problems that may arise in the year 2000. Computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Company. Data
processing is also essential to most other financial institutions and many other
companies.
Most of our material data processing that could be affected by this
problem is provided by a third party service bureau. The service bureau used by
First Star has advised us that it expects to resolve this potential problem by
the third quarter of 1998, and to begin testing the system in the fourth
quarter. If by the end of this year it appears that our primary data processing
service bureau will be unable to resolve this problem in a timely manner, then
we will identify a secondary data processing service provider to complete the
task. If we are unable to do this, we will identify those steps necessary to
minimize the negative impact the computer problems could have on us. If we are
unable to resolve this potential problem in time, we will likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial condition
and results of operation of First Star. See "Management's Discussion and
Analysis -- Year 2000 Issues."
Possible Delay in Completing the Offering
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time that will be required to complete the sale of shares being offered in the
conversion following the meeting of our members at which the Plan is being
submitted for approval. If delays are experienced, significant changes may occur
in our estimated pro forma market value upon conversion together with
corresponding changes in the offering price and the
12
<PAGE>
net proceeds to be realized by us from the sale of the shares. In the event the
conversion is terminated, we will charge all conversion expenses against current
income and any funds collected by us in the offering will be promptly returned,
with interest, to each potential investor.
PROPOSED PURCHASES BY TRUSTEES AND OFFICERS
OF NESQUEHONING SAVINGS BANK
The following table sets forth the approximate purchases of common
stock by each trustee and executive officer and their associates in the Merger
Conversion. Shares purchased by officers and trustees in the conversion may not
be sold for at least one year. The table assumes that 46,685 shares (the
midpoint of the estimated valuation range) of the common stock will be sold at
$_____ per share and that sufficient shares will be available to satisfy
subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Sold(1)
---- -------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Joseph F. Arieta Trustee
William P. Gardiner Trustee
Martin S. Kovich, Jr. Trustee
Francis X. Koomar Trustee, President and
Chairman of the Board
Stephen P. Koomar Vice President,
Secretary and Managing
Officer
---------- ---------- ----------
$ %
========== ========== ==========
</TABLE>
USE OF PROCEEDS
Based on the Appraised Value of $2,500,000 (the midpoint of the
Valuation Range) and a Subscription Price of $48.20 per share, the Company
estimates it will receive $2,150,000 in net proceeds from the sale of the
Conversion Stock offered hereby. The net proceeds will be contributed to the
Company's capital funds and will be used for general corporate purposes,
including the origination of various types of loans and investments in
securities. Pending actual utilization of such net proceeds, the Company
anticipates that the net proceeds will be invested in investment securities.
Net proceeds cannot be precisely determined as of the date hereof. The
amount of such proceeds is dependent upon the actual number of shares of
Conversion Stock subscribed for and sold, whether such shares are sold in the
Subscription Offering or the Community Offering and the actual expenses of the
merger Conversion. The following table shows estimated gross and net proceeds
based upon $2,125,000, $2,500,000, and $2,875,000 of Conversion Stock
(respectively, the minimum, midpoint and maximum of the Valuation Range) issued
in the Merger Conversion at the Subscription Price. In each case, it is assumed
that (i) 100% of the Conversion Stock is sold in the Subscription Offering; (ii)
no shares of Conversion Stock are issued in the Community Offering and no
additional fees are paid to registered securities firms, and (iii) the expenses
related to the Merger Conversion are $350,000. There can be no assurances that
the dollar amount of the expenses related to the Merger Conversion will not vary
significantly from the amount estimated.
13
<PAGE>
Minimum Midpoint Maximum
Appraised Appraised Appraised
Value of Value of Value of
-------- -------- --------
(In thousands)
Number of shares to be issued........ 39,683 46,685 53,688
Subscription Purchase Price
per share.......................... $48.20 $48.20 $48.20
Gross proceeds....................... $2,125 $2,500 $2,875
Expenses............................. 350 350 350
------ ------ ------
Net proceeds......................... $1,775 $2,150 $2,525
===== ===== =====
DIVIDENDS
First Star Bancorp's board of directors have the authority to declare
dividends on the shares, subject to statutory and regulatory requirements. The
Company does not currently pays cash dividends on its common stock. Any
declaration of dividends by the board of directors will depend upon a number of
factors, including: (i) the amount of the net proceeds retained by the Company
in the Merger Conversion, (ii) investment opportunities available, (iii) capital
requirements, (iv) regulatory limitations, (v) results of operations and
financial condition, (vi) tax considerations, and (vii) general economic
conditions. In addition, there can be no assurance that regular or special
dividends will be paid, or, if paid, will continue to be paid. See "Historical
and Pro Forma Capital Compliance", "The Merger Conversion -- Effects of Merger
Conversion to Stock Form on Depositors and Borrowers of Nesquehoning Savings
Bank -- Liquidation Account" and "Regulation -- Dividend and Other Capital
Distribution Limitations."
The Company is subject to the requirements of Pennsylvania law, which
generally requires that dividends be declared and paid out of a company's
surplus, or if there is no surplus, out of the company's net profits for the
fiscal year in which the dividend is declared or for the preceding fiscal year.
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Company without the
payment of federal income taxes by us at the then current income tax rate on the
amount deemed distributed, which would include the amount of any federal income
taxes attributable to the distribution. See "Taxation -- Federal Taxation" and
Note 12 to our Consolidated Financial Statements. We do not contemplate any
distribution that would result in a recapture of the bad debt reserve or
otherwise create federal tax liabilities.
14
<PAGE>
MARKET FOR THE COMMON STOCK
Our common stock is not traded on any exchange, and there is no
established public trading market. To our knowledge, trading to date has been
extremely limited. The following table sets forth market price and common stock
cash dividend information for our Common Stock. Information is presented for
each quarter of the previous two calendar years. These prices represent prices
voluntarily disclosed by buyers or sellers and do not include any retail markup,
markdown, or commission, and may not necessarily represent actual transactions.
Such transactions may not be representative of all transactions during the
indicated periods or of the actual fair market value of our common stock at the
time of such transaction due to the infrequency of trades and the limited market
for our common stock.
Cash
High Low Dividends
---- --- ---------
Year Ended
----------
June 30, 1996 25.50 20.00 .16(1)
Quarter Ended
-------------
1997
March 31 .04
June 30 32.50 24.50 .04
September 30 25.00 25.00 .04
December 31 29.125 26.50 .04
1998
March 31 31.875 27.50 --
June 30 42.50 32.25 --
- -------------------
(1) Represents annualized dividend.
The last trade of our Common Stock on September 1, 1998 was at a price
of $67.50 per share.
The development of an active trading market depends on the existence of
willing buyers and sellers. An active trading market in our common stock may not
develop or be maintained. You could have difficulty disposing of your shares and
so you should not view the shares as a short-term investment. You may not be
able to sell your shares at a price equal to or above the price you paid for the
shares.
15
<PAGE>
CAPITALIZATION
The following table presents, as of June 30, 1998, our historical
capitalization and the consolidated capitalization of First Star Bancorp after
giving effect to the Merger Conversion of Nesquehoning Savings Bank and the
other assumptions set forth below and under "Pro Forma Data," based upon the
sale of shares at the minimum, midpoint and maximum of the EVR at a price of
$48.20 per share.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of
--------------------------------------
At June 30, 1998 Historical
---------------------------------------
39,683 46,685 53,688
First Star Nesquehoning Shares(1) Shares(1) Shares(1)
---------- ------------ --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) .................................. $ 145,096 $ 14,141 $ 159,237 $ 159,237 $ 159,237
Borrowed funds................................ 150,612 -- 150,612 150,612 150,612
------- ------- -------- -------- --------
Total deposits and borrowed funds........... $ 295,708 $ 14,141 $ 309,945 $ 309,945 $ 309,945
======== ======= ======== ======== ========
Stockholders' equity:
Preferred stock, $1.00 per share, 1,000,000
shares authorized; 27,520 issued........... 28 N/A 28 28 28
Common stock, $1.00 par value, 2,500,000
shares authorized; total shares to be
issued as reflected........................ 372 N/A 412 419 426
Additional paid-in capital.................... 8,423 N/A 10,158 10,526 10,894
Retained earnings............................. 5,777 2,175 7,952 7,952 7,952
ESOP(3)..................................... (300) N/A (513) (550) (588)
Net unrealized gains on
available-for-sale securities............. 813 -- 813 813 813
-------- ------- -------- -------- --------
Total stockholders' equity.................... 15,113 $ 2,175 $ 18,850 $ 19,188 $ 19,525
======== ======= ======== ======== ========
Total stockholders' equity
as a % of total assets...................... 4.78% N/A 5.63% 5.73% 5.83%
Book value per share of Common Stock.......... $40.62 N/A $45.78 $45.82 $45.85
Shares outstanding............................ 372,084 N/A 411,767 418,769 425,772
</TABLE>
- --------------------------
(1) Assumes all shares are sold to eligible depositors of Nesquehoning at a
price of $48.20 per share at the minimum, midpoint and maximum of the
valuation range.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock. Such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Assumes the ESOP purchases 10% of the Conversion Stock or $213,000,
$250,000 and $288,000 at the minimum, midpoint and maximum of the Valuation
Range.
16
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
Set forth below is a summary of the historical regulatory capital at
June 30, 1998 of First Star Savings Bank, First Star Bancorp, and Nesquehoning
Savings Bank, and pro forma regulatory capital following completion of the
Merger Conversion, based on the estimated net proceeds from the sale of the
Common Stock in the Offering at the midpoint of the Valuation Range. First Star
Savings Bank, First Star Bancorp, and Nesquehoning Savings Bank exceed all
regulatory capital requirements on an historical and pro forma basis.
<TABLE>
<CAPTION>
Bank Company Nesquehoning Bank Company
Historical Historical Historical Pro Forma Pro Forma
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total stockholders' equity of
GAAP capital....................... $ 18,148 $ 15,113 $ 2,175 $ 22,223 $ 19,188
Less: unrealized gain on securities
available for sale................. 694 813 -- 813 813
Less: intangible assets............. -- -- -- -- --
------- ------- ------- ------- -------
FDIC leverage capital................ 17,454 14,300 2,175 21,410 18,375
Plus: FDIC tier 2 capital (1)....... 1,489(1) 6,969(2) 120 1,609 7,089
-------- ------- ------- ------- -------
Total FDIC risk-based capital........ $ 18,943 $ 21,269 $ 2,295 $ 23,019 $ 25,464
======= ======= ======= ======= =======
FDIC quarterly average total assets
for leverage ratio................. $287,104 $289,904 $ 16,500 $303,604 $306,404
FDIC net risk-weighted assets
including off - balance sheet
items.............................. $157,257 $161,039 $ 7,695 164,952 168,734
FDIC leverage capital ratio.......... 6.08% 4.93% 13.90% 7.58% 8.31%
Minimum requirement..................3.00% to 5.00%(2) 3.00% to 5.00%(2) 3.00% to 5.00%(2) 3.00% to 5.00%(2) 3.00% to 5.00%(2)
Total FDIC risk-based capital ratio.. 12.04% 13.21% 29.82% 13.95% 15.09%
Minimum requirement.................. 8.00% 8.00% 8.00% 8.00% 8.00%
</TABLE>
- -----------------------------
(1) Tier 2 capital consists entirely of the allowance for loan losses, which is
limited to 1.25% of total risk-weighted assets as detailed under
regulations of the FDIC.
(2) The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3.00%, and all
other institutions will be required to maintain an additional cushion of
100 to 200 basis points. As of June 30, 1998, the Bank had not been advised
of any additional requirements in this regard.
The Bank is also subject to Pennsylvania Department of Banking
("Department") capital guidelines. Although not adopted in regulation form, the
Department utilized capital standards requiring a minimum of 6% leverage capital
and 10% risk-based capital. The components of leverage and risk- based capital
are substantially the same as those defined by the FDIC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements give
effect to the Merger Conversion on a purchase accounting basis. These statements
assume the sale of 46,685 shares of First Star common stock at $48.20 per share
or $2,500,000 in aggregate (the midpoint of the Estimated Price
17
<PAGE>
Range), less offering expenses of $350,000. The pro forma combined condensed
balance sheet assumes the Merger took place on June 30, 1998 and combines First
Star's audited balance sheet with Nesquehoning's unaudited balance sheet at that
date. The pro forma condensed combined statements of income have been prepared
as if the Merger Conversion had occurred at the beginning of the periods
presented.
The pro forma condensed combined statement of income for the year ended
June 30, 1998 includes First Star's historical financial information for the
year ended June 30, 1998 and Nesquehoning historical financial information for
the twelve months ended June 30, 1998 and assumes 46,685 shares of First Star
Bancorp, Inc. common stock were sold at the midpoint of the valuation range.
The pro forma condensed combined statement of income is not necessarily
indicative of operating results which would have been achieved had the Merger
Conversion been consummated as of the beginning of the period and should not be
construed as representative of future operations.
The stockholders' equity information is not intended to represent the
fair market value of the shares, or the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Merger Conversion -- Certain Effects of the
Merger Conversion to Stock Form on Depositors and Borrowers of Nesquehoning
Savings Bank -- Liquidation Account" and Note ____ to the Consolidated Financial
Statements. The pro forma income derived from the assumptions set forth above
should not be considered indicative of the actual results of our operations for
any period. Such pro forma data may be materially affected by a change in the
price per share or number of shares to be issued in the conversion and by other
factors. For information regarding investment of the proceeds see "Use of
Proceeds" and "The Merger Conversion -- Stock Pricing" and "-- Change in Number
of Shares to be Issued in the Merger Conversion."
18
<PAGE>
The pro forma condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
First Star set forth elsewhere in this Prospectus.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 1998
<TABLE>
<CAPTION>
(In thousands)
Historical Pro Forma Pro Forma
---------------------------- Conversion
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 1,385 $ 65 1,900 (1) $ 3,350
Interest bearing time deposits with banks.............. 857 3,362 4,219
Securities available for sale.......................... 103,933 130 104,063
Securities held to maturity............................ -- 94 94
Loans receivable, net.................................. 12,816 209,328
Bank premises and equipment, net....................... 687 52 739
Other assets........................................... 12,728 30 12,758
------- ------- --------
Total assets.................................. $316,102 $ 16,549 $334,551
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits.......................... $ 1,555 $ -- $ 1,555
Interest bearing deposits.............................. 143,541 14,141 157,682
------- ------- -------
Total deposits................................ 145,096 14,141 159,237
------- ------- -------
FHLB advances.......................................... 144,485 -- 144,485
Convertible subordinated debentures.................... 5,480 -- 5,480
Other borrowed funds................................... 647 -- 647
Other liabilities...................................... 5,281 233 5,514
-------- -------- --------
Total liabilities............................. 300,989 14,374 315,363
------- ------- -------
STOCKHOLDERS' EQUITY
Preferred stock........................................ 28 -- 28
Common Stock........................................... 372 -- 46 (1) 418
Surplus................................................ 8,423 -- 2,104 (1) 10,527
Retained earnings...................................... 5,777 2,175 7,952
ESOP................................................... (300) -- (250)(2) (550)
Net unrealized gain on securities
available for sale, net of tax....................... 813 -- 813
--------- --------- --------
Total stockholders' equity.................... 15,113 2,175 19,188
-------- ------- -------
Total liabilities and stockholders' equity.... $316,102 $ 16,549 $334,551
======= ======= =======
</TABLE>
- ------------------
(1) Represents the cash proceeds of the offering of $2,150,000 and the
issuance of 46,685 shares of First Star common stock at $48.20 per share,
net of estimated fees and expenses of $350,000.
(2) Represents purchase by ESOP in the offering.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Historical
For the Year Ended
Pro Forma
June 30, 1998 December 31,1997 Conversion Pro Forma
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income
Loans receivable..................... $ 13,470 $ 1,024 14,494
Mortgage-backed securities........... 4,780 135 4,780
Interest and dividends on
investments........................ 2,989 -- 63(1) 3,187
------- ------- -------
Total interest income.............. 21,239 1,159 63(1) 22,461
------- ------- -------
Interest expense
Deposits............................. $ 6,638 $ 687 $ 7,325
Short-term borrowings................ 37 -- 37
Long-term borrowings................. 7,935 -- 7,935
------- ------- -------
Total interest expense............. 14,610 687 15,297
------- ------- -------
Net interest income........................... 6,629 472 7,164
Provisions for loan loses..................... 385 -- 385
-------- --------- -------
Net interest income after provision for
loans losses................................ 6,244 472 6,779
Operating income.............................. 1,760 13 1,773
Other expenses................................ 3,581 282 3,863
------- ------- -------
Income before income taxes.................... 4,423 203 4,689
Provisions for income taxes................... 1,607 72 1,679
------- ------- -------
Net income........................... 2,816 131 3,010
------- ------- -------
Dividends on preferred stock.................. 45 -- 63(2) 45
-------- -------- -------
Net income applicable to
common stockholders......................... $ 2,771 $ 131 63 $ 2,965
======= ======= =======
Earnings per common share..................... $5.04 N/A $5.39
Earnings per common share - assuming
full dilution............................... $4.90 N/A $5.24
Weighted average shares outstanding:
per common share.......................... 295,025 N/A 46,685(3) 341,710
per common share - assuming full dilution. 548,780 N/A 46,685(3) 595,465
</TABLE>
- -------------------
(1) Represents gross annualized return of 5.37% on net proceeds, a tax rate of
38.0% on the net proceeds, and a net return of 3.33 on such proceeds.
(2) Represents added ESOP expense.
(3) Assumes all 46,685 shares are outstanding for the entire fiscal year
20
<PAGE>
THE MERGER CONVERSION
General
The Merger Conversion is being conducted pursuant to the Agreement and
the Plan. The Merger Conversion has been approved by Department subject to,
among other things, approval of the Agreement by Nesquehoning's depositors. A
special meeting of depositors has been called for this purpose to be held on
__________ ___, 1998 (the "Special Meeting"). Copies of the Agreement and the
Plan are available without charge from us by a written request addressed to the
Corporate Secretary, ____________________________, Pennsylvania _______, or by a
telephone call to (___) ___-____.
In accordance with the Plan and subject to certain maximum and minimum
purchase limitations, subscription rights to purchase Common Stock have been
granted to (i) Nesquehoning's Eligible Account Holders, (ii) Nesquehoning's
Supplemental Eligible Account Holders and (iii) Nesquehoning's Other Depositors.
Any shares of Common Stock for which subscriptions have not been accepted in the
Subscription Offering may, at the sole discretion of the Board of Directors of
First Star, be offered for sale in the Community Offering. In the Community
Offering, should it be conducted, unsubscribed shares will be offered directly
to the general public with a preference to our Employee Stock Ownership Plan,
current shareholders and to those natural persons residing in Carbon,
__________, Pennsylvania. Additional terms and conditions may be established at
any time prior to the closing of any Community Offering by the Board of
Directors of First Star and the Board of Trustees of Nesquehoning.
Effects of Merger Conversion on Depositors and Borrowers of Nesquehoning Savings
Bank
Voting Rights. Currently in mutual form, voting rights are vested in
the Board of Trustees of Nesquehoning. FDIC regulations require the affirmative
vote of a majority of the depositors before the Merger Conversion can be
completed. Following the Merger Conversion, all voting rights will be held
solely by stockholders.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the Conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the Merger Conversion.
Tax Effects. We have received an opinion from our counsel, Malizia,
Spidi, Sloane & Fisch, P.C. on the federal tax consequences of the Merger
Conversion. The opinion has been filed as an exhibit to the registration
statement of which this prospectus is a part and covers those federal tax
matters that are material to the transaction. The opinion provides, in part,
that: (i) the Merger Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized by us by reason
of the proposed Merger Conversion; (ii) no gain or loss will be recognized by us
upon the receipt of money from the Company for our stock; (iii) our assets will
have the same basis before and after the Merger Conversion; (iv) the holding
period of our assets will include the period during which the assets were held
by us in our mutual form; (v) no gain or loss will be recognized by the Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Depositors
upon the issuance to them of withdrawable savings accounts in us in the stock
form in the same dollar amount as their savings accounts in us in the mutual
form plus an interest in our liquidation account in the stock form in exchange
for their savings accounts in us in the mutual form; (vi) provided that the
amount to be paid for the shares pursuant to the subscription rights is equal to
the fair market value of such shares, no gain or loss will
21
<PAGE>
be recognized by Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Depositors under the Plan upon the distribution to them of
nontransferable subscription rights; (vii) the basis of each account holder's
savings accounts after the Merger Conversion will be the same as the basis of
his savings accounts prior to the conversion, decreased by the fair market value
of the nontransferable subscription rights received and increased by the amount,
if any, of gain recognized on the exchange; (viii) the basis of each account
holder's interest in the liquidation account will be zero; (ix) the holding
period of the common stock acquired through the exercise of subscription rights
shall begin on the date on which the subscription rights are exercised; (x) we
will succeed to and take into account our earnings and profits or deficit in
earnings and profits as of the date of conversion; (xi) immediately after
conversion, we will succeed to the bad debt reserve accounts previously held by
us, and the bad debt reserves will have the same character in our hands after
conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on our taxable income.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights will be
approximately equal to the fair market value of those shares at the time of the
completion of the proposed conversion. We have received an opinion of Feldman
Financial Advisors which, based on certain assumptions, concludes that the
subscription rights to be received by Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the subscription rights are exercised. Such opinion is based on
the fact that such rights are: (i) acquired by the recipients without payment
therefor, (ii) non-transferable, (iii) of short duration, and (iv) afford the
recipients the right only to purchase shares at a price equal to their estimated
fair market value, which will be the same price at which shares for which no
subscription right is received in the subscription offering will be offered in a
public offering. If the subscription rights granted to Eligible Account Holders
or other eligible subscribers are deemed to have an ascertainable value, receipt
of such rights would be taxable only to those Eligible Account Holders or other
eligible subscribers who exercise the subscription rights in an amount equal to
such value (either as a capital gain or ordinary income), and we could recognize
gain on such distribution.
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia, Spidi, Sloane & Fisch, P.C. that the conversion will be
treated for Pennsylvania state tax purposes similar to the conversion's
treatment for federal tax purposes. The opinion has been filed as an exhibit to
the registration statement to which this prospectus is a part and covers those
state tax matters that are material to the transaction.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C. and Feldman Financial Advisors have no binding effect or official
status, and no assurance can be given that the conclusions reached in any of
those opinions would be sustained by a court if contested by the IRS or the
Pennsylvania tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Depositors are encouraged to consult with their own
tax advisers as to the tax consequences in the event the subscription rights are
deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to equal distribution of
any of our assets, pro rata according to the value of his/her accounts,
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts). Each depositor's pro rata
share of such remaining assets would be in the same proportion as the value of
his/her deposit accounts was to the total value of all deposit accounts held by
us at the time of liquidation.
22
<PAGE>
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
of our other general creditors. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled upon our complete liquidation after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, July 31, 1997. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, September 30, 1998. The interest as
to each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date (December 31) is less
than the amount in such account on the respective qualifying dates, then the
interest in this special liquidation account would be reduced at that time by an
amount proportionate to any such reduction, and the interest would cease to
exist if such deposit account was closed. The interest in the special
liquidation account will never be increased despite any increase in the related
deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
Non-transferable subscription rights to purchase shares of the common
stock have been granted to persons and entities entitled to purchase shares in
the subscription offering under the Plan. If the community offering or
syndicated community offering, as described below, extends beyond 45 days
following the completion of the subscription offering, subscribers will be
resolicited. Subscription priorities have been established for the allocation of
stock to the extent that more shares are subscribed for than are to be issued in
the conversion subject to the purchase limitations set forth in the Plan and as
described below under "-- Limitations on Purchases and Transfer of Shares." The
following priorities have been established:
Category 1: Eligible Account Holders (First Priority). Eligible Account Holders
are persons who had a deposit account of at least $50 with us on July 31, 1997.
Each Eligible Account Holder will receive non-transferable subscription rights
on a priority basis to purchase that number of shares of common stock which is
equal to the greater of $100,000 of Common Stock, or 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Eligible Account Holder and the denominator is the
total amount of qualifying deposits of all Eligible Account Holders (subject to
the maximum purchase limitation). If there is an oversubscription in this
category, shares shall be allocated among subscribing Eligible Account Holders
so as to permit each such account holder, to the extent
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possible, to purchase the lesser of 100 shares or the total amount of his
subscription. Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Only a
person(s) with a qualifying deposit as of the eligibility record date (or a
successor entity or estate) shall receive subscription rights in this category.
Any Person(s) added to a Savings Account after the Eligibility Record Date is
not an Eligible Account Holder. Subscription rights received by officers and
directors in this category based on their increased deposits with us in the
one-year period preceding July 31, 1997, are subordinated to the subscription
rights of other Eligible Account Holders. See "-- Limitations on Purchases and
Transfer of Shares."
Category 2: Supplemental Eligible Account Holders (Second Priority).
Supplemental Eligible Account Holders are persons who had a deposit account of
at least $50 with us on September 30, 1998. Each Supplemental Eligible Account
Holder who is not an Eligible Account Holder will receive non-transferable
subscription rights to purchase that number of shares which is equal to the
greater of $100,000 of Common Stock, or 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares to be
issued by a fraction of which the numerator is the amount of the qualifying
deposit of the Supplemental Eligible Account Holder and the denominator is the
total amount of qualifying deposits of all Supplemental Eligible Account Holders
(subject to the maximum purchase limitation). If the allocation made in this
paragraph results in an oversubscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. See "-- Limitations on Purchases and Transfer of
Shares."
The rights of Supplemental Eligible Account Holders to subscribe for
shares is subordinate to the rights of the Eligible Account Holders to subscribe
for shares.
Category 3: Other Depositors (Third Priority). Other Depositors are persons who
have a deposit account of at least $50 on April 30, 1998, the voting record date
of our special meeting, and borrowers also as of the voting record date of our
special meeting. Each Other Depositor who is not an Eligible Account Holder or
Supplemental Eligible Account Holder, will receive non-transferable subscription
rights to purchase up to $100,000 of Common Stock to the extent such shares are
available following subscriptions by Eligible Account Holders, Employee Plans,
and Supplemental Eligible Account Holders. In the event there are not enough
shares to fill the orders of the Other Depositors, the subscriptions of the
Other Depositors will be allocated so that each subscribing Other Depositor will
be entitled to purchase the lesser of 100 shares or the number of shares
ordered. Any remaining shares will be allocated among Other Depositors whose
subscriptions remain unsatisfied on a 100 share (or whatever lesser amount is
available) per order basis until all orders have been filled on the remaining
shares have been allocated. See "-- Limitations on Purchases and Transfer of
Shares."
Depositors in Non-Qualified States. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign country;
(ii) the granting of subscription rights or offer or sale of shares of common
stock to
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those persons would require either us or our employees to register under the
securities laws of that state or foreign country as a broker or dealer, or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his or her account. Each person subscribing for shares will be
required to certify that he/she is purchasing shares solely for his/her own
account and has not entered into an agreement or understanding regarding the
sale or transfer of those shares. The regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase subscription rights or shares of common stock prior to the completion
of the Merger Conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
that we believe involve the transfer of subscription rights or which appear to
us to present other irregularities.
Expiration Date. The Subscription Offering will expire at 12:00 noon,
Bethlehem, Pennsylvania Time, on December __, 1998 (Expiration Date).
Subscription rights will become void if not exercised prior to the Expiration
Date.
Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we may offer
shares in a community offering, with a preference to our Employee Stock
Ownership Plan, our shareholders and natural persons who reside in Carbon,
______________ Counties, Pennsylvania, on a best-efforts basis through
[Advisor]. Any orders received in connection with the community offering, if
any, will receive a lower priority than orders properly made in the subscription
offering by persons exercising Subscription Rights. Common stock sold in the
community offering will be sold at the same price as all shares in the
subscription offering. We have the right to reject any orders in the community
offering.
No person ordering through a single account will be permitted to
purchase more than $100,000 of Common Stock in the community offering. In
addition, no person, related person or persons acting together, may purchase in
all categories more than $100,000 of Common Stock sold in the conversion. To
order common stock in the community offering, if held, an executed stock order
and account withdrawal authorization (if applicable) must be received prior to
the termination of the community offering. Promptly upon receipt of applicable
funds, together with a properly executed stock order form and account withdrawal
authorization, if applicable, and certification, [Advisor] will forward funds
for any order in the community offering to us to be deposited in a subscription
escrow account.
The date by which orders must be received in the community offering
("community offering Expiration Date") will be set by us at the time of
commencement of the community offering; provided however, if the offering is
extended beyond _______, 1998, each subscriber will have the opportunity to
maintain, modify, or rescind his order. In such event, all funds received in the
community offering will be promptly returned with interest unless the subscriber
affirmatively indicates otherwise.
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If an order in the community offering is accepted, promptly after the
completion of the Conversion, a certificate for the appropriate amount of shares
will be forwarded to ____________________________ as nominee for the beneficial
owner. In the event that an order is not accepted in the community offering or
that the Conversion is not consummated, we will promptly refund with interest
the funds received to ____________________________ who will then return the
funds to the purchaser's account. If the appraisal of the estimated market value
of Nesquehoning is less than $2,125,000 or more than $3,306,250, each subscriber
will have the right to modify or rescind his order. The Plan also permits
[Advisor] to conduct a syndicated community offering, but this is not expected
to occur. If a syndicated community offering does occur, it will be conducted on
a best-efforts basis through [Advisor] (on terms negotiated prior to
commencement of the syndicated community offering) and [Advisor] will not be
committed to purchase any shares.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe for stock in the subscription
offering or to purchase stock in the community offering (if any) may only be
exercised by completing an original order form. Persons ordering shares in the
subscription offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, subscription orders cannot be revoked without our
consent unless the conversion is not completed within 45 days of the Expiration
Date.
In the event an order form (i) is not delivered and is returned to us
by the United States Postal Service or we are unable to locate the addressee,
(ii) is not received or is received after the Expiration Date, (iii) is
defectively completed or executed, or (iv) is not accompanied by full payment
for the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed order form within the time period specified. We may, but
will not be required to, waive any irregularity on any order form or require the
submission of corrected order forms or the remittance of full payment for
subscribed shares by such date as we specify. The waiver of an irregularity on
an order form in no way obligates us to waive any other irregularity on that or
on any other order form. Waivers will be considered on a case by case basis.
Photocopies of order forms, payments from private third parties, or electronic
transfers of funds will not be accepted. Our interpretation of the terms and
conditions of the Plan and of the acceptability of the order forms will be
final. We have the right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule l5c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock may be made (i)
in cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us. (Orders of $25,000 or more must be paid by
Nesquehoning account withdrawals, certified funds, cashier's check or money
order.) Appropriate means
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by which such withdrawals may be authorized are provided for in the order form.
Once such a withdrawal has been authorized, no portion of the designated
withdrawal amount may be used by the subscriber for any purpose other than to
purchase the shares. Where payment has been authorized to be made through
withdrawal from a savings account, the sum authorized for withdrawal will
continue to earn interest at the contract rate until the conversion has been
completed or terminated. Interest penalties for early withdrawal applicable to
certificate accounts will not apply to withdrawals authorized for the purchase
of shares; however, if a partial withdrawal results in a certificate account
with a balance less than the applicable minimum balance requirement, the
certificate evidencing the remaining balance will earn interest at the passbook
savings account rate subsequent to the withdrawal. Payments made in cash or by
check or money order, will be placed in a segregated savings account and
interest will be paid by us at our passbook savings account rate from the date
payment is received until the conversion is completed or terminated. An executed
order form, once received by us, may not be modified, amended, or rescinded
without our consent, unless the conversion is not completed within 45 days after
the conclusion of the subscription offering, in which event subscribers may be
given an opportunity to increase, decrease, or rescind their order. In the event
that the conversion is not consummated, all funds submitted pursuant to the
offering will be refunded promptly with interest.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares in the offering, provided that such IRAs are not maintained on
deposit with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your
self-directed IRA. Because of the paperwork involved, persons owning IRAs with
us who wish to use their IRA account to purchase stock in the offering, must
contact the Stock Information Center no later than ___________, 1998.
The ESOP may subscribe for shares by submitting its order form along
with evidence of a loan commitment from a financial institution or the Company
for the purchase of the shares during the subscription offering and by making
payment for shares on the date of completion of the conversion.
Federal regulations prohibit us from lending funds or extending credit
to any person to purchase shares in the conversion.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, as soon as practicable following consummation
of the conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the offering have been distributed to eligible
subscribers by mail. Additional copies are available at our Stock Information
Center. Our officers may be available to answer questions about the conversion.
Responses to questions about us will be limited to the information contained in
this document. Officers will not be authorized to render investment advice. All
subscribers for the shares being offered will be instructed to send payment
directly to us. The funds will be held in a segregated special escrow account
and will not be released until the closing of the conversion or its termination.
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Marketing Arrangements
We have engaged [Advisor] as our financial advisor in connection with
the offering. [Advisor] has agreed to exercise its best efforts to assist us in
the sale of the shares in the offering. [Advisor] will receive a fee of (a)
____% of the aggregate dollar amount of common stock sold in the offerings to
investors who reside in Pennsylvania and those counties of ____________
(excluding shares sold to Nesquehoning and First Star trustees, directors,
executive officers and their associates, and to the ESOP); and (b) ____% of the
aggregate dollar amount of common stock sold in the offerings to investors who
reside outside the areas described in (a). This fee, however, will not exceed
$_______. Of this fee $______ has already been paid to [Advisor] We will also
reimburse [Advisor] for its out-of-pocket expenses (up to $______) and legal
expenses (up to $______). We have also agreed to indemnify [Advisor] for
reasonable costs and expenses in connection with certain claims or liabilities
which might be asserted against [Advisor]. This indemnification covers the
investigation, preparation of defense and defense of any action, proceeding or
claim relating to, among other things, misrepresentation or breach of warranty
of the written agreement between [Advisor] and us or the omission or alleged
omission of a material fact required to be stated or necessary in order to make
disclosure in the prospectus and related documents not misleading. We will
negotiate the fees and reimbursement of expenses for [Advisor] before we begin
any syndicated community offering.
The shares will be offered principally by the distribution of this
document and through activities conducted at the Stock Information Center. The
Stock Information Center is expected to operate during our normal business hours
throughout the offering. A registered representative employed by [Advisor] will
be working at, and supervising the operation of, the Stock Information Center.
[Advisor] will assist us in responding to questions regarding the conversion and
the offering and processing order forms. Our personnel will be present in the
Stock Information Center to assist [Advisor] with clerical matters and to answer
questions related solely to our business.
Stock Pricing
We have retained Feldman Financial Advisors, Inc., an independent
consulting and appraisal firm, which is experienced in the evaluation and
appraisal of business entities, including savings institutions involved in the
conversion process to prepare an appraisal of our estimated market value.
Feldman Financial Advisors will receive fees of $15,000 for preparing the
appraisal and also will be reimbursed reasonable out-of-pocket expenses. We have
agreed to indemnify Feldman Financial Advisors under certain circumstances
against liabilities and expenses arising out of or based on any misstatement or
untrue statement of a material fact contained in the information we supplied to
Feldman Financial Advisors.
Feldman Financial Advisors has prepared the appraisal in reliance upon
the information contained herein, including the financial statements. The
appraisal contains an analysis of a number of factors including, but not limited
to, our financial condition and operating trends, the competitive environment
within which we operate, operating trends of certain savings institutions and
savings and loan holding companies, relevant economic conditions, both
nationally and in the Commonwealth of Pennsylvania which affect the operations
of savings institutions, and stock market values of certain savings
institutions. In addition, Feldman Financial Advisors has advised us that it has
considered the effect of the additional capital raised by the sale of the shares
on our estimated aggregate pro forma market value.
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On the basis of the above, Feldman Financial Advisors has determined,
in its opinion, that as of _______, 1998, the estimated market value was
$2,500,000. Department regulations require, however, that the appraiser
establish a range of value for the stock to allow for fluctuations in the
aggregate value of the stock due to changing market conditions and other
factors. Accordingly, Feldman Financial Advisors has established a range of
value from $2,125,000 to $2,875,000 for the offering, the EVR. The EVR will be
updated prior to consummation of the conversion and the EVR may increase to
$3,306,250 without resolicitation of subscriptions.
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The board of
directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions.
In order for stock sales to take place, Feldman Financial Advisors must
confirm to the Department that, to the best of Feldman Financial Advisors'
knowledge and judgment, nothing of a material nature has occurred which would
cause Feldman Financial Advisors to conclude that the aggregate sale price for
the shares would not be compatible with Feldman Financial Advisors' estimate of
our pro forma market value immediately upon conversion. If, however, facts do
not justify such a statement, an amended EVR may be established.
The appraisal is not a recommendation of any kind as to the
advisability of purchasing these shares. In preparing the appraisal, Feldman
Financial Advisors has relied upon and assumed the accuracy and completeness of
financial and statistical information provided by us. Feldman Financial Advisors
did not independently verify the financial statements and other information
provided by us, nor did Feldman Financial Advisors independently value our
assets and liabilities. The appraisal considers us only as a going concern and
it should not be viewed as our liquidation value. Moreover, because the
appraisal is based upon estimates and projections of a number of matters which
are subject to change, the market price of the common stock could decline.
Change in Number of Shares to be Issued in the Merger Conversion
Depending on market and financial conditions at the time of the
completion of the offerings, we may significantly increase or decrease the
number of shares to be issued in the conversion. In the event of an increase in
the valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro forma net income
and net worth (book value) on an aggregate basis. In the event of a material
reduction in the valuation, we may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease pro forma net
income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the Merger
Conversion results in an offering which is either less than $2,125,000 or more
than $3,306,250. Persons who did not subscribe for shares will not have the
opportunity to do so.
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Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional purchase limitations. The
minimum purchase is 25 shares and the maximum purchase for any individual person
or persons ordering through a single account, is $100,000 of Common Stock (or
2,075 shares). In addition, no person or persons ordering through a single
account, together with their associates, or group of persons acting together,
may purchase more than $100,000 of Common Stock (or 2,075 shares). However, the
ESOP may purchase up to 10% of the shares sold. Furthermore, the Plan of
Conversion provides that officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares issued pursuant to the
conversion.
Depending on market conditions and the results of the offering, the
board of directors may, if the Department agrees, increase or decrease any of
the purchase limitations without the approval of our members and without
resoliciting subscribers. If the maximum purchase limitation is increased,
persons who ordered the maximum amount will be given the first opportunity to
increase their orders. In doing so the preference categories in the offerings
will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders; (ii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account
Holders; (iii) in the event that there is an oversubscription by Other
Depositors, to fill unfulfilled subscriptions of Other Depositors; and (iv) to
fill unfulfilled subscriptions in the community offering to the extent possible.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity
(excluding tax-qualified employee stock benefit plans), and (iii) any relative
or spouse of such person or any relative of such spouse, who has the same home
as such person or who is one of our directors or officers, or a director or
officer of any of our subsidiaries. For example, a corporation of which a person
serves as an officer would be an associate of that person, and therefore all
shares purchased by that corporation would be included with the number of shares
which that person individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, secretary and
treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
To order shares in the conversion, persons must certify that their
purchase does not conflict with the purchase limitations. In the event that the
purchase limitations are exceeded by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such persons),
we will have the right to purchase from that person at $48.20 per share all
shares acquired by that person in excess of the purchase limitations. If the
excess shares have been sold by that person, we may recover the profit from the
sale of the shares by that person. We may assign our right either to purchase
the excess shares or to recover the profits from their sale.
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Shares of common stock purchased pursuant to the conversion will be
freely transferable, except for shares purchased by our directors and officers.
For certain restrictions on the shares purchased by directors and officers, see
"-- Restrictions on Sales and Purchases of Shares by Trustees and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, the Company
may not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase up to five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the Department. The
Department may disapprove a repurchase program upon a determination that (1) the
repurchase program would adversely affect our financial condition, (2) the
information submitted is insufficient upon which to base a conclusion as to
whether the financial condition would be adversely affected, or (3) a valid
business purpose was not demonstrated. However, the Department may grant special
permission to repurchase shares after six months following the conversion and to
repurchase more than five percent during each of the second and third years. In
addition, the Securities and Exchange Commission ("SEC") rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by the Company and affiliated purchasers. If, in the future, the
rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Trustees and Officers
Shares purchased by trustees and officers of the Nesquehoning may not
be sold for one year following the conversion, except in the event of the death
of the trustee or officer. Any shares issued to directors and officers as a
stock dividend, stock split, or otherwise with respect to restricted stock shall
be subject to the same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the Department has approved the purchase or the purchase is an
arm's length transaction and involves more than one percent of the outstanding
shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our
interpretations are final. Amendments to the Plan after the receipt of member
approval will not need further member approval unless required by the Department
and /or FDIC.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of a majority of the total number of votes eligible to be
cast by our members, and (ii) completion of the sale of shares within 24 months
following approval of the Plan by our members. If these conditions are not
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satisfied, the Plan will be terminated and we will continue our business in the
mutual form of organization. We may terminate the Plan at any time prior to the
meeting of members to vote on the Plan or at any time thereafter with the
approval of the Department and non-objection by the FDIC.
Other
All statements made in this document are hereby qualified by the
contents of the Plan of Conversion, the material terms of which are set forth
herein. The Plan of Conversion is attached to the proxy statement mailed to
certain depositors. Copies of the Plan are available from us and should be
consulted for further information. Adoption of the Plan by Nesquehoning's
depositors authorizes us to interpret, amend or terminate the Plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is intended to assist you in
understanding our financial condition and results of operations. The information
in this section should also be read with our Consolidated Financial Statements
and Notes to the Consolidated Financial Statements included elsewhere in this
document.
General
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
noninterest income, including, income from customer deposit account service
charges, gains on sales of loans, gains and losses from the sale of investments
and mortgage-backed securities and noninterest expense, including, primarily,
compensation and employee benefits, federal deposit insurance premiums, office
occupancy cost, and data processing cost. Our results of operations are also
affected significantly by general and economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond our control.
Market Risk Analysis
Our assets and liabilities may be analyzed by examining the extent to
which they are interest rate sensitive and by monitoring the expected effects of
interest rate changes on our net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to address the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by maintaining
sufficient liquid assets for material and prolonged changes in interest rates.
32
<PAGE>
We originate fixed- and adjustable-rate real estate loans which
approximated 73% of our loan portfolio at June 30, 1998. To manage the interest
rate risk on this type of loan portfolio, we emphasize the origination of
adjustable-rate loans and sell a portion of our fixed-rate mortgage loans. At
June 30, 1998, adjustable-rate mortgage loans totalled $62.7 million or 31.7% of
our total loan portfolio. We also maintain a portfolio of liquid assets which
includes investment securities and mortgage-backed securities. As an
asset/liability management tool, we may use alternative sources of funding if
deposit pricing in our local market area is not acceptable. Maintaining liquid
assets tends to reduce potential net income because liquid assets usually
provide a lower yield than other interest-earning assets.
Net Portfolio Value
In order to encourage savings associations to reduce their interest
rate risk, the Department adopted a rule incorporating an interest rate risk
("IRR") component into the risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the Department will calculate the IRR
component quarterly for each institution. The following table presents our NPV
at June 30, 1998.
<TABLE>
<CAPTION>
Changes
in Market $ %
Interest Rates NPV Amount Change Change in NPV NPV Ratio(1)
-------------- ---------- ----------------- ------------------------ ------------------
(basis points)
<S> <C> <C> <C> <C> <C>
+400 5,409 (17,808) (76.7) 1.87%
+300 11,437 (11,779) (50.7) 3.83%
+200 16,112 (7,105) (30.6) 5.27%
+100 20,344 (2,873) (12.4) 6.50%
0 23,217 -- -- 7.28%
-100 23,352 135 .6 7.21%
-200 21,427 (1,789) (7.7) 6.53%
-300 19,884 (3,333) (14.4) 5.98%
-400 19,217 (4,000) (17.2) 5.68%
</TABLE>
- ------------------
(1) Calculated as the estimated NPV divided by present value of total assets.
33
<PAGE>
Management believes these calculations indicate that we would be deemed
to have a more than normal level of interest rate risk under applicable
regulatory capital requirements based on the current level of regulatory
capital.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react at different times and in
different degrees to changes in market rates of interest. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, an increased credit risk may result as many borrowers may be
unable to service their debt in the event of an interest rate increase.
Our board of directors reviews our asset and liability policies on an
annual basis. The board of directors meets quarterly to review interest rate
risk and trends, as well as liquidity and capital ratios and requirements.
Management administers the policies and determinations of the board of directors
with respect to our asset and liability goals and strategies. We expect that our
asset and liability policies and strategies will continue as described so long
as competitive and regulatory conditions in the financial institution industry
and market interest rates continue as they have in recent years.
Asset and Liability Management. The Bancorp's exposure to interest rate
risk results from the difference in maturities on interest-bearing liabilities
and interest-earning assets and the volatility of interest rates. Because the
Bancorp's liabilities have a shorter maturity than its assets, the Bancorp's
earnings will be negatively affected during the periods of rising interest
rates. Management has been working to increase the interest rate sensitivity of
the Bancorp's assets and decrease the sensitivity of its liabilities.
As rates on sources of funds have become deregulated and subject to
competitive pressures, financial institutions have become increasingly concerned
with the extent to which they are able to match maturities of interest-earning
assets and interest-bearing liabilities. Such matching is facilitated by
examining the extent to which such assets and liabilities are "interest rate
sensitive and by monitoring an institution's interest rate sensitivity 'gap. An
asset or liability is considered to be interest rate sensitive if it will mature
or reprice within a specific time period. The interest rate sensitivity gap is
defined as the excess of interest-earning assets maturing or repricing within a
specific time period over interest-bearing liabilities maturity or repricing
within that time period.
Financial Condition
Total assets increased at June 30, 1998, to $316.1 million from $270.9
million at June 30, 1997, an increase of $45.2 million or 16.7%. The increase in
total assets was attributable primarily to an increase in loans receivable which
increased by $45.6 million to $195.1 million from $149.5 million at June 30,
1997.
34
<PAGE>
Real Estate acquired through foreclosure ('REO") is recorded at the
lower of cost or fair market value upon acquisition of the real estate less cost
to dispose. REO increased to $1,129,000 at June 30, 1998, from $767,000 at June
30, 1997. At June 30, 1998, REO consisted of twelve single-family dwelling
units, with seven of these properties located in the Pocono mountains.
Deposits increased to $145.1 million at June 30, 1998, from $118.7
million at June 30, 1997, an increase of $26.4 million or 22.4%. This increase
in deposits is concentrated primarily in certificates of deposit which increased
by $2.2 million to $104.1 million from $85.4 million and in money market demand
accounts which increased by $5.6 million to $15.4 million from $9.8 million.
Advances from the Federal Home Loan Bank increased to $144.5 million at
June 30, 1998, from $129.4 million at June 30, 1997, an increase of $15.1
million or 11.7%. The proceeds from these advances were used to fund the
aforementioned increase in loans receivable.
Stockholders' equity increased to $15.1 million at June 30, 1998, from
$12 million at June 30, 1997, an increase of approximately $3.1 million or 25.8
%. The increase is mainly attributable to net income from operations and an
increase in the unrealized gain on securities available for sale.
Non-Performing Assets. First Star places all loans 90 days or more
delinquent, or sooner, if the collection of principal or interest becomes
doubtful, on non-accrual status. At June 30, 1998 the Bancorp's non-performing
assets were $4.2 million compared to $4.9 million at June 30, 1997, an decrease
of $700,000 or 14.3%. The ratio of non-performing assets to total assets was
1.3% at June 30, 1998 compared to 1.8 % at June 30, 1997.
The non-accrual non-consumer leases represent the acquisition of
numerous leases and campground interests that were purchased from The Bennett
Funding Group, Inc. and its subsidiaries. These companies which service the
leases, including all collection work, are in Chapter 11 bankruptcy proceedings.
The Securities and Exchange Commission has alleged fraud by at least one of the
principals of The Bennett Funding Group, Inc.. While most lessees continue to
make their payments to The Bennett Funding Group, the Trustee disputes the
ownership and has raised various other issues in the proceedings which may
affect collectibility. First Star maintains a reserve of 25% of the outstanding
balance due from The Bennett Funding Group pending additional legal results of
the disputed issues.
35
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company'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. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
At June 30, Year Ended June 30,
----------- ------------------------------------------------------------------
1998 1998 1997
------------- -------------------------------- ---------------------------------
Average Interest Average Average Interest Average
Yield/Cost Balance Income Yield/Cost Balance Income Yield/Cost
---------- ------- ------ ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............................ 8.03% 170,991 13,470 7.84% 150,727 11,852 7.86%
Investment securities(2)....................... 6.58 114,451 7,769 6.78 65,616 4,430 6.75
------- ------ ------- -------
Total interest-earning assets................. 7.50% 285,442 21,239 7.44% 216,343 16,192 7.48%
Non-interest-earning assets..................... 4,162 4,318
Total assets.................................. 289,904 220,661
Interest-bearing liabilities:
NOW accounts . ................................. 2.12% 14,250 311 2.18% 13,036 267 2.05%
Passbook and club accounts...................... 2.72 10,427 283 2.71 10,029 278 2.78
Money market demand accounts.................... 4.22 12,902 572 4.43 9,991 420 4.20
Certificates of Deposit......................... 5.83 96,108 5,472 5.69 81,745 4,504 5.51
Other liabilities.............................. 5.92 137,734 7,972 5.79 91,328 4,937 5.41
------- ------- ------- -------
Total interest-bearing liabilities.............. 5.49% 271,421 $ 14,610 5.38% 206,129 $ 10,406 5.05%
------- ======= ------- =======
Non-interest-bearing liabilities................ 4,271 3,239
-------- --------
Total liabilities............................. 275,692 209,368
Retained earnings............................... 14,212 11,293
------- -------
Total liabilities and retained earnings....... $289,904 $220,661
======= =======
Net interest income............................. $ 6,629 $ 5,786
======= =======
Interest rate spread(3)......................... 2.01% 2.05% 2.43%
====== ====== ======
Net yield on interest-earning assets(4)......... 2.12% 2.32% 2.67%
====== ====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities.......... 105.28% 105.28% 104.95%
====== ====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
36
<PAGE>
The table below sets forth certain information regarding changes in our
interest income and interest expense for the 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 June 30,
------------------------------------------------
1998 vs. 1997
------------------------------------------------
Increase/(Decrease)
Due to
------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................................ $1,593 $ (30) $ (4) $1,559
Investment securities........................... 995 76 55 1,126
Mortgage-backed securities...................... 2,104 38 29 2,171
FHLB stock...................................... 144 26 14 184
----- ---- ----- -----
Total interest-earning assets................ 4,836 110 94 5,040
----- ---- ----- -----
Interest-bearing liabilities:
NOW and money market deposits................... 147 40 8 195
Savings and certificate accounts................ 802 140 26 968
FHLB borrowings................................. 2,511 347 176 3,034
----- ---- ---- -----
Total interest-bearing liabilities........... 3,460 527 210 4,197
----- ---- ---- -----
Increase (decrease) in net interest income........ $1,376 $(417) $(116) $ 843
===== ==== ==== =====
</TABLE>
Results of Operations for the Years Ended June 30, 1998 and 1997
General. The largest components of the Company's total income and total
expenses are interest items. As a result, First Star's earnings are greatly
influenced by its net interest income, which is determined by the difference
between the interest earned on its interest-earning assets and the rates paid on
its interest-bearing liabilities ('interest rate spread') as well as by the
relative amounts of its interest-earning assets and interest-bearing
liabilities.
Like most savings banks, First Star's interest income and cost of funds
are substantially affected by general economic conditions and by policies of
regulatory authorities of the state and federal government. Because a
significant portion of the Bancorp's assets consist of fixed rate loans,
increases in interest costs will result in a decline in the Bancorp's net
interest income or possibly a net interest loss.
Results of Operations. The Company recorded a net income of $2,816,223
for the fiscal year ended June 30, 1998, representing a 86.6% increase from the
$1,509,557 net income recorded for the fiscal year ended June 30, 1997 and a
increase of 121.7% from the $1,270,509 net income recorded for the fiscal year
ended June 30, 1996. The increase from June 30, 1997, is mainly attributable to
an increase of $843,377 in net interest income and an increase in gains realized
on the sale of mortgage-backed securities of $804,233. The increase from June
30, 1996, is also attributable to an increase in net interest income of
$2,157,038 and an increase in gains realized on the sale of mortgage-backed
securities of $1,087,586, which was partially offset by an increase in operating
expenses of $733,150 to $3,581,269 from $2,848,119.
37
<PAGE>
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets, primarily loans,
investment and mortgage-backed securities and interest we pay on our
interest-bearing liabilities, primarily deposits. Net interest income depends on
the volume of and rates earned on interest-earning assets and the volume of and
rates paid on interest-bearing liabilities.
Total Interest Income. For the fiscal year ended June 30, 1998, total
interest income increased to $21.2 million from $16.2 million for fiscal year
ended June 30, 1997. This increase of $5 million or 30.86% is due primarily to
an increase in income on loans receivable to $13.5 million at June 30, 1998 as
compared to $11.9 million at June 30, 1997 and to an increase in income on
mortgage-backed securities to $4.8 million at June 30, 1998 from $2.7 million at
June 30, 1997. During the same time periods the average balance on loans
receivable increased by $20.3 million to $171 million at June 30, 1998 from
$150.7 million at June 30, 1997, and the average balance on mortgage-backed
securities increased by $32.6 million to $74.7 million at June 30, 1998 from
$42.1 million at June 30, 1997.
Total Interest Expense. Total interest expense increased to $14.6
million for the fiscal year ended June 30, 1998 from $10.4 million for the
fiscal year ended June 30, 1997. The two components of total interest expense
are interest on deposits, which increased by $1.1 million for the fiscal year
ended June 30, 1998 to $6.6 million from $5.5 million for the fiscal year ended
June 30, 1997 and interest on borrowings, which increased by $3.1 million for
the fiscal year ended June 30, 1998 to $8 million from $4.9 million for the
fiscal year ended June 30, 1997.
Provision For Loan Losses. Historically, we have emphasized our loss
experience over other factors in establishing the provision for loan losses. We
review the allowance for loan losses in relation to (i) our past loan loss
experience, (ii) known and inherent risks in our portfolio, (iii) adverse
situations that may affect the borrower's ability to repay, (iv) the estimated
value of any underlying collateral, and (v) current economic conditions.
Management believes the allowance for loan losses is at a level that is adequate
to provide for estimated losses. However, there can be no assurance that further
additions will not be made to the allowance and that such losses will not exceed
the estimated amount. See "Business of First Star Savings Bank -- Non-performing
and Problem Assets -- Allowance for Loan Losses."
The provision for loan losses was $385,000 for the fiscal year ended
June 30, 1998, as compared to $220,000 for the fiscal year ended June 30, 1997.
The amount charged to operations and the related balance in the allowance for
loan loss is based on periodic reviews of the portfolio by management. At its
current level, the allowance for loan loss represents .75% of loans outstanding
at June 30, 1998 as compared to .77% of loans outstanding at June 30, 1997.
Other Income. Included in other income are loan servicing income, gains
or losses on sales of mortgage-backed securities and other investments by the
Bank, and other miscellaneous sources of operating income.
During the fiscal year ended June 30, 1998, other income increased to
$1,759,745 from $720,463 for the fiscal year ended June 30, 1997. The reason for
the increases are mainly attributable to increases in the amount of gains
realized on the sale of mortgage-backed securities which was $1,087,586 for the
fiscal year ended June 30, 1998 and $283,353 for the fiscal year ended June 30,
1997. Also included in other income were gains realized on the sale of REO of
$101,345 and $73,246 for the fiscal years ended June 30, 1998 and 1997,
respectively.
Operating Expenses. Total operating expenses decreased $455,007 or
11.3% to $3,581,269 for the fiscal year ended June 30, 1998, as compared to
$4,036,276 for the fiscal year ended June 30, 1997.
38
<PAGE>
The primary component of operating expenses was salaries and employee
benefits which increased $275,435 or 17.3% to $1,864,647 from $1,589,212 for the
fiscal year ended June 30, 1997. The primary reason for the decrease in
operating expenses during fiscal 1998 from fiscal 1997 was due to a special
charge of $745,174 levied on September 30, 1996 against all SAIF member
financial institutions to recapitalize the SAIF fund.
Management continues to monitor expenses and eliminate unnecessary
expenses, where possible. The ratio of operating expense to average assets
continues to be extremely low at 1.22% as compared to our peer group average of
2.20%
Liquidity and Capital Resources. The Bank has pursued a policy of
maintaining an adequate level of liquidity to generate sufficient cash to fund
current loan demand, meet deposit withdrawals, pay operating expenses and fund
debt obligations. Cash for these short-term and long-term needs is generated
through deposits (including the use of brokered deposits), funds borrowed from
the Federal Home Loan Bank, the sale and maturity of investment securities, cash
flows generated from operations, and collections of principal payments and
prepayments of outstanding loans. Loan principal repayments are a relatively
stable source of funds while deposit flows are influenced significantly by
general interest rates, and money market conditions. Borrowings are also used to
compensate for reductions in other sources of funds such as deposits as well as
to fund the expansion of loan volume. In the event that they provide less
expensive funds, brokered savings deposits are used as well.
As a member of the Federal Home Loan Bank System, the Bank may borrow
from the Federal Home Loan Bank of Pittsburgh (FHLB Pittsburgh"). At June 30,
1998, the Company had outstanding from the FHLB of Pittsburgh advances equal to
$144,484,620, as compared to the $129,399,643 in outstanding advances at June
30, 1997. Such borrowings, as a percentage of the Bank's total assets, equaled
45.7% at June 30, 1998 and 47.9% at June 30, 1997. Within certain guidelines,
the policies of FHLB of Pittsburgh are flexible with respect to the borrowing
limits of a member institution. At June 30, 1998 the Bank's maximum borrowing
capacity was $202,200,000.
At June 30, 1998, the Bank had outstanding previously issued loan
commitments (consisting predominately of single-family residential mortgage
loans) in the aggregate amount of approximately $5.7 million. Management of the
Company believes that normal cash flow from principal and interest payments on
its loan portfolio will be sufficient to meet these loan commitments. No other
significant commitments existed at June 30, 1998.
Regulatory Capital. The Bank is subject to regulatory capital
requirements by the Federal Deposit Insurance Corporation ("FDIC"). To be deemed
"adequately capitalized" the FDIC has three minimum regulatory capital ratios: a
leverage capital ratio equal to 4% of adjusted total assets; a Tier I risk-based
capital ratio equal to 4% of risk-based assets; and total risk-based capital
equal to 8% of risk- based assets.
The following table sets forth the Bank's regulatory capital position
at June 30, 1998, as compared to the minimum regulatory capital requirements
imposed on the Bank by the FDIC.
39
<PAGE>
Percentage of
Amount Average Asset
------ -------------
(Dollars
in thousands)
Leverage Capital:
Regulatory requirement............ $11,740 4.0%
Actual capital.................... 17,454 6.0
------ ---
Excess............................ $5,714 2.0%
===== ===
Tier I Risk-Based Capital:
Regulatory requirement............ $ 6,289 4.0%
Actual Capital.................... 17,454 11.1
------ ----
Excess............................ $11,165 7.1%
====== ====
Risk-based Capital:
Regulatory requirement............ $12,580 8.0%
Actual Capital.................... 18,943 12.1
------ ----
Excess............................ $ 6,366 4.1%
====== ====
Impact of Inflation and Changing Prices. The financial statements and
related data presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and service as measured by the consumer price index.
Year 2000 Issues
The approaching millennium is causing organizations of all types to
review their computer systems for the ability to properly accommodate the year
2000. When computer systems were first developed, two digits were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 as January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates.
Our internal Year 2000 Working Committee, comprised of Paul Sebastian,
Karen Kuehner, and Debbie Schneider, was formed in January, 1998 to address the
potential risk that Year 2000 poses for us. This committee, which reports to the
President and the Board of Directors, meets monthly. In
40
<PAGE>
January, 1998, the committee compiled a Year 2000 Action Plan to promote
awareness of pertinent issues and to provide for evaluation and testing of our
electronic systems, programs and processes.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendor or by us could have a significant adverse
impact on our financial condition and results of operations. We have been
assured by our data processing service bureau that their computer services will
function properly on and after January 1, 2000. Our data processing service
bureau has advised us that it, in fact, anticipates completing programming
corrections by the third quarter of 1998, and commencing testing in the fourth
quarter, 1998. If by the end of this year it appears that our primary data
processing service bureau will be unable to resolve this problem in a timely
manner, then we will identify a secondary data processing service provider to
complete the task. If we are unable to do this, we will identify those steps
necessary to minimize the negative impact the computer problems could have on
us. Our computer hardware does not require specific upgrades in order to meet
Year 2000 requirements.
Recent Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. "Reporting Comprehensive Income" SFAS No.
130 will require the Bank to classify items of other comprehensive income by
their nature in the financial statements and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of equity. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The adoption of
this standard will not impact on the Company's consolidated financial
statements.
FASB Statement on Earnings Per Share. In March 1997, FASB issued SFAS
No. 128, "Earnings Per Share." The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS No. 128 was adopted by
us on July 1, 1997. The adoption of this statement did not have a material
effect on the Company's reported earnings per share.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129 "Disclosure of Information About
Capital Structure." The Statement incorporates the disclosure requirements of
APB Opinion No. 15, Earnings per Share, and makes them applicable to all public
and nonpublic entities that have issued securities addressed by the Statement.
APB Opinion No. 15 requires disclosure of descriptive information about
securities that is not necessarily related to the computation of earnings per
share. This statement continues the previous requirements to
41
<PAGE>
disclose certain information about an entity's capital structure found in APB
Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per Share, and FASB
Statement No. 47, Disclosure of Long-Term Obligations, for entities that were
subject to the requirements of those standards. This Statement eliminates the
exemption of nonpublic entities from certain disclosure requirements of Opinion
15 as provided by FASB Statement No. 21, Suspension of the Reporting of Earnings
per Share and Segment Information by Nonpublic Enterprises. It supersedes
specific disclosure requirements of Opinions 10 and 15 and Statement 47 and
consolidates them in this Statement for ease of retrieval and for greater
visibility to nonpublic entities. The Statement is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 was adopted
by us on July 1, 1997.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by APB Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning after December
15, 1995. Pro forma disclosures must include the effects of all awards granted
in fiscal years beginning after December 15, 1994. We expect to use the
"intrinsic value based method" as prescribed by APB Opinion No. 25.
As no options were granted during 1998 or 1997, the disclosure
requirements of SFAS No. 123 relating to proforma net income, pro forma earnings
per share and the fair value of options granted and the assumptions used to
determine fair value have been omitted.
BUSINESS OF FIRST STAR BANCORP, INC.
The Company is the parent holding company and sole stockholder of First
Star Savings Bank. It was formed in March 10, 1993 as a Pennsylvania-chartered
corporation to be the holding company for First Star Savings Bank. The holding
company structure will facilitate: (i) diversification into non-banking
activities, (ii) acquisitions of other financial institutions, such as savings
institutions, (iii) expansion within existing and into new market areas, and
(iv) stock repurchases without adverse tax consequences. There are, however, no
present plans regarding diversification, acquisitions, expansion or repurchases.
The office of the Company is located at 418 West Broad Street,
Bethlehem, Pennsylvania. The telephone number is (610) 691-2233.
BUSINESS OF FIRST STAR SAVINGS BANK
General
First Star Savings Bank is a Pennsylvania-chartered stock savings bank
which was established in 1969 as a result of the merger of two
Pennsylvania-chartered mutual savings associations, one of which traces its
origins to 1893. First Star's principal business consists of attracting deposits
from the general
42
<PAGE>
public and originating loans secured by residential properties. First Star's
business is conducted through its main office located in Bethlehem, Pennsylvania
and five branch offices.
In May 1987, First Star converted from the mutual to the stock form of
ownership (the "Conversion"). In December of 1990, First Star issued and sold
shares Series A Preferred Stock in a private offering to nine individuals, all
of whom were Directors of First Star. On July 27, 1993, First Star converted to
a state chartered savings bank.
The principal sources of funds for our activities are deposits,
payments on loans and borrowings from the FHLB of Pittsburgh. Funds are used
principally for the origination of adjustable-rate mortgage loans, but also for
the origination of fixed-rate mortgage loans, secured by first mortgages on one-
to four-family residences located in our local communities, and for the purchase
of investment securities. One- to four-family mortgage loans totalled $145.7
million, or 73.28% of our total loans receivable portfolio at June 30, 1998. Our
principal sources of revenue are interest received on loans and on investments
and our principal expense is interest paid on deposits.
Market Area
Our other branch offices are located in Bath, Palmer, Allentown,
Nazareth and Alburtis, which, respectively, fall within Lehigh and Northhampton
Counties. Our market area includes the counties of Lehigh, Northhampton, Carbon,
Bucks and, Monroe in their entities. Carbon, Lehigh and Northhampton Counties
made up the metropolitan area known locally as the Lehigh Valley. The population
of this area in 1990 was 595,000. The largest industry groups, ranked by number
of employees, include service industries, manufacturing, retail trade and
government. Monroe County is sparsely populated, while Bucks County, considered
part of metropolitan Philadelphia, is densely populated, reporting over 544,000
residents in 1990.
Lending Activities
Most of our loans are mortgage loans which are secured by one- to
four-family residences and to a lesser extent, commercial real estate. We also
make construction loans, as well as consumer (including home equity, automobile
and unsecured business) loans. In the current interest rate environment, most of
the loans we originate have fixed rates of interest.
43
<PAGE>
The following table sets forth information concerning the types of
loans held by us.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ------------------- ------------------ ---------------------- -----------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loans:
Real Estate:
1-4 family.................... 145,722 73.28 127,054 83.11 128,335 87.38 128,614 80.05 101,459 76.83
Construction.................. 110 .06 1,231 .80 895 .61 12,208 7.60 13,461 10.19
Multi-family and commercial... 21,838 11.03 1,155 7.30 6,000 4.09 5,743 3.57 3,611 2.73
Commercial(1)................. 19,826 10.01 -- -- -- -- -- -- -- --
Commercial leases ............ 1,496 .76 1,897 1.24 1.345 .92 2,009 1.25 1,925 1.46
Consumer Loans:
Home equity................... 7,904 3.99 9,349 6.12 9,071 6.18 10,735 6.68 10,258 7.77
Auto loans.................... 328 .16 218 .14 220 .15 323 .20 347 .26
Other......................... 728 .71 1,976 1.29 983 .67 1,042 .65 992 .76
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Total loans..................... 197,952 100.00 152,880 100.00 146,849 100.00 160,674 100.00 132,053 100.00
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
Loans in process.............. 66 927 447 4,180 7,280
Deferred loan origination fees 1,215 1,143
and costs.................... 1,273 1,321 1,090
Allowance for loan losses..... 1,489 1,156 1,014 859 838
------- ----- ------- -------- -------
Total loans, net................ 195,124 149,476 144,299 154,420 122,792
======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) Consists of trust preferred securities. First Star includes such securities
in its loan portfolio as permitted by regulatory policy. The trust
preferred securities are included as debt securities in accordance with
generally accepted accounting principals. See Note 3 to the Consolidated
Financial Statements.
44
<PAGE>
The following table sets forth the dollar amount of all loans due after
June 30, 1999, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
One-to-four family...... $ 78,369 $ 62,700 $141,069
Construction............ -- 110 110
Commercial leases ...... 1,407 -- 1,407
Commercial.............. 17,778 22,087 39,865
Home Equity............. 6,023 1,881 7,904
Other consumer.......... 808 249 1,057
------- ------- -------
Total................. $104,385 $ 87,027 $191,412
======= ======= =======
45
<PAGE>
The following information contains information concerning changes in
the amount of loans held by us.
<TABLE>
<CAPTION>
For the Years Ended
June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of period ......... $ 152,880 $ 146,859 $ 162,681 $ 139,296 $ 108,534
========= ========= ========= ========= =========
Loans originated:
1 to 4 family residential ... 32,399 16,241 22,754 36,464 35,917
Construction ................ 385 1056 767 11,302 13,052
Multi-family and commercial
real estate ............... 41,735 9,564 2,079 2,911 --
Home equity and second
mortgages ................. 2,733 4,522 3,662 4,766 5,432
Other consumer .............. 878 1,015 785 1,088 981
--------- --------- --------- --------- ---------
Total loans originated ........ 78,130 32,398 30,047 56,531 55,382
--------- --------- --------- --------- ---------
Loans sold:
Whole loans securitized ..... $ 7,034 $ -- $ 10,784 $ -- $ 8,092
--------- --------- --------- --------- ---------
Total loans sold .............. $ 7,034 $ -- $ 10,784 $ -- $ 8,092
--------- --------- --------- --------- ---------
Loan principal repayments ..... 26,024 26,367 35,085 33,146 16,528
Other (NET) ................... $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
Net loan activity ............. $ 45,072 $ 6,031 $ (15,822) $ 23,385 $ 30,762
========= ========= ========= ========= =========
Total gross loans receivable
at end of period ............ $ 197,952 $ 152,880 $ 146,859 $ 162,681 $ 139,296
========= ========= ========= ========= =========
</TABLE>
Mortgage Loans
One- to Four-Family Residential Loans. Our primary lending activity
consists of originating one- to four-family residential mortgage loans secured
by property located in our market areas. About 31.7% of our loan portfolio is
comprised of adjustable-rate mortgage ("ARM") loans which we retain for our
portfolio. The remainder consists of fixed-rate loans which we originate either
to resell in the secondary market or to retain in our portfolio, depending on
the yield on the loan and on our asset/liability management objectives.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or repay
loans at their option.
The interest rate on our ARM loans is based on an index plus a stated
margin. We usually offer discounted initial interest rates on ARM loans.
Borrowers qualify for the ARM loan at the initial interest rate. However, ARM
loan borrowers are, for loan approval, required to meet lower income-to-debt
ratios than those required for fixed-rate loans. ARM loans provide for periodic
interest rate adjustments upward or downward of up to 2% per adjustment. The
interest rate generally may not increase more than 6% over the life of the loan.
Our ARM loans typically reprice annually, after the initial adjustment period of
one year, three years or five years, with most loans having terms to maturity of
30 years. ARM loans
46
<PAGE>
are offered to all applicants; however, in a relatively low interest rate
environment, borrowers may prefer a fixed-rate to ARM loans. Consumer preference
in our market area for ARM loans has recently been weak.
Our fixed-rate loans generally have terms of 15 or 30 years with
principal and interest payments calculated using up to a 30-year amortization
period. Loans originated with a loan-to-value ratio in excess of 80% require
private mortgage insurance. The maximum loan-to-value ratio on mortgage loans
secured by non-owner occupied properties generally is limited to 80%. We conform
our loans to the standards that are used in the mortgage industry allowing our
loans to be readily sold in the secondary market. We do not currently retain
servicing rights to those loans sold in the secondary market.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Multi-Family and Commercial Real Estate Loans. Multi-family and
commercial loans generally have a loan-to-value ratio of 80% or less. These
loans do not have terms greater than 30 years. Our multi-family loans are
secured by multiple six-plex and four-plex units. Commercial real estate loans
are secured by office buildings, churches and other commercial properties.
Multi-family and commercial real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us. Most construction loans convert to
permanent loans with us after 6 months.
Residential Construction Loans. We make residential construction
loans/permanent loans on one- to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. Only interest payments are required during construction and these
are to be paid from the borrower's own funds. These loans are underwritten using
the same criteria as applied in the underwriting of one- to four-family mortgage
loans. The maximum loan-to-value ratio is 80%. Upon completion of construction,
regular principal and interest payments commence.
Commercial Leases. The Bank invests in loans secured by commercial
equipment leases, primarily medical equipment. Such leases generally have fixed
rates of interest and are for terms of five years. A number of such leases were
produced by a single entity. See "Management's Discussion and Analysis --
Financial Condition -- Non-Performing Assets."
47
<PAGE>
Consumer Loans. We offer consumer loans in order to provide a wider
range of financial services to our customers and because these loans provide
higher interest rates and shorter terms than many of our other loans. Our
consumer loans consist primarily of home equity, direct automobile loans
unsecured lines of credit, and savings account loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. Our senior loan committee,
which is comprised of President, Senior Vice President, Vice President of
Lending and Servicing Manager approves all commercial loans and all mortgage
loans over $400,000. The loan committee has authority to approve loans in any
category up to $1,000,000 in aggregate. Loan requests above this amount must be
approved by the board of directors.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers.
Private mortgage insurance will also be required in certain instances.
Construction/permanent loans are made on individual properties. Funds
advanced during the construction phase are held in a loans-in-process account
and disbursed at various stages of completion, following physical inspection of
the construction by a loan officer or appraiser.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 60 days of the loan application. Loan commitments in excess of
this period may be issued upon payment of a non-refundable fee or upon agreement
on an interest rate float, allowing us to adjust the interest rate on the loan.
At June 30, 1998, commitments to cover originations of mortgage loans totalled
$5.67 million.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed 15% of our unimpaired capital and unimpaired
surplus. We may lend an additional 10% of our unimpaired capital and unimpaired
surplus if the loan is fully secured by readily marketable collateral. Our
maximum loan to one borrower limit was $2,841,000 at June 30, 1998. At June 30,
1998, the aggregate loans of our five largest borrowers have outstanding
balances of between $1.97 million and $1.57 million. All of these loans were
performing in accordance with their terms.
Non-performing and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 15 days past due, a
notice of nonpayment is sent to the borrower. After the loan becomes 30 days
past due, another notice of nonpayment is sent to the borrower. If the loan
continues in a delinquent status for 90 days past due and no repayment plan is
in effect, foreclosure proceedings will be initiated. The borrower will be
notified when foreclosure is commenced.
48
<PAGE>
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when, in our opinion, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Non-performing Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. For
the year ended June 30, 1998, interest income that would have been recorded on
loans accounted for on a nonaccrual basis under the original terms of such loans
was immaterial.
Non-Performing Assets
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
1-4 family residential real estate $2,312 $3,166 $3,689 $2,206 $1,678
Construction................................. -- -- 106 106 --
Multi-family and commercial.................. 336 336 -- 33 60
Commercial leases.............................. 333 333 333 -- --
Consumer loans:
Home equity.................................. 100 287 192 180 101
Other consumer.............................. -- 41 73 76 54
------- ------ ------ ----- -----
Total.......................................... 3,082 4,163 4,393 2,601 1,893
======= ======= ======= ====== =====
Real estate owned.............................. 1,129 767 259 506 472
Other non-performing assets.................... -- -- -- -- --
------ ------ ------ ------ ----
Total non-performing assets.................... $ 4,211 $ 4,930 $ 4,652 $3,107 $2,365
====== ====== ====== ===== =====
Total non-accrual and accrual loans to net
loans........................................ 1.58% 2.79% 3.04% 1.66% 1.46%
Total non-accrual and accrual loans to total
assets....................................... .98% 1.54% 2.42% 1.40% 1.20%
Total non-performing assets to total assets.... 1.33% 1.82% 2.56% 1.67% 1.50%
</TABLE>
Classified Assets. The classification policies of the Department and
FDIC regulations provide for a classification system for problem assets of
savings associations which covers all problem assets. Under this classification
system, problem assets of savings institutions such as ours are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the institution will sustain
"some loss" if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not
49
<PAGE>
warranted. Assets may be designated "special mention" because of potential
weakness that do not currently warrant classification in one of the
aforementioned categories.
When we classify problem assets as either substandard or doubtful, we
may establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When we classify problem assets as loss, we are required either
to establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. Our determination as to
the classification of our assets and the amount of its valuation allowances is
subject to review by the Department and the FDIC, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as substandard or doubtful may be included in determining a savings
association's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
At June 30, 1998, we had loans classified as special mention,
substandard, doubtful and loss as follows:
At
June 30,
1998
--------------
(In thousands)
Special mention............................. $ 236
Substandard................................. 4,186
Doubtful assets............................. --
Loss assets................................. --
------
Total.................................. $ 4,442
======
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses incurred in our loan
portfolio. The evaluation, including a review of all loans on which full
collectibility of interest and principal may not be reasonably assured,
considers: (i) our past loan loss experience, (ii) known and inherent risks in
our portfolio, (iii) adverse situations that may affect the borrower's ability
to repay, (iv) the estimated value of any underlying collateral, and (v) current
economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination as to the amount of allowance for loan losses is subject to review
by the Department and the FDIC, as part of their examination process. After a
review of the information available, the Department and the FDIC might require
the establishment of an additional allowance.
The following table illustrates the allocation of the allowance for
loan losses for each category of loans. The allocation of the allowance to each
category is not necessarily indicative of future losses in any particular
category and does not restrict our use of the allowance to absorb losses in
other loan categories.
50
<PAGE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ------------------- ------------------- ------------------ -----------------
Percent Percent of Percent of Percent of Percent of
of Loans Loans to Loans to Loans to Loans to
to Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period allocated
to:
One-to four-family....... $ 992 66.62% $ 817 70.67% $ 336 82.45% $ 650 75.58% $ 657 78.31%
Construction............. -- -- -- -- 16 1.58 30 3.49 11 1.31
Multi-family and
commercial real estate. 395 26.53 231 19.98 117 11.54 130 15.12 110 13.11
Commercial leases........ 93 6.25 89 7.70 34 3.35 27 3.14 32 3.81
Consumer................. 9 .60 19 1.65 11 1.08 23 2.67 29 3.46
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total allowance.......... $1,489 100.00% $1,156 100.00% $1,014 100.00% $ 860 100.00% $ 839 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
The following table sets forth information with respect to our
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................... $ 196,512 $ 150,944 $ 148,503 $ 162,681 $ 139,296
========= ========= ========= ========= =========
Average loans outstanding ................. 170,991 150,727 155,594 150,989 123,914
========= ========= ========= ========= =========
Allowance balances (at beginning of period) 1,156 1,014 860 839 486
Provision (credit):
1-4 family residential .................. 226 101 209 76 223
Construction ............................ -- (16) (13) 19 3
Multi-family and commercial real estate . 165 114 (13) 27 59
Commercial leases ....................... 4 29 33 (11) 28
Consumer ................................ (10) (8) 2 (7) 18
Net charge-offs (recoveries)
1-4 family residential .................. 43 73 53 83 (22)
Construction ............................ -- -- -- -- --
Multi-family and commercial real estate . -- -- -- -- --
Commercial leases ....................... -- -- -- -- --
Consumer ................................ 9 11 -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ...... 1,489 1,156 1,014 860 839
========= ========= ========= ========= =========
Allowance for loan losses as a percent of . .76% .77% .68% .53% .60%
total loans outstanding
Net loans charged off as a percent of
average loans outstanding ............... .03% .05% .04 .06% --
</TABLE>
REO. At June 30, 1998, we had 12 properties with an aggregate book
value of $1.1 million in real estate owned. The largest REO property had a book
value of $137,000 at June 30, 1998 and consisted of a single family dwelling
located in the Pocono Mountain section of Northeastern Pennsylvania. Of the
total amount of REO, $830,000, or 74% of the total consisted of seven single
family dwellings located in the Pocono Mountain section of Northeastern
Pennsylvania.
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation -- Savings
Institution Regulation -- Federal Home Loan Bank System" and
51
<PAGE>
"Management's Discussion and Analysis -- Liquidity and Capital Resources." The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) our judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, (iv) asset/liability management, and (v) our projections
as to the short-term demand for funds to be used in loan origination and other
activities. We classify our investment securities as "available-for-sale" or
"held-to-maturity" in accordance with SFAS No. 115. At June 30, 1998, our
investment portfolio policy permitted investments in instruments such as: (i)
U.S. Treasury obligations, (ii) U.S. federal agency or federally sponsored
agency obligations, (iii) local municipal obligations, (iv) mortgage-backed
securities, (v) banker's acceptances, (vi) certificates of deposit, (vii)
federal funds, including FHLB overnight and term deposits (up to six months),
and (viii) investment grade corporate bonds, commercial paper and mortgage
derivative products. The board of directors may authorize additional
investments.
Our investment securities "available-for-sale" portfolio at June 30,
1998, did not contain securities of any issuer with an aggregate book value in
excess of 10% of our equity, excluding those issued by the United States
government agencies.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities and collateralized mortgage
obligations ("CMOs"). Mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity. Mortgage-backed
securities represent a participation interest in a pool of single-family or
other type of mortgages. Principal and interest payments are passed from the
mortgage originators, through intermediaries (generally quasi-governmental
agencies) that pool and repackage the participation interests in the form of
securities, to investors such as us. The quasi-governmental agencies guarantee
the payment of principal and interest to investors and include the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), and Federal National Mortgage Association ("FNMA").
At June 30, 1998, our entire mortgaged-backed securities portfolio was
classified as "available- for-sale." Each security was issued by GNMA, FHLMC or
FNMA. Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
The interest rate risk characteristics of the underlying pool of mortgages
(i.e., fixed-rate or adjustable-rate) and the prepayment risk, are passed on to
the certificate holder. The life of a mortgage-backed pass-through security is
equal to the life of the underlying mortgages. Mortgage-backed securities issued
by FHLMC and GNMA make up a majority of the pass-through certificates market.
52
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of our investments. All investments, are classified as "available for sale." See
Notes 2, 3 and 4 to our Consolidated Financial Statements elsewhere in this
document.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1998 1997 1996
------------------ ----------------- --------------------
(In thousands)
<S> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal Agencies..................... $ 16,529 $ 16,996 --
Mortgage-backed securities .............................. 76,035 74,736 19,417
Corporate debt securities................................ 9,612 9,806 5,273
Marketable equity securities............................. 1,757 1,733 6
-------- -------- --------
Total securities available for sale...................... $103,933 $103,271 $ 24,696
======= ======= =======
Total investments and mortgage-backed
securities ......................................... $103,933 $103,271 $ 24,696
======= ======= =======
</TABLE>
53
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investments at June 30, 1998 by contractual maturity. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
------------------ ------------------ ----------------- ------------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal
agencies................... $ -- --% $ 2,014 7.03% $ 4,243 7.16% $ 10,272 7.77% $ 16,529 7.52% $ 16,529
Mortgage-backed securities... -- -- 616 7.21 -- -- 75,424 5.76 76,035 5.77 76,035
Corporate debt securities.... 250 6.83 7,279 7.14 1,934 7.57 149 7.21 9,612 7.22 9,612
Marketable equity securities. -- -- -- -- -- -- 1,757 6.49 1,757 6.49 1,757
-------- ----- ------- ------ -------- ----- ------- ----- -------- ----- -------
Total investments.......... $ 250 6.83% $ 9,904 7.12% $ 6,177 7.29% $ 87,602 6.01% $ 103,933 6.19% $103,933
======= ===== ======= ===== ======= ===== ======= ===== ======== ===== =======
</TABLE>
54
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including checking accounts, regular savings accounts, money
market accounts, and term certificate accounts. IRA accounts are also offered.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the
direction of our senior management. Interest rates are determined based on our
liquidity requirements, interest rates paid by our competitors, and our growth
goals and applicable regulatory restrictions and requirements.
Regular savings, money market demand and NOW accounts constituted $12.7
million, or 87%, of our deposit portfolio at June 30, 1998. Certificates of
deposit constituted $104 million or 71.7% of the deposit portfolio of which
$12.8 million or 8.8% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. Such deposits are offered at negotiated rates. As
of June 30, 1998, we had $689,000 in brokered deposits.
At June 30, 1998, our deposits were represented by the various types of
savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Balance as of Percentage of
Category Term Rate(1) Amount June 30, 1998 Total Deposits
- -------- ---- ------- ------ ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-interest demand accounts......... None --% $ 250 $ 1,555 1.07%
NOW accounts......................... None 2.10 100 12,690 8.74
Passbook and club accounts........... None 2.79 100 11,468 7.90
Money market demand.................. None 2.91 1,000 15,327 10.57
Certificates of Deposit:
Fixed Term, Fixed-rate............... 91 Days 4.50 1,000 767 .53
Fixed Term, Fixed-rate............... 6-12 months 4.88 1,000 43,699 30.10
Fixed Term, Fixed-rate............... 13-30 months 5.31 1,000 29,971 20.65
Fixed Term, Fixed-rate............... 31-48 months 5.40 1,000 5,232 3.60
Fixed Term, Fixed-rate............... 49-60 months 5.45 1,000 13,237 9.13
IRA deposits......................... None -- -- 11,155 7.67
-------
145,096 99.95%
------- ------
Accrued interest on deposits 74 .05%
------- ------
Total $145,170 100.00%
------- ------
</TABLE>
(1) Interest rate offerings as of June 30, 1998.
55
<PAGE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Interest Rate
4.00% or less........................................... $ -- $ -- $ --
4.01-600%............................................... 68,287 68,215 69,053
6.01-8.00%.............................................. 36,532 16,167 13,453
8.01% or more........................................... 242 1,057 718
Accrued interest on certificate accounts................ 63 45 23
-------- -------- --------
Total $ 104,124 $ 85,484 $ 83,247
======== ======== ========
</TABLE>
The following table sets forth the time deposits in First Star
classified by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------------------------------
After
Interest Rate June 30, June 30, June 30, June 30,
1999 2000 2001 2001 Total
---- ---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less................... $ -- $ -- $ -- $ -- $ --
4.01-6.00%...................... 48,719 13,383 2,512 2,673 67,287
6.01-8.00%...................... 21,747 10,368 1,173 3,244 36,532
8.01 or more.................... 11 214 17 -- 242
Accrued Interest on
Certificate Accounts.......... 41 16 2 4 63
-------- -------- -------- -------- --------
Total......................... $ 72,649 $ 23,981 $ 3,704 $ 5,921 $ 104,124
======= ======= ======== ======== ========
</TABLE>
The following table indicates the amount of our certificates of
deposits of $100,000 or more by time remaining until maturity as of June 30,
1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months............... $ 2,918
Three through six months.......... 3,347
Six through twelve months......... 2,232
Over twelve months................ 4,334
-------
$ 12,831
========
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<PAGE>
Borrowings. Advances (borrowings) may be obtained from the FHLB of
Pittsburgh to supplement our supply of lendable funds. Advances from the FHLB of
Pittsburgh are typically secured by a pledge of our stock in the FHLB of
Pittsburgh, substantially all of our first mortgage loans and other assets. Each
FHLB credit program has its own interest rate (which may be fixed or adjustable)
and range of maturities. At June 30, 1998, we could borrow up to $202.2 million
from the FHLB of Pittsburgh. If the need arises, we may also access the Federal
Reserve Bank discount window to supplement our supply of lendable funds and to
meet deposit withdrawal requirements. At June 30, 1998, borrowings from the FHLB
of Pittsburgh totalled $144.5 million ($27.9 million of which were short-term
borrowings maturing before June 30, 1999).
The following table sets forth the terms of our short-term FHLB
advances.
<TABLE>
<CAPTION>
During the
Year Ended June 30
------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding..................... $ 31,481 $ 38,214 $17,042
Maximum balance at end of any month............. 45,020 55,567 29,000
Balance outstanding end of period............... 27,935 55,567 29,000
Weighted average rate during period............. 5.90% 5.80% 6.09%
Weighted average rate at end of period.......... 5.91 5.56 6.01
</TABLE>
Subordinated Debentures. During the year ended June 30, 1992, the Bank
offered $1,590,000 of Adjustable-Rate Mandatorily Convertible Subordinated
Debentures due in the year 2002 (the "Debentures"). Interest on the Debentures
is 2% over the prime rate, adjustable monthly. Interest is payable on the
Debentures on the first day of each month. The Debentures will automatically
convert into Permanent Noncumulative Convertible Preferred Stock, Series A
("Series A Preferred Stock" (see Note 17)) of the Company on January 1, 2002,
unless previously converted. The Debentures may be converted into Series A
Preferred Stock at any time, at the option of either the Company or the holder
of the Debenture, unless previously redeemed, at a conversion price of one share
per $15.625 principal amount of Debenture or 640 shares per $10,000 principal
amount of Debentures, subject to adjustment of certain events. The Series A
Preferred Stock is convertible at the option of the holder at any time, on a
one-for-one basis (as adjusted for stock dividends) into shares of common stock
of the Company.
The Debentures are redeemable at anytime after January 1, 1996, in
whole or in part, on not less than 30 days' notice at the option of the Company
at various redemption prices. The Debentures are subordinated in right of
payment to all present and future Senior Indebtedness of the Company - The
Debentures are not transferable or assignable for a period of one year from the
date of purchase.
During the year ended June 30, 1992, $110,000 of the Debentures were
converted to the Series A Preferred Stock. At the formation of the holding
company, the Debentures were assumed by Company. At June 30, 1996, $1,480,000 of
the Debentures remain outstanding.
On December 31, 1996 the Company sold $4,000,000 of Adjustable-Rate
Mandatorily Convertible Subordinated Debentures due in the year 2008 (the "1996
Debentures"). Interest on the 1996 Debentures is 1% under the prime rate,
adjustable monthly. Interest is payable on the 1996 Debentures on the first day
of each month. The 1996 Debentures will automatically convert into Permanent
57
<PAGE>
Noncumulative Convertible Preferred Stock, Series B ("Series B Preferred Stock")
of the Company on December 31, 2008, unless previously converted. The 1996
Debentures may be converted into Series B Preferred Stock at any time by the
holder or after two years by the Company, unless previously redeemed, at a
conversion price of one share per $35 principal amount of 1996 Debenture or 715
shares per $25,000 principal amount of 1996 Debentures, subject to adjustment in
certain events. The Series B Preferred Stock is convertible at the option of the
holder at any time, on a one-for-one basis (as adjusted for stock dividends)
into shares of common stock of the Company.
The 1996 Debentures are redeemable at any time after January 1, 1997
for the holder and any time after January 1, 1999 for the Bancorp in whole or in
part. The 1996 Debentures are subordinated in right of payment to all present
and future Senior Indebtedness of the Bancorp. The 1996 Debentures are not
transferable to a person who is not a resident of Pennsylvania for a period of
twelve months from the date of sale.
All Debentures are includable as Tier 2 capital for determining the
Bancorp's compliance with regulatory capital requirements (see Note 13). Upon
conversion, the Debentures become Tier I capital.
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
finance companies, and multi-state regional banks in our market areas.
Competition for funds also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from commercial banks, thrift institutions, credit unions
and mortgage bankers.
58
<PAGE>
Properties
We own three of our six offices and lease three of them. The net book
value of this real property at June 30, 1998, was $508,581. Our total investment
in office equipment had a net book value of $178,643 at June 30, 1998.
Year Total Book Owned
Address Opened Investment Value Lease
------- ------ ---------- ----- -----
MAIN OFFICE:
418 West Broad Street 1952 1,877,296 345,760 Owned
Bethlehem, PA 18018
BRANCH OFFICES:
358 South Walnut Street 1986 95,075 14.988 Leased(1)
Bath, PA 18014
3590 Northwood Avenue 1987 165,702 -- Leased(2)
Palmer, PA 18043
14 South Main Street 1989 7,823 3,085 Leased(3)
Nazareth, PA 18064
471-497 Wabash Street 1994 191,933 140,419 Owned
Allentown, PA 18103
11 North Main Street 1997 202,846 182,972 Owned
Alburtis, PA 18011
- ----------------------
(1) Expires May 2001. Option to renew for an additional three-year term.
(2) Expires June 2008. Option to renew for an additional ten-year term.
(3) Expires June 1999. Option to renew for an additional one-year term.
Personnel
At June 30, 1998 we had 39 full-time employees and 7 part-time
employees. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Additional Subsidiary Activity
First Star Bancorp has two direct subsidiaries: the Bank and Integrated
Financial Corp. Integrated Financial Corp. leases two automobiles for Bank
officers. Furthermore, Integrated Financial Corp. has one wholly owned
subsidiary, Integrated Abstract, Inc., which is inactive.
59
<PAGE>
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not a party to any legal proceedings which are
expected to have a material adverse effect on our financial statements.
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulation.
Regulation of the Bank
General. As a Pennsylvania chartered, SAIF-insured savings bank, we are
subject to extensive regulation and examination by the Department, the FDIC,
which insures its deposits to the maximum extent permitted by law, and to a much
less or extent, by the Federal Reserve. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, the reserves required to be kept
against deposits, the timing of the availability of deposited funds and the
nature and amount of and collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department, the FDIC or the United States Congress
could have a material adverse impact on the Company, the Bank and their
operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code ("Banking
Code") contains detailed provisions governing the organization, location of
offices, rights and responsibilities of trustees, officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of
the Bank and its affairs. The Banking Code delegates extensive rule-making power
and administrative discretion to the Department so that the supervision and
regulation of state chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be fully competitive with each other and with other
financial institutions existing under other state, federal and foreign laws. To
this end, the Banking Code provides state-chartered savings banks with all of
the powers enjoyed by federal savings and loan associations, subject to
regulation by the Department. The Federal Deposit Insurance Corporation Act
("FDIA"), however, prohibits state chartered institutions from making new
investments, loans, or becoming involved in activities as principal and equity
investments which are not permitted for national banks unless (1) the FDIC
determines the activity or investment does not pose a significant risk of loss
to the SAIF and (2) the savings bank meets all capital requirements.
Accordingly, the ability of the Banking Code to provide additional operating
authority to us are limited by the FDIA.
The Department generally examines each savings bank not less frequently
than once every two years. The Banking Code permits the Department to accept the
examinations and reports of the FDIC in lieu of the Department's examination.
The present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law or
unsafe
60
<PAGE>
or unsound business practice and may direct any trustee, officer, attorney or
employee of a savings bank engaged in an objectionable activity, after the
Department has ordered the activity to be terminated, to show cause at a hearing
before the Department why such person should not be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in another state (a "foreign
institution") to acquire the voting stock of, merge or consolidate with, or
purchase assets and assume liabilities of, a Pennsylvania-chartered savings bank
and (ii) the establishment of branches in Pennsylvania by foreign institutions,
in each case subject to certain conditions including (A) reciprocal legislation
in the state in which the foreign institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania savings institutions and (B)
approval by the Department. Pennsylvania law also provides for nationwide
branching by Pennsylvania- chartered savings banks and savings and loan
associations, subject to the Department's approval and certain other conditions.
On September 29, 1994, the United States Congress enacted the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Law"), which amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The Interstate Banking Law will allow, effective September 29, 1995,
the acquisition by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
will be allowed effective June 1, 1997, however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting laws that specifically
prohibit such interstate transactions. States may, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. Pursuant to the Interstate Banking Law, states may also
enact legislation to allow for de novo interstate branching by out of state
banks.
Pennsylvania has enacted "opt-in" legislation authorizing full
interstate branching for state-chartered financial institutions prior to June 1,
1997. This legislation allows out-of-state banks to branch into Pennsylvania
either by buying an existing bank or converting it into a branch or by setting
up a de novo branch. The law requires reciprocity from the other state until
June 1, 1997. The legislation also allows state-chartered banks the same rights
as federally chartered banks to branch into other states that allow interstate
branching.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and savings institutions and safeguards the safety and soundness of the
banking and savings industries. Two separate insurance funds, the Bank Insurance
Fund ("BIF") for commercial banks, state savings banks and some federal savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. The Bank, which was previously a state savings association, remains a
member of the SAIF and its deposit accounts are insured by the FDIC, up to the
prescribed limits. The FDIC has examination authority over all insured
depository institutions, including the Bank, and has under certain
circumstances, authority to initiate enforcement actions against federally
insured savings institutions to safeguard safety and soundness and the deposit
insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and the SAIF. The
FDIC may increase assessment rates for either
61
<PAGE>
fund if necessary to restore the fund's ratio of reserves to insured deposits to
its target level within a reasonable time and may decrease such assessment rates
if such target level has been met. The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under this system, assessments
are set within a range, based on the risk the institution poses to its deposit
insurance fund. This risk level is determined based on the institution's capital
level and the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings associations were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for SAIF-insured deposits. Legislation to
capitalize the SAIF and to eliminate the significant premium disparity between
the BIF and the SAIF became effective December 31, 1996. The recapitalization
plan provided for a special assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured deposits were required to
pay a lower special assessment. Based on its deposits at March 31, 1995, on
November 27, 1996, the Bank paid a pre-tax special assessment of $745,000. Such
payment was recorded as an expense and accounted for by the Bank as of December
31, 1996. Earnings and capital were, therefore, negatively affected for the
quarter ended September 30, 1996, by an after-tax amount of approximately
$476,000.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF (Fico Bond payments), which
increased BIF assessments for healthy banks to approximately $.013 per $100 of
deposits. SAIF assessments for healthy savings institutions starting in 1997
will be approximately $.064 per $100 in deposits and may never be reduced below
the level set for healthy BIF institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 0 to 27 basis points.
In addition, SAIF-member savings institutions as assessed approximately $.064
per $100 in deposits to the Financing Corp. (Fico Bonds).
Regulatory Capital Requirements. The FDIC has promulgated regulations
and adopted a statement of policy prescribing the capital adequacy requirements
for state-chartered banks, some of which, like the Bank, are not members of the
Federal Reserve. At June 30, 1998, the Bank exceeded all regulatory capital
requirements and is classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Rating
System. Leverage or core capital is defined as the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, and minority interests in consolidated subsidiaries, minus
all intangible assets other than certain qualifying supervisory goodwill, and
certain purchased mortgage servicing rights and purchased credit and
relationships.
62
<PAGE>
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
A bank which has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
We are also subject to more stringent Department guidelines. Although
not adopted in regulation form, the Department utilizes capital standards
requiring a minimum of 6.0% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
The Bank was in compliance in both the FDIC and Pennsylvania capital
requirements at June 30, 1998. See "Historical and Pro Forma Capital
Compliance."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. The Bank
received a "satisfactory" rating in its last CRA examination in October, 1996.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the Bank's capital. Affiliates of the Bank include
the Holding Company and any company which would be under common control with the
Bank.
The Bank's authority to extend credit to executive officers, trustees
and 10% shareholders, as well as entities such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals,
63
<PAGE>
place limits on the amount of loans the Bank may make to such persons based, in
part, on the Bank's capital position, and require certain approval procedures to
be followed. See, however, "Management of the Bank - Transactions With
Management and Others."
Federal Home Loan Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Trustees of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1998, the Bank had $7.4 million in FHLB
stock, which was in compliance with this requirement.
As a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment in low and moderate income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. For the year ended June 30, 1998, dividends
paid by the FHLB of Pittsburgh to the Bank totalled approximately $443,000.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy the liquidity requirements that are imposed by the Department. At June
30, 1998, the Bank met its reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all sources before borrowing from the Federal Reserve.
The Bank had no discount window borrowings at June 30, 1998.
Regulation of the Company
General. The Company, as a bank holding company, is subject to
regulation and supervision by the Board of Governors of the Federal Reserve and
by the Department. This regulation is generally intended to ensure that the
Company limits its activities to those allowed by law and that it operates in a
safe and sound manner without endangering the financial health of its subsidiary
banks. The Company will be required to file annually a report of its operations
with, and is subject to examination by, the Federal Reserve and the Department.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA"), prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve. In determining whether to authorize a bank
holding company (or a company that will become a bank holding company) to
acquire control of a bank, the Federal Reserve takes into consideration the
financial and managerial resources of the bank holding
64
<PAGE>
company, as well as those of the bank to be acquired, and considers whether the
acquisition is likely to have anti-competitive effects or other adverse effects.
The BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the operations of the existing bank
subsidiaries of the bank holding company are principally conducted unless
specifically authorized by applicable state law. No approval under the BHCA is
required, however, for a bank holding company already owning or controlling 50%
or more of the voting shares of a bank to acquire additional shares of such
bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. In making such determinations, the Federal Reserve is required to weigh
expected benefits to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include those of operating a mortgage company, a finance company, a
credit card company, a factoring company, a trust company or a savings
association; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
leasing personal property on a full-payout (and, to a limited extent, less than
full-payout), non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve also has determined that certain other activities, including
real estate brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications to it under the BHCA. The Federal Reserve capital adequacy
guidelines are similar to those imposed on the Bank by the FDIC. See "Regulation
of the Bank - Regulatory Capital Requirements."
Commitments to Affiliated Depository Institutions. Under Federal
Reserve policy, the Company will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The enforceability and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. However, should the Bank require the support of additional capital
resources, it should be anticipated that the Company will be required to respond
with any such resources available to it.
Restrictions Applicable to Pennsylvania-Chartered Holding Companies.
The Company is subject to such regulations as the Department may from time to
time prescribe. No holding company regulations have been issued to date.
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PRINCIPAL SECURITY HOLDERS
The Company knows of no person or entity other than those set forth
below who is a beneficial owner of more than 5% of the Common Stock. The
following table sets forth, as of June 30, 1998, certain information as to those
persons who were beneficial owners of more than 5% of the Company's outstanding
shares of Common Stock and as to the Common Stock beneficially owned by all
officers and directors of the Company as a group, as calculated from the lists
of security holders of the Company.
Percent
Name and Address of Amount and Nature of of
Beneficial Owner Beneficial Ownership (1) Class
- ------------------- ------------------------ -----
Neil Scott (2)(3)
315 Pennsylvania Avenue
Pen Argyl, Pennsylvania 18072............ 38,411 9.44%
Amelio Scott (2)
205 David Avenue
Pen Argyl, Pennsylvania 18072............ 32,830 8.27%
Tighe Scott (2)(3)
Hemlock Lane Star Route
Saylorsburg, Pennsylvania 18353.......... 121,905 25.62%
Paul J. Sebastian (3)
418 West Broad Street
Bethlehem, Pennsylvania 18018............ 97,574 21.30%
Joseph T. Svetik (3)
418 West Broad Street
Bethlehem, Pennsylvania 18018............ 101,438 22.1%
First Star Bancorp, Inc.
Employee Stock Ownership Plan
418 West Broad Street
Bethlehem, Pennsylvania 18018............ 69,038 17.5%
All directors and officers as a group
(10 persons) (3)........................ 341,872 77.6%
(1) Includes shares of Common Stock owned by corporations or foundations in
which the stockholder, director or officer is an officer or major
stockholder or by spouses, or as a custodian or trustee for minor children,
over which shares the named individual or all officers and directors as a
group effectively exercise sole voting and investment power, unless
otherwise indicated. Also includes shares of Common Stock that may be
obtained through the conversion or exercise of other securities. Absent the
conversion or exercise of other securities, all directors and officers as a
group held 57,162 shares of Common Stock at June 30, 1998.
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(2) Amelio Scott and Neil Scott are father and son, respectively. Tighe
Scott, a director of the Company, is also a son of Amelio Scott.
(3) Includes 27,502 shares of Common Stock which may be acquired through the
exercise of stock options which are immediately exercisable. Also includes
shares over which officers and directors exercise joint voting and
investment power with certain members of their families, 184,493 shares of
Common Stock issuable upon conversion of Series A Preferred Stock
(including Debentures that are convertible into Series A Preferred Stock)
and 145,164 shares of Common Stock issuable upon conversion of Series B
Preferred Stock (including Debentures that are convertible into Series B
Preferred Stock).
MANAGEMENT OF FIRST STAR BANCORP, INC.
Directors and Executive Officers
Our board of directors is composed of eight members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our current charter and bylaws and our proposed stock charter and
bylaws require that directors be divided into three classes, as nearly equal in
number as possible. Our officers are elected annually by our board and serve at
the board's discretion.
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially
Year First Current Owned at Percent
Elected Term June 30, of
Name Age Director Expires 1998(1) Class
- ---- --- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Martin A. Marschang.............. 88 1977 2000 1,805(2) .48%
Harold J Suess................... 77 1964 2000 5,828(3) 1.56%
Stephen M. Szy................... 53 1987 2000 3,864(4) 1.04%
Joseph T. Svetik................. 49 1987 1998 101,438(5) 22.13%
Paul J. Sebastian................ 55 1986 1998 97,574(6) 21.30%
Mark Parseghian, Jr.............. 70 1974 1999 4,190(7) 1.61%
Tighe Scott...................... 49 1987 1999 121,905(8) 25.62%
</TABLE>
- --------------------------------
(1) Except as otherwise noted below, the named individual effectively
exercises sole voting and investment power over the shares beneficially
owned.
(2) Includes 1,013 shares of the Series A Preferred Stock.
(3) Includes 2,017 shares of the Series A Preferred Stock.
(4) Includes 1,013 shares of the Series A Preferred Stock.
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(5) Includes 11,376 shares which may be received upon the exercise of stock
options which are immediately exercisable, 8,617 shares of the Series A
Preferred Stock, 38,522 shares of Series A Preferred Stock receivable
upon conversion of the Debentures and 27,799 shares of Series B
Preferred Stock receivable upon conversion of Series B Debentures.
(6) Includes 16,128 shares which may be received upon the exercise of stock
options which are immediately exercisable, 8,617 shares of the Series A
Preferred Stock, 29,399 shares of Series A Preferred Stock receivable
upon conversion of the Debentures and 31,917 shares of Series B
Preferred Stock receivable upon conversion of Series B Debentures.
(7) Includes 1,267 shares held by Mr. Parseghian's wife and 2,059 shares of
Series B Preferred Stock receivable upon conversion of Series B
Debentures also held by Mr. Parseghian's wife.
(8) Includes 19,261 shares of the Series A Preferred Stock and 64,880
shares of Series A Preferred Stock receivable upon Conversion of the
Debentures and 19,548 shares of Series B Preferred Stock receivable
upon Conversion of Series B Debentures. Tighe Scott is the brother of
Neil Scott and the son of Amelio Scott.
The business experience during at least the past five years for each of
the directors is as follows:
Martin A. Marschang.Mr. Marschang has been retired for more than the
past five years. Prior to his retirement, Mr. Marschang was employed as the
corporate secretary for Lehigh Navigation Dodson Company.
Harold J. Suess. Retired for the past several years, Mr. Suess is a
prior President of Bethlehem Fence Works. From 1990 until his retirement, he was
Chairman of the Board of that company.
Stephen M. Szy. For more than the past five years, Mr. Szy has been
self-employed as a public accountant in Hellertown, Pennsylvania.
Joseph T. Svetik. Mr. Svetik became Chairman of the Board of the
Savings Bank in August 1997. Mr. Svetik became President and Chief Executive
Officer of the Savings Bank in November 1990. Prior to that date, Mr. Svetik was
Executive Vice President and Chief Operating Officer of the Savings Bank.
Paul J. Sebastian. Mr. Sebastian became Senior Vice President of the
Savings Bank in October 1989 and Chairman of the Board of Directors of the
Company in August 1997.
Mark Parseghian, Jr. For more than the past five years, Mr. Parseghian
has been self-employed as a consultant to companies engaged in the construction
industry.
Tighe J. Scott. For more than the past five years, Mr. Scott has been
Vice President - Operations of Scotty's Fashion, Inc. an apparel manufacturer
located in Pen Argyl, Pennsylvania.
Meetings and Committees of the Board of Directors
The Company's Board of Directors holds regular monthly meetings and
special meetings when needed. During the fiscal year ended June 30, 1998, the
Board met 12 times. No director attended fewer than 75% of the total number of
Board meetings held during the fiscal year ended June 30, 1998,
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and the total number of meetings held by all committees of the Board on which
the director served during such year.
The Board of Directors has a number of standing committees, including
an Executive Committee, and Audit Committee and a Compensation Committee.
The Executive Committee, except as limited by the Company's Bylaws, has
the full authority of the Board of Directors when the Board of Directors is not
in session. The current members of the Executive Committee are Directors
Marschang, Sebastian, Svetik and Szy. The Executive Committee did not meet
during the fiscal year ended June 30, 1998.
The Audit Committee reviews the records and affairs of the Company to
determine its financial condition and reviews with management and the
independent auditors the systems of internal control. This Committee approves
the scope of the audit procedures employed by the Company's independent auditors
and meets with the auditors to discuss the results of their audit. The Audit
Committee reports to the Board of Directors with respect to the foregoing
matters and recommends annually the selection of independent auditors. The
current members of the Audit Committee are Directors Marschang, Parseghian and
Szy. During the fiscal year ended June 30, 1998, the Audit Committee met four
times.
The Compensation Committee is responsible for reviewing and
establishing compensation for all officers and employees of the Company and also
administers the Company's Employee Stock Compensation Program. The current
members of the Compensation Committee are Directors Parseghian, Scott, Stehly
and Suess. This Committee met two times during the fiscal year ended June 30,
1998.
The full Board of Directors acts as a nominating committee for the
annual selection of nominees to the Board of Directors. Only its nominations,
and those of any stockholder delivered to the Secretary of the Company at least
60 days in advance of the Annual Meeting, shall be voted on at the Annual
Meeting. In its capacity as the Nominating Committee, the Board of Directors
held one meeting during the fiscal year ended June 30, 1998.
Director Compensation
Each director is paid monthly. Total aggregate fees paid to the
directors for the year ended June 30, 1998 were $40,800. Since January 1, 1998,
each outside director has been paid a monthly fee of $450 for each meeting
attended.
In addition, non-officer directors receive an annual cash bonus based
upon the performance of the Bank. During fiscal 1998, each non-employee director
received a cash bonus of $1,500.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
June 30, 1998 and 1997. No other employee earned in excess of $100,000 for the
year ended June 30, 1998.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------
Stock Based
Other Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation # of Options Compensation
- --------------------------- ---- ------ ----- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph T. Svetik 1998 149,581 58,026 -- -- $26,175(2)
Director, President and CEO 1997 133,519 24,450 -- -- $23,370(2)
Paul J. Sebastian 1998 142,103 58,026 -- -- $25,614(3)
Director, Senior Vice President 1997 126,843 24,450 -- -- $23,976(3)
</TABLE>
- -----------------
(1) Other annual compensation does not equal the lesser of $50,000 or 10% of
the total of individual's annual salary and bonus.
(2) Includes First Star matching contributions of $2,175 and $870 under the
401(k) Plan and First Star contributions of $24,000 and $22,500 made
pursuant to the Employee Stock Ownership Plan during 1998 and 1997,
respectively.
(3) Includes First Star matching contributions of $1,614 and $1,652 under the
401(k) Plan and First Star contributions of $24,000 and $22,324 made
pursuant to the Employee Stock Ownership Plan during 1998 and 1997,
respectively.
Employment Agreements. We have entered into employment agreements with
Joseph T. Svetik and Paul J. Sebastian ("Employment Agreements"). The Employment
Agreements have a term of five years. The agreements are terminable by us for
"cause" as defined in the agreements. If we terminate the individual without
cause or such person terminates for good reason, he will be entitled to two
times his salary. The agreements provide that we will enter into a similar
agreement with Stephen Koomar of Nesquehoning.
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Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is funded by contributions made by us in cash or common stock.
Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
10% of the common stock to be issued in the Merger Conversion. The ESOP intends
to borrow funds from the Company. The loan is expected to be for a term of [ten]
years at an annual interest rate equal to the prime rate as published in The
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
to 10% of the common stock to be issued in the offering (i.e., 4,668 shares,
based on the midpoint of the EVR). The loan will be secured by the shares
purchased and earnings of ESOP assets. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the loan
is repaid. We anticipate contributing approximately $25,000 annually (based on a
$250,000 purchase) to the ESOP to meet principal obligations under the ESOP
loan, as proposed. It is anticipated that all such contributions will be
tax-deductible. This loan is expected to be fully repaid in approximately 10
years.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become vested in plan allocations
following five years of service. Employment prior to the adoption of the ESOP
shall be credited for the purposes of vesting. Vesting will be accelerated upon
retirement, death, disability, change in control of the Company, or termination
of the ESOP. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits may be payable in the form of
a lump sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Proposed Future Stock Benefit Plans
Stock Option Plan. The board of directors intends to adopt a stock
option plan (the Option Plan) following the Merger Conversion, subject to
approval by the Company's stockholders, at a stockholders' meeting to be held no
sooner than six months after the Merger Conversion. The Option Plan would be in
compliance with the Department regulations in effect. The purpose of the Option
Plan will be to provide additional performance and retention incentives to
certain officers, trustees and employees of Nesquehoning by facilitating their
purchase of a stock interest in our company. The Option Plan will provide for a
term of 10 years, after which no awards could be made, unless earlier terminated
by the
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board of directors pursuant to the Option Plan and the options would vest over a
five year period (i.e., 20% per year), beginning one year after the date of
grant of the option. Options would be granted based upon several factors,
including seniority, job duties and responsibilities, job performance, our
financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by Company. However, no purchases in the
open market will be made that would violate applicable regulations restricting
purchases by Company. The exercise of options and payment for the shares
received would contribute to the equity of Company.
If the Option Plan is implemented more than one year after the
conversion, the Option Plan will comply with Department and FDIC regulations and
policies that are applicable at such time.
Certain Related Transactions. We grant loans to our officers, directors
and employees. These loans are made in the ordinary course of business and upon
the same terms, including collateral, as those prevailing at the time for
comparable transactions and do not involve more than the normal risk of
collectibility or present any other unfavorable features. Loans to officers and
directors and their affiliates amounted to $3.5 million or 23.24% of our total
equity, at June 30, 1998.
RESTRICTIONS ON ACQUISITION OF FIRST STAR BANCORP, INC.
While the board of directors is not aware of any effort that might be
made to obtain control of the Company after conversion, the board of directors
believes that it is appropriate to include certain provisions as part of the
Company's articles of incorporation to protect the interests of the Company and
its stockholders from hostile takeovers ("anti-takeover" provisions) which the
board of directors might conclude are not in our best interests or those of our
stockholders. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the board of directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over the current
market prices. As a result, stockholders who might desire to participate in such
a transaction may not have the opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of the
Company more difficult.
The following discussion is a general summary of the material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions of the Company, which may be deemed to have such an
anti-takeover effect. The description of these provisions is necessarily general
and reference should be made in each case to the articles of incorporation and
bylaws of the Company which are filed as exhibits to the registration statement
of which this prospectus is a part. See "Where You Can Find Additional
Information" as to how to obtain a copy of these documents.
Provisions of the Company Articles of Incorporation and Bylaws
Election of Directors. Certain provisions of the Company's articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. The Company's articles of incorporation provide that the board of
directors of the Company will be divided into three staggered classes, with
directors in each class elected for three-year terms. Thus, it would take two
annual elections to replace a majority of the Company's board. The Company's
articles of incorporation provide that the
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size of the board of directors may be increased or decreased only if approved by
a vote of two-thirds of the whole board of directors. The bylaws also provide
that any vacancy occurring in the board of directors, including a vacancy
created by an increase in the number of directors, may be filled only by the
board of directors, acting by a majority vote of the directors then in office
and any director so chosen shall hold office until the next succeeding annual
election of directors. Finally, the articles of incorporation and the bylaws
impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the board of directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of a majority of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The articles of incorporation
of the Company provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the Board of Directors, the
Chairman of the Board of Directors, or the President.
Absence of Cumulative Voting. The Company's articles of incorporation
provide that stockholders may not cumulate their votes in the election of
directors.
Authorized Shares. The articles of incorporation authorize the issuance
of 2,500,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide the Company's board of
directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the board of directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The board of directors also has
sole authority to determine the terms of any one or more series of preferred
stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of preferred stock,
the board has the power, to the extent consistent with its fiduciary duty, to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
At June 30, 1998, 27,520 shares of Permanent Non-Cumulative Preferred Stock,
Series A, par value $1.00 per share ("Series A Preferred Stock") were issued and
outstanding. The Series A preferred Stock is immediately convertible on a
one-for-one basis into Common Stock of First Star.
Convertible Debentures. For a discussion of the convertible debentures,
see "Business of First Star Savings Bank -- Source of Funds -- Subordinated
Debentures."
Procedures for Certain Business Combinations. The articles of
incorporation require that unless certain fair price provisions are met,
business combinations must be approved by the affirmative vote of the holders of
not less than two-thirds of the outstanding stock of the Company. Exceptions to
this requirement may occur if two-thirds of the members of the board of
directors, who are continuing directors, has previously approved the business
transaction. Any amendment to this provision requires the affirmative vote of at
least two-thirds of the shares of the Company entitled to vote generally in an
election of directors.
Amendment to Articles of Incorporation and Bylaws. Amendments to the
Company's articles of incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least two-thirds
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of the outstanding voting stock is required for certain provisions (i.e.,
number, classification, election and removal of directors; amendment of bylaws;
call of special stockholder meetings; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the articles of incorporation).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least two-thirds of the outstanding
shares of the Company entitled to vote in the election of directors, cast at a
meeting called for that purpose.
Benefit Plans. In addition to the provisions of the Company's articles
of incorporation and bylaws described above, certain of our benefit plans
adopted in connection with the conversion contain provisions which may also
discourage hostile takeover attempts which the board of directors might conclude
are not in our best interests or those of our stockholders. For a description of
the benefit plans and the provisions of such plans relating to changes in
control, see "Management of First Star Bancorp, Inc. -- Executive Compensation."
Regulatory Restrictions. Federal regulations require that, prior to
obtaining control of an insured institution, a person, other than a company,
must give 60 days notice to the Federal Reserve Board and have received no
Federal Reserve Board objection to such acquisition of control, and a company
must apply for and receive Federal Reserve Board approval of the acquisition.
Control, involves a 25% voting stock test, control in any manner of the election
of a majority of the institution's directors, or a determination by the Federal
Reserve Board that the acquiror has the power to direct, or directly or
indirectly to exercise a controlling influence over, the management or policies
of the institution. Acquisition of more than 10% of an institution's voting
stock, if the acquiror also is subject to any one of either "control factors,"
constitutes a rebuttable determination of control under the regulations. The
determination of control may be rebutted by submission to the Federal Reserve
Board, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock after the effective
date of the regulations must file with the Federal Reserve Board a certification
that the holder is not in control of such institution, is not subject to a
rebuttable determination of control and will take no action which would result
in a determination or rebuttable determination of control without prior notice
to or approval of the Federal Reserve Board, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 2,500,000 shares of common stock,
$1.00 par value per share, and 1,000,000 shares of serial preferred stock. We
currently expect to issue up to 53,688 shares of common stock in the Merger
Conversion. We do not intend to issue any shares of serial preferred stock in
the Merger Conversion, nor are there any present plans to issue such preferred
stock following the Merger Conversion. The aggregate par value of the issued
shares will constitute the capital account of First Star. The balance of the
purchase price will be recorded for accounting purposes as additional paid-in
capital. See "Capitalization." The capital stock of the Company represents
nonwithdrawable capital and will not be insured by us, the FDIC, or any other
governmental agency.
As of June 30, 1998, the Company had 372,084 shares of common stock,
par value $1.00 per share (the "Common Stock"), issued and outstanding and
27,520 shares of Permanent Non-Cumulative Preferred Stock, Series A (the "Series
A Preferred Stock") issued and outstanding.
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Common Stock
Voting Rights. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and holders will not
be permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company; (ii) any accrued dividend claims; and (iii) liquidation preferences of
any serial preferred stock which may be issued in the future.
Restrictions on Acquisition of the Common Stock. See "Restrictions on
Acquisition of First Star Bancorp, Inc." for a discussion of the limitations on
acquisition of shares of the common stock.
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Accordingly, the board of directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The common stock is not subject to call for
redemption, and the outstanding shares of common stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
Issuance of Additional Shares. Except in the offering and possibly
pursuant to the Option Plan, the Company has no present plans, proposals,
arrangements or understandings to issue additional authorized shares of the
common stock. In the future, the authorized but unissued and unreserved shares
of the common stock will be available for general corporate purposes, including,
but not limited to, possible issuance: (i) as stock dividends; (ii) in
connection with mergers or acquisitions; (iii) under a cash dividend
reinvestment or stock purchase plan; (iv) in a public or private offering; or
(v) under employee benefit plans. See "Risk Factors -- Possible Dilutive Effect
of Stock Options" and "Pro Forma Data." Normally no stockholder approval would
be required for the issuance of these shares, except as described herein or as
otherwise required to approve a transaction in which additional authorized
shares of the common stock are to be issued.
For additional information, see "Dividends," "Regulation" and
"Taxation" with respect to restrictions on the payment of cash dividends; "The
Merger Conversion -- Restrictions on Sales and Purchases of Shares by Directors
and Officers" relating to certain restrictions on the transferability of shares
purchased by directors and officers; and "Restrictions on Acquisitions of First
Star Bancorp, Inc." for information regarding restrictions on acquiring common
stock of the Company.
Serial Preferred Stock
No additional shares of serial preferred stock of the Company will be
issued in the Merger Conversion. After the Merger Conversion is completed, the
board of directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the common stock as to dividend rights, liquidation preferences, or both, and
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may have full or limited voting rights. The board of directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the common stock. The board of directors has no present intention to issue
any additional shares of the serial preferred stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act, and is therefore,
unenforceable.
Section 17-6305 of the Pennsylvania General Corporation Code (the
"Code") describes those circumstances under which directors, officers, employees
and agents may be insured or indemnified against liability which they may incur
in their capacities as such. The Company's Articles of Incorporation (the
"Articles") require indemnification of directors, officers, employees or agents
of the Company to the full extent permissible under Pennsylvania law.
The Company may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Company or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Company would have the power to indemnify such person
against such liability under the provisions of the Code or of the Articles.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for
[Advisor] may be passed upon by __________________________. The federal and
Pennsylvania income tax consequences of the conversion have been passed upon for
us by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
EXPERTS
The financial statements of First Star Bancorp, Inc. as of and for the
years ended June 30, 1998 and 1996, appearing in this document have been audited
by Deloitte & Touche, independent certified public accountants, as set forth in
their report which appears elsewhere in this document, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Feldman Financial Advisors, Inc. has consented to the publication
herein of a summary of its letters to Nesquehoning Savings Bank setting forth
its opinion as to the estimated pro forma market value of Nesquehoning in
converted form and its opinion setting forth the value of subscription rights.
It has also consented to the use of its name and statements with respect to it
appearing in this document.
REGISTRATION REQUIREMENTS
The common stock of the Company is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company will be subject to the information, proxy solicitation, insider trading
restrictions, tender offer rules, periodic reporting and other requirements of
the SEC under the Exchange Act.
76
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form
SB-2 under the Securities Act of 1933, as amended, with respect to the common
stock offered in this document. As permitted by the rules and regulations of the
SEC, this document does not contain all the information set forth in the
registration statement. Such information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The SEC also maintains an internet address ("Web site")
that contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http://www.sec.gov". The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 are, of necessity, brief descriptions and
are not necessarily complete; each such statement is qualified by reference to
such contract or document.
The Bank has filed an Application for Approval of a Merger Company (the
"Applications") with the Department with respect to the Conversion Merger. In
addition, the Bank has filed similar applications with the FDIC. This Prospectus
omits certain information contained in these applications. The Applications may
be examined at the principal office of the Department, located at 333 Market
Street, Harrisburg, Pennsylvania 17101, and at the New York Regional Office of
the FDIC, located at 452 5th Avenue, 21st Floor, New York, New York 10018. The
most recent appraisal by Feldman Financial Advisors, Inc., may be examined at
the main office of the First Star located at 418 West Broad Street, Bethlehem,
Pennsylvania 18018 and Nesquehoning Savings Bank, 301 West Catawissa Street,
Nesquehoning, Pennsylvania 18240 during regular business hours.
A copy of the Plan of Conversion as well as copies of the Articles and
Bylaws of each of the Company and the Bank may be obtained promptly and without
charge from the Bank by contacting __________, Secretary, First Star Bancorp,
Inc., 418 West Broad Street, Bethlehem, Pennsylvania 18018 at (610) 691-2333.
77
<PAGE>
First Star Bancorp, Inc.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report.....................................
Consolidated Balance Sheets......................................
Consolidated Statements of Earnings..............................
Consolidated Statements of Equity................................
Consolidated Statements of Cash Flows............................
Notes to Consolidated Financial Statements.......................
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
78
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of First Star Bancorp and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of First Star Bancorp and subsidiaries (the "Bancorp") as of June 30, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1998.
These consolidated financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Star Bancorp and subsidiaries
at June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
August 19, 1998
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,384,802 $ 1,823,188
Interest-bearing deposits 857,535 1,486,524
------------- -------------
Total cash and cash equivalents 2,242,337 3,309,712
Investment securities available for sale (amortized cost of $47,483,475, 1998; $28,446,698, 1997) 47,724,077 28,534,867
Mortgage-backed securities available for sale (amortized cost of $75,066,823, 1998; $74,005,753, 1997) 76,035,303 74,736,438
Loans receivable - net 175,298,118 149,475,643
Mortgage loans held for sale - at lower of cost or market value 1,387,671 1,468,047
Accrued interest receivable on:
Loans 1,601,866 1,564,280
Investment securities 430,181 424,429
Mortgage-backed securities 371,589 687,541
Real estate acquired through foreclosure 1,129,290 766,506
Federal Home Loan Bank stock - at cost 7,378,000 6,970,000
Office properties and equipment 687,224 727,603
Investment in limited partnerships 44,837 47,148
Deferred income taxes 22,754 155,432
Cash surrender value of life insurance 1,583,381 1,780,375
Prepaid expenses and other assets 165,487 251,134
------------- -------------
TOTAL ASSETS $ 316,102,115 $ 270,899,155
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 145,095,966 $ 118,662,118
Advances from Federal Home Loan Bank 144,484,620 129,399,643
Subordinated debentures 5,480,000 5,480,000
Other borrowed money 647,404 671,880
Advances by borrowers for taxes and insurance 3,168,082 2,650,303
Accrued interest payable 785,489 659,850
Accounts payable, accrued expenses and income taxes payable 1,027,648 960,071
Employee Stock Ownership Plan debt 300,000 400,000
------------- -------------
Total liabilities 300,989,209 258,883,865
------------- -------------
Commitments and contingencies (Notes 11 and 15)
Stockholders' Equity:
Preferred stock, $1 par value - authorized, 1,000,000 shares; issued and outstanding,
27,520 shares in 1998 and 1997 27,520 27,520
Common stock, $1 par value - authorized, 2,500,000 shares; issued and outstanding,
372,084 and 258,393 shares in 1998 and 1997 372,084 258,393
Paid-in capital in excess of par 8,422,959 3,032,890
Retained earnings 5,777,027 8,540,721
Employee Stock Ownership Plan debt (300,000) (400,000)
Unrealized gain on available for sale securities, net of tax 813,316 555,766
------------- -------------
Total stockholders' equity 15,112,906 12,015,290
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 316,102,115 $ 270,899,155
============= =============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 13,233,529 $ 11,852,315 $ 11,948,556
Mortgage-backed securities 4,780,330 2,690,981 706,273
Interest and dividends on investments 3,225,723 1,649,386 724,677
----------- ----------- -----------
Total interest income 21,239,582 16,192,682 13,379,506
----------- ----------- -----------
INTEREST EXPENSE:
Interest on:
Deposits 6,637,893 5,468,761 6,087,443
Short-term borrowings 36,989 372,690 166,634
Long-term borrowings 7,934,953 4,564,861 2,652,720
----------- ----------- -----------
Total interest expense 14,609,835 10,406,312 8,906,797
----------- ----------- -----------
NET INTEREST INCOME 6,629,747 5,786,370 4,472,709
PROVISION FOR LOAN LOSSES 385,000 220,000 244,610
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,244,747 5,566,370 4,228,099
----------- ----------- -----------
OTHER INCOME:
Loan servicing 284,572 225,709 226,084
Gain on sales of:
Loans and mortgage-backed securities - net 1,087,586 283,353
Investment securities - net 63,071 0 101,611
Real estate acquired through foreclosure 101,345 73,246 51,865
Other income 223,171 138,155 168,469
----------- ----------- -----------
Total other income 1,759,745 720,463 548,029
----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 1,864,647 1,589,212 1,433,055
Occupancy and equipment 470,327 406,149 378,299
Federal insurance premiums 77,632 107,233 277,579
SAIF Assessment 0 745,174
Data processing 143,478 113,178 120,577
Professional fees 215,967 211,670 44,176
Advertising 120,879 137,910 82,871
Other expense 688,339 725,750 511,562
----------- ----------- -----------
Total operating expenses 3,581,269 4,036,276 2,848,119
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,423,223 2,250,557 1,928,009
----------- ----------- -----------
INCOME TAXES (BENEFIT):
Current 1,607,000 776,466 498,458
Deferred 0 (35,466) 159,042
----------- ----------- -----------
Total income taxes 1,607,000 741,000 657,500
----------- ----------- -----------
NET INCOME 2,816,223 1,509,557 1,270,509
DIVIDENDS ON PREFERRED STOCK (45,150) (44,464) (45,345)
----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 2,771,073 $ 1,465,093 $ 1,225,164
=========== =========== ===========
EARNINGS PER COMMON SHARE $ 5.04 $ $ 3.55 $ 3.02
=========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION $ 4.90 $ $ 3.44 $ 2.94
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Per common share 295,025 278,454 269,936
=========== =========== ===========
Per common share - assuming full dilution 548,780 412,918 405,422
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Paid-in Employee Gain on
Capital Stock Available Total
Preferred Common In Excess Retained Ownership for Sale Stockholders'
Stock Stock of Par Earnings Plan Debt Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 $ 27,520 $ 256,829 $ 3,021,158 $ 5,932,956 $ (135,000) $ 8,704 $ 9,112,167
Net income 1,270,509 1,270,509
Repayment of ESOP debt 135,000 135,000
Cash dividends paid on:
Preferred stock (45,345) (45,345)
Common stock (41,093) (41,093)
Exercise of common stock options 1,564 11,732 13,296
Unrealized gain on available for
sale securities, net of tax 0 0 0 0 0 125,925 125,925
-------- --------- ----------- ----------- ---------- --------- ------------
BALANCE, JUNE 30, 1996 27,520 258,393 3,032,890 7,117,027 134,629 10,570,459
Net income 1,509,557 0 1,509,557
Issuance of stock to ESOP (400,000) (400,000)
Cash dividends paid on: 0
Preferred stock (44,464) (44,464)
Common stock (41,399) (41,399)
Unrealized gain on available for
sale securities, net of tax 0 0 0 0 0 421,137 421,137
-------- --------- ----------- ----------- ---------- --------- ------------
BALANCE, JUNE 30, 1997 27,520 258,393 3,032,890 8,540,721 (400,000) 555,766 12,015,290
0
Net income 2,816,223 2,816,223
Stock dividends paid 113,691 5,390,069 (5,503,760) 0
Repayment of ESOP debt 100,000 100,000
Cash dividends paid on: 0
Preferred stock (45,150) (45,150)
Common stock (31,007) (31,007)
Unrealized gain on available for
sale securities, net of tax 0 0 0 0 0 257,550 257,550
-------- --------- ----------- ----------- ---------- --------- ------------
BALANCE, JUNE 30, 1998 $ 27,520 $ 372,084 $ 8,422,959 $ 5,777,027 $ (300,000) $ 813,316 $ 15,112,906
======== ========= =========== =========== ========== ========= ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,816,223 $ 1,509,557 $ 1,270,509
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 385,000 220,000 244,610
Depreciation and amortization 110,167 152,042 122,934
Gain on sale of:
Loans and mortgage-backed securities (1,150,657) (283,353)
Investment securities (101,611)
Real estate acquired through foreclosure (101,345) (73,246) (51,865)
Amortization of deferred and prepaid loan fees (200,364) (166,185) (319,608)
Deferred income taxes (35,466) 159,042
Changes in assets and liabilities which provided (used) cash:
Interest receivable 272,614 (1,255,994) (165,456)
Prepaid expenses and other assets 85,823 108,584 (361,604)
Accounts payable, accrued expenses and income taxes payable 67,577 (21,153) 495,994
Accrued interest payable 125,639 387,313 16,695
------------ ------------ -----------
Net cash provided by operating activities 2,410,677 542,099 1,309,640
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchase of:
Mortgage-backed securities (51,604,420) (73,573,328) (3,981,597)
Investment securities (33,075,597) (27,895,082) (13,013,126)
Federal Home Loan Bank stock (1,368,600) (5,418,900) (967,500)
Proceeds from sale of:
Investment securities 301,152 10,364,526
Real estate acquired through foreclosure 1,035,759 889,462 601,750
Loans and mortgage-backed securities 36,969,396 15,198,350
Federal Home Loan Bank stock 960,600 977,500 1,017,100
Proceeds from maturing investment securities 13,781,000 5,249,000 2,057,000
Principal collected on long-term loans and mortgage-backed securities 45,973,446 32,724,484 36,284,736
Long-term loans originated or acquired (58,303,377) (32,397,758) (30,047,090)
Purchases of premises and equipment (86,388) (229,428) (29,483)
Increase (decrease) in cash surrender value of life insurance policies 103,006 142,510 (106,746)
------------ ------------ -----------
Net cash (used in) provided by investing activities (45,314,023) (84,333,190) 2,179,570
------------ ------------ -----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 7,812,158 2,180,160 (1,103,444)
Proceeds from ESOP loan 0 400,000
Repayment of ESOP loan (100,000)
Proceeds from sales of certificates of deposit 31,489,249 17,230,862 12,689,402
Payments for maturing certificates of deposit (12,867,559) (15,015,144) (21,273,259)
Proceeds from Federal Home Loan Bank advances 159,788,035 313,893,240 53,361,401
Repayment of Federal Home Loan Bank advances (144,703,058) (235,064,534) (51,565,453)
Repayment of other borrowed money (24,476) (82,428) (99,557)
Increase (decrease) in advances from borrowers for taxes and insurance 517,779 (36,013) (331,238)
Dividends paid (76,157) (85,418) (86,438)
------------ ------------ -----------
Net cash provided by (used in) financing activities 41,835,971 83,420,725 (8,408,586)
------------ ------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,067,375) (370,366) (4,919,376)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,309,712 3,680,078 8,599,454
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,242,337 $ 3,309,712 $ 3,680,078
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits, advances and other borrowed money $ 14,498,394 $ 10,033,523 $ 8,890,102
============ ============ ===========
Income taxes $ 1,688,190 $ 653,492 $ 640,673
============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Loans swapped for mortgage-backed securities $ 7,033,896 $ $10,783,582
============ ==========================
Transfer of loans to real estate acquired through foreclosure $ 1,497,130 $ 2,451,683 $ 353,492
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
First Star Bancorp (the "Bancorp") is the parent holding company and sole
stockholder of First Star Savings Bank ("the Bank"). The Bank is a
Pennsylvania chartered stock savings bank which provides lending and
depository services to the Lehigh Valley through its six branch locations
(Bethlehem, Bath, Palmer, Nazareth, Allentown and Alburtis). The Bank is
supervised and regulated by the Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the FDIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements of the
Bancorp include the accounts of the Bank, Integrated Financial
Corporation, a wholly owned subsidiary of the Bank, and Integrated
Abstract Incorporated, a wholly owned subsidiary of Integrated Financial
Corporation. Intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates in the Preparation of Consolidated Financial Statements -
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
income and expenses during the reporting period. The most significant
estimates and assumptions in the Bancorp's consolidated financial
statements are recorded in the allowance for loan and lease losses and
real estate acquired through foreclosure. Actual results could differ from
those estimates.
Investment and Mortgage-Backed Securities - The Bank classifies and
accounts for debt and equity securities as follows:
Available for Sale - Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of
alternative investments are classified as available for sale. These
assets are carried at an estimated fair value. Management believes the
most reliable measure of fair value is market value. Market value is
determined using published quotes as of the close of business.
Unrealized gains and losses are excluded from earnings and are reported
net of tax as a separate component of stockholders' equity until
realized.
Real Estate Owned - Real estate owned consists of properties acquired by
foreclosure and is stated at the lower of fair value less cost to sell or
the balance of the loan on the property at the date of acquisition. Costs
of holding foreclosured property are charged to expense in the current
period, except for significant property improvements which are capitalized
only to the extent of net realizable value.
-6-
<PAGE>
Allowance for Loan and Lease Losses - Allowances are provided for specific
loans and leases when losses are probable and can be estimated. When this
occurs, management considers the remaining principal balance and estimated
net realizable value of the property collateralizing the loan. Current and
future operating and/or sales conditions are considered. These estimates
are susceptible to changes that could result in material adjustments to
results of operations. Recovery of the carrying value of such loans is
dependent to a great extent on economic, operating and other conditions
that may be beyond management's control.
Loan and lease loss allowances are established as an allowance for losses
based on the perceived risk of loss in the loan and lease portfolio. In
assessing risk, management considers historical experience, volume and
composition of lending conducted by the Bank, industry standards, status
of nonperforming loans, general economic conditions as they relate to the
Bank's market area and other factors related to the collectibility of the
Bank's loan and lease portfolio.
Impaired loans are measured based either on the present value of expected
future cash flows discounted at the loan's effective interest rate, or the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Impairment losses are included in the
provision for loan losses.
Office Properties and Equipment - Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method
over the expected useful lives of the related assets. The costs of
maintenance and repairs are expensed as they are incurred and renewals and
betterments are capitalized.
Investment in Limited Partnerships - The Bank's wholly owned subsidiary,
Integrated Financial Corporation, was formed for the purpose of investing
in equity securities and real estate limited partnerships. The Bank
accounts for its investment in the limited partnerships under the equity
method.
Cash Surrender Value of Life Insurance - The Bank is the beneficiary of
insurance policies on the lives of certain officers of the Bank.
Income Recognition on Loans - Interest on loans is credited to income when
earned. Accrual of loan interest is discontinued and a reserve established
on existing accruals if the loan becomes 90 days past due or if management
believes after considering economic and business conditions and collection
efforts, that the borrowers' financial condition is such that collection
of interest is doubtful. Such interest ultimately collected is credited to
income in the period of recovery.
Unearned Discounts and Premiums - Unearned discounts and premiums on
mortgage loans purchased are amortized over the estimated life of the
loans. Unearned discounts on consumer loans are amortized over the term of
the loans. The Bank uses an amortization method which approximates the
interest method.
Deferred Loan Fees - The Bank defers loan origination fees net of certain
direct loan origination costs. The balance is accreted into income over
the life of the loan using a method which approximates the interest
method. Loan origination costs consist primarily of salaries and employee
benefits.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and amounts due from depository institutions
and interest-bearing deposits in other banks with original maturities of
three months or less.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates 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.
-7-
<PAGE>
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - The Bancorp adopted Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, as
of January 1, 1997. This statement requires an entity to recognize,
prospectively, the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has
been surrendered, and derecognize liabilities when extinguished. It
requires that servicing assets and other retained interests in transferred
assets be measured by allocating the previous carrying amount between the
assets sold, if any, and retained interests, if any, based on their
relative fair values at the date of the transfer. It also provides
implementation guidance for servicing of financial assets,
securitizations, loan syndications and participations and transfers of
receivables with recourse. The statement supersedes SFAS No. 122,
Accounting for Mortgage Servicing Rights, which was adopted by the Bancorp
as of July 1, 1996. Management of the Bancorp has determined that the
adoption of this statement did not materially impact the Bancorp's
consolidated financial position or results of operations.
Accounting for Stock Options - The Bancorp accounts for stock-based
compensation in accordance with the Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. This method
calculates compensation expense using the intrinsic value method which
recognizes as expense the difference between the market value of the stock
and the exercise price at grant date. The Bancorp has not recognized any
compensation expense under this method. In the year ended June 30, 1997,
the Bancorp adopted the reporting disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, which requires the Bancorp to
disclose the pro forma effects of accounting for stock-based compensation
using the fair value method as described in the accounting requirements of
SFAS No. 123. As permitted by SFAS No. 123, the Bancorp will continue to
account for stock-based compensation under APB Opinion No. 25. As no
options were granted during 1998 or 1997, the disclosure requirements of
SFAS No. 123 relating to pro forma net income, pro forma earnings per
share and the fair value of options granted and the assumptions used to
determine fair value have been omitted.
Accounting for Earnings Per Share- The Bancorp adopted SFAS No. 128,
Earnings Per Share, effective June 30, 1998. This statement establishes
standards for computing and presenting earnings per share. All earnings
per share amounts for periods presented have been retroactively restated
in accordance with this statement. The adoption of this statement did not
have a material effect on the Bancorp's reported earnings per share.
Accounting Principles Issued But Not Adopted - In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, Reporting
Comprehensive Income, which requires disclosure of, as a component of
comprehensive income, amounts from transactions and other events which are
currently excluded from the statement of income and are recorded directly
to stockholders' equity. This statement is effective for fiscal years
beginning after December 15, 1997. This statement, which concerns
disclosure standards only, will not have any impact on the Bancorp's
consolidated financial condition or results of operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued. This statement 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. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, and should not be applied retroactively to financial
statements of prior periods. Management of the Bancorp does not believe
this statement will have a material impact on the Bancorp's consolidated
results of operations or financial position when adopted.
-8-
<PAGE>
Reclassifications - Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements to conform with the 1998
presentation. Such reclassifications had no impact on the reported net
income.
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities are
as follows:
<TABLE>
<CAPTION>
Available for Sale
June 30, 1998
----------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Debt securities $ 45,978,435 $ 379,113 $ (390,098) $ 45,967,450
Marketable equity securities 1,505,040 251,587 0 1,756,627
------------ --------- ---------- ------------
Total investment securities $ 47,483,475 $ 630,700 $ (390,098) $ 47,724,077
============ ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale
June 30, 1997
----------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Debt securities $ 26,760,868 $ 131,113 $ (89,687) $ 26,802,294
Marketable equity securities 1,685,830 46,743 0 1,732,573
------------ --------- ---------- ------------
Total investment securities $ 28,446,698 $ 177,856 $ (89,687) $ 28,534,867
============ ========= ========= ============
</TABLE>
The amortized cost and approximate fair value of debt securities by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 265,612 $ 270,770 $ 443,553 $ 445,221
Due after one year
through five years 17,260,925 17,268,546 7,586,537 7,611,184
Due after five years
through ten years 6,077,561 5,975,644 6,927,163 6,942,749
Due after ten years 2,548,212 2,626,365 11,803,615 11,803,140
------------ ------------ ------------ ----------
Total $ 26,152,310 $ 26,141,325 $ 26,760,868 $26,802,294
============ ============ ============ ===========
</TABLE>
During the year ended June 30, 1998, proceeds from the sales of debt
securities were $290,000, resulting in a gross realized gain of $45,371.
There were no such sales during 1997.
-9-
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at June 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Available for Sale
June 30, 1998
-------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 14,336,542 $ 250,325 $ 14,586,867
FNMA pass-through certificates 24,926,227 490,461 25,416,688
GNMA 35,255,627 235,276 $ (11,728) 35,479,175
Collateralized mortgage obligations 548,427 4,650 (504) 552,573
------------ --------- --------- ------------
Total $ 75,066,823 $ 980,712 $ (12,232) $ 76,035,303
============ ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale
June 30, 1997
-------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 46,080,545 $ 518,110 $ (16,815) $ 46,581,840
FNMA pass-through certificates 19,223,470 199,310 (30,126) 19,392,654
GNMA 7,924,589 56,205 0 7,980,794
Collateralized mortgage obligations 777,149 5,329 (1,328) 781,150
------------ --------- --------- ------------
Total $ 74,005,753 $ 778,954 $ (48,269) $ 74,736,438
============ ========= ========= ============
</TABLE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1998 1997
<S> <C> <C>
First mortgage loans $ 147,898,340 $ 129,050,430
Construction loans 110,000 1,230,610
Commercial leases purchased 1,496,033 1,896,574
Consumer loans 728,335 1,009,108
Home equity loans 7,904,489 9,349,400
Auto loans 328,452 217,933
Commercial real estate loans 19,659,768 10,125,597
Total loans 178,125,417 152,879,652
Less:
Undisbursed portion of loans in process (65,690) (927,073)
Allowance for loan and lease losses (1,488,835) (1,155,621)
Deferred loan fees (1,272,774) (1,321,315)
------------- -------------
Total $ 175,298,118 $ 149,475,643
============= =============
</TABLE>
-10-
<PAGE>
Following is a summary of changes in the allowance for loan and lease
losses:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 1,155,621 $ 1,014,021 $ 859,549
Provision charged to operations 385,000 220,000 244,610
Charge-offs (57,290) (82,475) (92,407)
Recoveries 5,504 4,075 2,268
Balance, end of year $ 1,488,835 $ 1,155,621 $ 1,014,020
=========== =========== ===========
</TABLE>
The provision for loan losses charged to expense is based upon past loan
and loss experiences and an evaluation of estimated losses in the current
loan and lease portfolio, including the evaluation of impaired loans under
SFAS No. 114. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan. An
insignificant delay or insignificant shortfall in amount of payments does
not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. As
of June 30, 1998 and 1997, 100% of the impaired loan balance was measured
for impairment based on the fair value of the loans' collateral.
Impairment losses are included in the provision for loan losses. SFAS No.
114 does not apply to large groups or smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include consumer loans, residential real estate
loans, and smaller balance commercial and commercial real estate loans. At
June 30, 1998 and 1997, the Bank had no loans considered impaired under
SFAS No. 114.
Nonperforming loans (which include loans in excess of 90 days delinquent)
at June 30, 1998, 1997 and 1996 amounted to approximately $3,081,600,
$3,828,200 and $4,062,000, respectively. The reserve for delinquent
interest on loans totaled $320,074, $312,871 and $319,333 at June 30,
1998, 1997 and 1996, respectively. Revenue that would have been earned if
nonperforming loans were accruing interest approximated $217,000, $177,000
and $168,900 for the years ended June 30, 1998, 1997 and 1996,
respectively.
Certain directors and executive officers of the Bancorp have loans with
the Bank. Such loans were made in the ordinary course of business at the
Bank's normal credit terms including interest rate and collateralization,
and do not represent more than a normal risk of collection. Total loans to
these persons as of June 30, 1998, 1997 and 1996, along with an analysis
of the activity for the years ended June 30, 1998, 1997 and 1996, are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 2,593,400 $ 945,600 $ 675,700
Additions 1,131,525 1,828,200 555,000
Repayments 957,611 180,400 285,100
----------- ----------- ---------
Balance, end of year $ 2,767,314 $ 2,593,400 $ 945,600
=========== =========== =========
</TABLE>
6. MORTGAGE BANKING ACTIVITIES
At June 30, 1998, 1997 and 1996, as a result of loan sales and swaps, the
Bank was servicing loans for others amounting to approximately
$34,861,200, $34,645,932 and $39,334,000, respectively. Servicing
-11-
<PAGE>
loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees.
Premiums on the sale of loans represent the present value of the portion
of estimated future interest income retained on loans sold (based upon
certain prepayment assumptions and net of a normal servicing fee), which
are recognized as gains on sale of loans at the time the sales occur. Such
premiums are amortized in proportion to and over the estimated period such
interest will be collected. The unamortized balance of such premiums
totaled $0, $33,247 and $127,560 at June 30, 1998, 1997 and 1996,
respectively. During 1998, 1997 and 1996, respectively, amortization of
such premiums totaled $33,247, $94,313 and $82,186.
The Bank's carrying values of premiums on sale of loans, and the
amortization thereon, are periodically evaluated in relation to estimated
future net servicing revenues (undiscounted) and estimated future interest
(discounted) to be received and retained, and such carrying values are
adjusted for indicated impairments based on management's best estimate of
remaining cash flows, using a pool-by-pool method. Such estimates may vary
from the actual remaining cash flows due to prepayments of the underlying
mortgage loans and increases in servicing costs.
The Bank's carrying value of premiums on sale of loans does not purport to
represent the amount that would be realized by a sale of these assets in
the open market.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------
1998 1997
<S> <C> <C>
Land, buildings and improvements $ 961,254 $ 960,254
Furniture and equipment 1,338,872 1,252,664
Leasehold improvements 241,369 241,369
--------- ---------
Total 2,541,495 2,454,287
Accumulated depreciation (1,854,271) (1,726,684)
--------- ---------
Net $ 687,224 $ 727,603
========= =========
</TABLE>
-12-
<PAGE>
8. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------
Effective
Rate of
Amount Percent Interest
<S> <C> <C> <C>
NOW accounts $ 14,214,521 9.8 % 2.12 %
Money market demand accounts 15,352,163 10.6 4.22
Passbook and club accounts 11,468,234 7.9 2.72
Certificates of deposit 104,061,048 71.7 5.83
------------- -----
Total deposits $ 145,095,966 100.0 %
============= =====
Weighted average cost 5.05 %
====
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------
Effective
Rate of
Amount Percent Interest
<S> <C> <C> <C>
NOW accounts $ 13,203,834 11.1 % 2.48 %
Money market demand accounts 9,846,006 8.3 3.54
Passbook and club accounts 10,172,920 8.6 2.78
Certificates of deposit 85,439,358 72.0 5.60
------------- -----
Total deposits $ 118,662,118 100.0 %
============= =====
Weighted average cost 4.84 %
====
</TABLE>
At June 30, 1998 and 1997, the Bank had deposits of $100,000 or greater
totaling approximately $15,840,000 and $10,148,700, respectively.
At June 30, 1998 and 1997, respectively, the Bank had included in
certificates of deposit approximately $689,000 and $0 in brokered deposits.
While frequently renewed at maturity rather than paid out, certificate
amounts were scheduled to mature contractually as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- --------------------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Within one year $ 72,649,258 69.8 % $ 53,747,107 62.9 %
Beyond one year but within
three years 25,495,049 24.5 28,468,869 33.3
Beyond three years 5,916,741 5.7 3,223,382 3.8
------------- ----- ------------ -----
Total $ 104,061,048 100.0 % $ 85,439,358 100.0 %
============= ===== ============ =====
</TABLE>
-13-
<PAGE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------------
Type of Account 1998 1997 1996
<S> <C> <C> <C>
NOW $ 310,993 $ 267,177 $ 213,599
Money market demand 571,607 420,218 386,162
Passbook and club 283,124 277,719 308,115
Certificates of deposit 5,472,169 4,503,647 5,179,567
----------- ----------- -----------
Total $ 6,637,893 $ 5,468,761 $ 6,087,443
=========== =========== ===========
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------------------------------------------
1998 1997
------------------------------------ --------------------------------
Maturity Date Amount Percent Amount Percent
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
0-12 months $ 27,935,491 5.73 % $ 55,567,000 5.60 %
13-24 months 7,328,094 5.90 17,001,873 5.64
25-36 months 6,000,000 5.93 7,330,770 5.22
37-48 months 42,500,000 5.79 1,000,000 5.21
49-60 months 45,000,000 5.68 47,500,000 5.76
Over 60 months 15,721,035 6.44 1,000,000 8.56
------------- ---- ------------- ----
Total $ 144,484,620 5.83 % $ 129,399,643 5.66 %
============= ==== ============= ====
</TABLE>
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans. The Bank had available $14,000,000
in unused lines of credit at June 30, 1998.
10. SUBORDINATED DEBENTURES
During the year ended June 30, 1992, the Bank offered $1,590,000 of
Adjustable-Rate Mandatorily Convertible Subordinated Debentures due in the
year 2002 (the "Debentures"). At the formation of the holding company, the
Debentures were assumed by the Bancorp. Interest on the Debentures is 2%
over the prime rate, adjustable monthly. Interest is payable on the
Debentures on the first day of each month. The Debentures will
automatically convert into Permanent Noncumulative Convertible Preferred
Stock, Series A ("Series A Preferred Stock" (see Note 17)) of the Bancorp
on January 1, 2002, unless previously converted. The Debentures may be
converted into Series A Preferred Stock at any time, at the option of
either the Bancorp or the holder of the Debenture, unless previously
redeemed, at a conversion price of one share per $15.625 principal amount
of Debenture or 640 shares per $10,000 principal amount of Debentures,
subject to adjustment in certain events. The Series A Preferred Stock is
convertible at the option of the holder at any time, on a one-for-one
basis (as adjusted for stock dividends) into shares of common stock of the
Bancorp. During the year ended June 30, 1992, $110,000 of the Debentures
were converted to the Series A Preferred Stock.
The Debentures are redeemable at any time after January 1, 1996, in whole
or in part, on not less than 30 days' notice at the option of the Bancorp
at various redemption prices. The Debentures are subordinated in right of
payment to all present and future Senior Indebtedness of the Bancorp. The
Debentures are not transferable or assignable for a period of one year
from the date of purchase.
-14-
<PAGE>
On December 31, 1996 the Bancorp sold $4,000,000 of Adjustable-Rate
Mandatorily Convertible Subordinated Debentures due in the year 2008 (the
"1996 Debentures"). Interest on the 1996 Debentures is 1% under the prime
rate, adjustable monthly. Interest is payable on the 1996 Debentures on
the first day of each month. The 1996 Debentures will automatically
convert into Permanent Noncumulative Convertible Preferred Stock, Series B
("Series B Preferred Stock") of the Bancorp on December 31, 2008, unless
previously converted. The 1996 Debentures may be converted into Series B
Preferred Stock at any time by the holder or after two years by the
Bancorp, unless previously redeemed, at a conversion price of one share
per $35 principal amount of 1996 Debenture or 715 shares per $25,000
principal amount of 1996 Debentures, subject to adjustment in certain
events. The Series B Preferred Stock is convertible at the option of the
holder at any time, on a one-for-one basis (as adjusted for stock
dividends) into shares of common stock of the Bancorp.
The 1996 Debentures are redeemable at any time after January 1, 1997 for
the holder and any time after January 1, 1999 for the Bancorp in whole or
in part. The 1996 Debentures are subordinated in right of payment to all
present and future Senior Indebtedness of the Bancorp. The 1996 Debentures
are not transferable to a person who is not a resident of Pennsylvania for
a period of twelve months from the date of sale.
At June 30, 1998 and 1997, $1,480,000 of the Debentures and $4,000,000 of
the 1996 Debentures remain outstanding.
All Debentures are includable as Tier 2 capital for determining the
Bancorp's compliance with regulatory capital requirements (see Note 13).
Upon conversion, the Debentures become Tier 1 capital.
11. OTHER BORROWED MONEY
On December 31, 1987, the Bank entered into an agreement to transfer
$2,015,972 of loans with a weighted average interest rate of 8.07% to
another institution subject to certain recourse provisions. At June 30,
1998 and 1997, these loans had outstanding balances of $647,404 and
$671,880, respectively. The Bank is responsible for the collection of
principal and interest payments, for which it receives a servicing fee,
and remits the net proceeds to the transferee on a monthly basis. The Bank
is contingently liable for the collection of these loans and their
collectibility has been considered in the determination of the provision
for loan losses.
12. INCOME TAXES
Income tax (benefit) consists of the following components:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------- ------------------------------------ -----------------------------------
Federal State Total Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current tax
provision $ 1,275,500 $ 331,500 $ 1,607,000 $ 599,466 $ 177,000 $ 776,466 $ 347,958 $ 150,500 $ 498,458
Deferred tax
provision 0 0 0 (35,466) 0 (35,466) 159,042 0 159,042
----------- --------- ----------- --------- --------- --------- --------- --------- ---------
Total $ 1,275,500 $ 331,500 $ 1,607,000 $ 564,000 $ 177,000 $ 741,000 $ 507,000 $ 150,500 $ 657,500
=========== ========= =========== ========= ========= ========= ========= ========= =========
</TABLE>
-15-
<PAGE>
Income tax (benefit) differs from that computed at the statutory corporate
tax rate as follows:
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- -------------------------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 1,510,185 34.0 % $ 765,189 34.0 % $ 655,523 34.0 %
Increase (decrease) in taxes
resulting from:
State income taxes (net of
federal tax benefit) 218,790 4.9 116,820 5.2 99,330 5.2
Other (121,975) (2.7) (141,009) (6.3) (97,353) (5.1)
----------- ---- --------- ---- --------- ----
Income taxes per consolidated
statements of income $ 1,607,000 36.2 % $ 741,000 32.9 % $ 657,500 34.1 %
=========== ==== ========= ==== ========= ====
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts
are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
Deferred tax assets:
<S> <C> <C>
Property $ 63,933 $ 50,125
Deferred loan fees 216,230 272,312
Allowance for loan and lease losses 278,858 184,673
Total 559,021 507,110
Deferred tax liabilities:
Unrealized loss on investment securities (395,766) (297,832)
Other (140,501) (53,846)
-------- ---------
Total (536,267) (351,678)
-------- ---------
Net deferred tax asset $ 22,754 $ 155,432
======== =========
</TABLE>
In August 1996, The Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method
of accounting for bad debts for thrift institutions effective for years
beginning after December 31, 1995. The Act required the Bancorp as of July
1, 1996 to change its method of computing reserves for bad debts to the
experience method. The bad debt deduction allowable under this method is
available to small banks with assets less than $500 million. Generally,
this method allows the Bancorp to deduct an annual addition to the reserve
for bad debts equal to the increase in the balance of the Bancorp's
reserve for bad debts at the end of the year to an amount equal to the
percentage of total loans at the end of the year, computed using the ratio
of the previous six years net charge-offs divided by the sum of the
previous six years total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts treats such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves is taken into
account ratably over a six-
-16-
<PAGE>
taxable year period, beginning with the first taxable year beginning after
December 31, 1995. The timing of this recapture may be delayed for a
two-year period provided certain residential loan requirements are met. For
financial reporting purposes, the Bancorp has not incurred any additional
tax expense. Amounts which had previously been deferred will be reversed
for financial reporting purposes and will be included in the income tax
return of the Bancorp, increasing income tax payable. At June 30, 1998,
deferred taxes were provided on the difference between the book reserve at
June 30, 1998 and the applicable excess reserve in the amount equal to the
Bancorp's increase in the tax reserve from June 30, 1988 to June 30, 1998.
Retained earnings at June 30, 1998 and 1997 includes approximately $636,000
representing bad debt deductions for which no deferred income taxes have
been provided.
13. REGULATORY CAPITAL REQUIREMENTS
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 measurers 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 1 capital (as defined in the regulations)
to risk weighted assets (as defined), and of Tier 1 capital (as defined)
to average assets (as defined). Management believes, as of June 30, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 1998 and 1997, the most recent notification from the
Pennsylvania Department of Banking (dated September 30, 1997 ) 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.
<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 June 30, 1998:
Tier 1 Capital (to Average Assets) $ 17,454,000 5.95 % $ 11,740,254 4.00 % $ 14,675,032 5.00 %
Tier 1 Capital (to Risk Weighted Assets) 17,454,000 11.10 6,288,520 4.00 9,432,780 6.00
Total Capital (to Risk Weighted Assets) 18,943,000 12.05 12,577,040 8.00 15,721,300 10.00
As of June 30, 1997:
Tier 1 Capital (to Average Assets) $ 14,953,000 6.12 % $ 9,774,000 4.00 % $ 12,218,000 5.00 %
Tier 1 Capital (to Risk Weighted Assets) 14,953,000 11.61 5,153,000 4.00 7,729,000 6.00
Total Capital (to Risk Weighted Assets) 15,510,000 12.04 10,306,000 8.00 12,882,000 10.00
</TABLE>
The Bancorp's leverage, Tier 1 risk-based and total risk-based capital are
4.93%, 8.88% and 13.21%, respectively, at June 30, 1998 and 5.22%, 8.81%
and 13.91%, respectively, at June 30, 1997.
-17-
<PAGE>
14. BENEFIT PLANS
The Bank had a defined contribution pension plan which covered all
employees who had met certain eligibility requirements. Contributions were
made by the Bank at the rate of 5% of eligible compensation and were
funded as accrued. During the year ended June 30, 1994, the Bank created
an Employee Stock Ownership Plan ("ESOP") which covers all employees who
have met certain eligibility requirements. Employees were given the option
of transferring their balances from the defined contribution plan to the
Employee Stock Ownership Plan, or receiving a distribution of the balance
in their account. No future contributions will be made to the defined
contribution plan. The Bank made a 15% contribution to the ESOP in the
amount of $163,539 and $148,976 for the years ended June 30, 1998 and
1997, respectively, which was used to purchase the Bancorp's common stock.
In order to acquire common stock, the ESOP borrowed $400,000 on December
31, 1996 from the Bancorp. The debt, which accrues interest at prime plus
1% is due on July 1, 2000. As of June 30, 1998, the ESOP held 47,417
shares of the Bancorp's common stock and $525,000 of subordinated
debentures due December 31, 2008. As of June 30, 1997, the ESOP held
33,817 shares of the Bancorp's common stock and $525,000 of subordinated
debentures due December 31, 2008.
Because the Bank had committed either to make future contributions to the
ESOP or to make the principal payments when due, the debt had been
reflected as a liability, and an offsetting charge equivalent to the
future contributions to be made had been reflected as a reduction of
stockholders' equity in the accompanying consolidated statements of
financial condition and changes in stockholders' equity.
Effective January 1, 1997, the Bancorp established a 401(k) savings plan
(the "401(k) Plan") for all qualified employees. Employees can contributed
up to 5% of their compensation and the Bancorp provides matching
contributions equal to 25% of the employee's contributions. The Bancorp's
contribution to the 401(k) Plan was $12,061 and $7,359 for the years ended
June 30, 1998 and 1997, respectively.
15. COMMITMENTS
At June 30, 1998, commitments to originate loans totaled approximately
$4,564,000 for fixed rate loans and $1,108,000 for adjustable rate loans,
ranging from 7.0% to 9.5% for fixed rate loans and from 6.0% to 10.0% for
adjustable rate loans. All commitments are expected to be funded within
three months.
The Bank leases office space for its branch offices. Rental expense was
approximately $71,100, $69,600 and $70,000 for the years ended June 30,
1998, 1997 and 1996, respectively. Future minimum rental payments under
lease commitments for the next three years are as follows:
Year Ending June 30
1999 $ 72,000
2000 72,000
2001 72,000
---------
Total $ 216,000
=========
-18-
<PAGE>
16. STOCK OPTION PLANS
The Bancorp grants options under the Employee Stock Compensation Program
(the "Program") to certain officers and key employees. The Program has
reserved 34,662 shares of common stock for options. Options granted prior
to ratification of the Program by the stockholders are subject to such
stockholder ratification. Options granted under the Program are
exercisable for a term no longer than 10 years from the date of grant, are
generally not transferable, and will terminate within a period of time
following termination of employment with the Bancorp. Options granted
under the Program could either be "incentive stock options", which are
designed to result in beneficial tax treatment to the employee but no tax
deduction to the Bancorp, or "nonqualified options," which would not give
the employee the benefits of incentive stock options, but would entitle
the Bancorp to a tax deduction when the options are exercised.
A summary of options activity for the years ended June 30, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
Exercise Price
----------------------------------------
$15.00 $8.50 Total
<S> <C> <C> <C>
Options outstanding, June 30, 1995 2,600 19,357 21,957
Options exercised 1,564 1,564
Options terminated 0 330 330
----- ------ ------
Options outstanding, June 30, 1996 2,600 17,463 20,063
Options exercised
Options terminated 0 0 0
----- ------ ------
Options outstanding, June 30, 1997 2,600 17,463 20,063
20% stock dividends 1,144 7,683 8,827
Options exercised
Options terminated 0 0 0
----- ------ ------
Options outstanding, June 30, 1998 3,744 25,146 28,890
===== ====== ======
</TABLE>
All options were exercisable at June 30, 1998, 1997 and 1996.
17. ISSUANCE OF PREFERRED STOCK
In December 1989, the Bancorp issued 20,480 shares of Permanent
Noncumulative Preferred Stock for $15.625 per share pursuant to the
restated articles of incorporation of the Bancorp. The stock is
convertible at any time after May 20, 1990 into the common stock of the
Bancorp on a one-for-one basis (as adjusted for stock dividends) subject
to the limitations of the Bancorp's restated articles of incorporation.
Redemption rights are at the option of the Bancorp at declining redemption
prices subject to regulatory restrictions. During the year ended June 30,
1992, an additional 7,040 shares were issued upon the conversion of
subordinated debentures (see Note 10). The dividend pay rate is 2% over
the prime rate, adjusted monthly.
-19-
<PAGE>
18. EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted average
number of shares outstanding. Diluted earnings per share is computed based
on the weighted average number of shares outstanding, increased by the
number of common shares that are assumed to have been purchased with the
proceeds from the exercise of stock options (treasury stock method). These
purchases were assumed to have been made at the average market price of
the common stock. The average market price is based on the average closing
bid price for the common stock. Retroactive recognition has been given for
stock dividends and splits, as well as for the adoption of SFAS No. 128.
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
<S> <C> <C> <C>
Net income $2,771,073 $1,465,093 $1,225,164
Average shares outstanding 548,780 412,918 405,422
Actual shares outstanding 746,997 518,947 405,422
Average stock options outstanding 21,257 20,063 20,063
Weighted average expense price $ 9.34 $ 9.34 $ 9.34
Percent of options outstanding 2.85 % 3.87 % 4.95 %
Average price of shares $ 41.35 $ 28.50 $ 22.75
Option proceeds towards reclass of shares 4,801 6,575 8,237
Average shares outstanding 549,616 412,918 405,422
Treasury shares 16,455 13,488 11,826
Adjusted shares outstanding 566,071 426,406 417,248
Net income per share - basic $ 5.04 $ 3.55 $ 3.02
Net income per share - diluted $ 4.90 $ 3.44 $ 2.94
</TABLE>
19. CONCENTRATIONS OF CREDIT RISK
Most of the loans in the Bank's loan portfolio are with customers located
within the eastern part of the state of Pennsylvania. Generally, the loans
are secured by real estate consisting of single-family residential
properties. While this represents a concentration of credit risk, the
credit losses arising from this type of lending compare favorably with the
Bank's credit loss experience on its portfolio as a whole. The ultimate
repayment of these loans is dependent, to a certain degree, on the local
economy and real estate market.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Bank
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
-20-
<PAGE>
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and cash equivalents - These items are generally short-term in nature
and, accordingly, the carrying amounts reported in the consolidated
statements of financial condition are reasonable approximations of their
fair values.
Investment and mortgage-backed securities - Fair values for investment and
mortgage-backed securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable - The fair value was estimated by discounting approximate
cash flow of the portfolio to achieve a current market yield.
Consideration was given to prepayment speeds, economic conditions, risk
characteristics and other factors considered appropriate.
Deposits - As required by the standard, the fair values of deposits
subject to immediate withdrawal, such as interest and noninterest
checking, passbook savings and money market demand deposit accounts, are
equal to their carrying amounts in the accompanying consolidated
statements of financial condition. Fair values for time deposits are
estimated by discounting future cash flows using interest rates currently
offered on time deposits with similar remaining maturities.
Advances from Federal Home Loan Bank, subordinated debentures and other
borrowed money - Fair values for these borrowings are estimated by
discounting future cash flows using interest rates currently offered on
borrowings with similar remaining maturities.
Commitments - Fair values for off-balance-sheet lending commitments are
based on fees currently charged to enter into similar agreements, taking
into account remaining terms of the agreements and the counterparties'
credit standings. The estimated fair value approximates the carrying
amount, which is not significant.
-21-
<PAGE>
The estimated fair value of the Bancorp's financial instruments is as
follows at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,242,337 $ 2,242,337 $ 3,309,712 $ 3,309,712
Investment securities 47,724,077 47,724,077 28,534,867 28,534,867
Mortgage-backed securities 76,035,303 76,035,303 74,736,438 74,736,438
Loans receivable 175,298,118 180,545,293 149,475,643 150,255,766
Mortgage loans held for sale 1,387,671 1,432,232 1,468,047 1,503,271
Federal Home Loan
Bank stock 7,378,000 7,378,000 6,970,000 6,970,000
Liabilities:
NOW accounts 14,214,521 14,214,521 13,203,834 13,203,834
Money market demand
accounts 15,352,163 15,352,163 9,846,006 9,846,006
Passbook and club accounts 11,468,234 11,468,234 10,172,920 10,172,920
Certificates of deposits 104,061,048 104,741,281 85,439,358 85,423,545
Advances from Federal
Home Loan Bank 144,484,620 145,411,768 129,399,643 127,592,334
Subordinated debentures 5,480,000 5,480,000 5,480,000 5,480,000
Other borrowed money 647,404 647,404 671,880 671,880
</TABLE>
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since
June 30, 1998 and 1997 and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
21. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriation bill was enacted, which
included recapitalization of the Savings Association Insurance Fund
(SAIF). All SAIF insured depository institutions were charged a one-time
special assessment on their SAIF-assessable deposits as of March 31, 1995
at the rate of 65.7 basis points. Accordingly, the Bank incurred a pre-tax
expense of $745,174 during the year ended June 30, 1997.
22. SUBSEQUENT EVENT
On August 19, 1998, the Bancorp and Nesquehoning Savings Bank,
Nesquehoning, Pennsylvania, signed an agreement to convert Nesquehoning
Savings Bank to a stock form of organization and simultaneously merge it
with the Bank. Assets and deposits of the Bancorp will increase
approximately $16 million and $14 million, respectively, as a result of
the merger.
<PAGE>
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different.This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of First Star Bancorp, Inc., or First Star
Savings Bank may change after the date of this prospectus. Delivery of this
document and the sales of shares made hereunder does not mean otherwise.
First Star Bancorp, Inc.
Up to 53,688 Shares
(Anticipated Maximum, as adjusted)
Common Stock
PROSPECTUS
[Advisor]
Dated ___________________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of ____________________, 1998, or 90 days after commencement of
the offering of common stock, all dealers that buy, sell or trade these
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Sections 1741 through 1747 of the Pennsylvania Business Corporation Act
sets forth circumstances under which directors, officers, employees and agents
may be insured or indemnified against liability which they may incur in their
capacities as such.
The Articles of Incorporation of First Star Bancorp, Inc. (the
"Articles") attached as Exhibit 3(i) hereto, requires indemnification of
directors, officers and employees to the fullest extent permitted by
Pennsylvania law.
First Star Bancorp, Inc. ("First Star") may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of First Star or is or was serving at the request of First Star as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not First Star would have the power to indemnify him against such
liability under the provisions of the Articles.
Item 25. Other Expenses of Issuance and Distribution
* Special counsel and local counsel legal fees................ $ 75,000
* Printing and postage........................................ 35,000
* Appraisal/Business Plan..................................... 15,000
* Accounting fees............................................. 35,000
* Data processing/Conversion agent............................ 10,000
* SEC Registration Fee........................................ 975
* Department of Banking Filing Fees........................... 8,400
* NASD Fairness Filing........................................ 1,000
* Blue Sky legal and filing fees.............................. 10,000
* Underwriting fees and expenses,
including legal fees...................................... 120,000
* Stock Certificates.......................................... 1,000
* Transfer Agent.............................................. 5,000
* Miscellaneous expenses...................................... 33,625
-------
* TOTAL....................................................... $350,000
- -----------------
* Estimated.
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Sales Agency Agreement with _______________.*
2 Merger Conversion Agreement dated August 14, 1998
between First Bancorp, Inc., First Star Savings Bank
and Nesquehoning Savings Bank, including a Plan of
Conversion of Nesquehoning Savings Bank
3(i) Articles of Incorporation of First Star Bancorp, Inc.
3(ii) Bylaws of First Star Bancorp, Inc.
4 Specimen Stock Certificate of First Star Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered
5.2 Opinion of Feldman Financial Advisors, Inc. as to the
value of subscription rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.*
8.2 State Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.*
10.1 Form of Employment Agreement between the Bank and Stephen Koomar*
10.2 Stock Option Plan*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in
its opinions filed as Exhibits 5.1, 8.1 and 8.2)
23.2 Consent of Deloitte & Touche, LLP*
23.3 Consent of Feldman Financial Advisors, Inc.*
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
99.1 Stock Order Form*
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Marketing Materials*
</TABLE>
* To be filed by amendment
** Electronic filing only
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 ("Securities Act");
(ii) Reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
<PAGE>
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer 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 small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer 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
small business issuer 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.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Bethlehem,
Pennsylvania, on September 28, 1998.
FIRST STAR BANCORP, INC.
By: /s/ Joseph T. Svetik
--------------------------------
Joseph T. Svetik
President and Director
(Duly Authorized Representative)
We the undersigned directors and officers of First Star Bancorp, Inc.
do hereby severally constitute and appoint Joseph T. Svetik our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Joseph T. Svetik may deem
necessary or advisable to enable First Star Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form SB-2 relating to the offering of First Star Bancorp, Inc.'s
common stock, including specifically but not limited to, power and authority to
sign for us or any of us, in our names in the capacities indicated below, the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that Joseph T. Svetik
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of September 28, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Joseph T. Svetik /s/ Paul J. Sebastian
- ----------------------------------------------- -----------------------------------
Joseph T. Svetik Paul J. Sebastian
President, Chief Executive Officer and Director Chairman of the Board and Director
(Principal Executive Officer)
/s/ Martin A. Marschang /s/ Harold J. Suess
- ----------------------------------------------- -----------------------------------
Martin A. Marschang Harold J. Suess
Director Director
/s/ Mark Parseghian, Jr.
- ----------------------------------------------- -----------------------------------
Mark Parseghian, Jr. Tighe J. Scott
Director Director
/s/ Michael Styer
- -----------------------------------------------
Michael Styer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
EXHIBIT 2
<PAGE>
MERGER CONVERSION AGREEMENT
---------------------------
THIS MERGER CONVERSION AGREEMENT ("Agreement") is entered into as of
this 14th day of August, 1998 by and among FIRST STAR BANCORP, INC. ("Fist
Star"), a Pennsylvania corporation, FIRST STAR SAVINGS BANK (the "Bank"), a
Pennsylvania- chartered savings bank and the wholly owned subsidiary of First
Star, and NESQUEHONING SAVINGS BANK ("NSB"), a Pennsylvania-chartered mutual
savings bank.
WHEREAS, pursuant to the applicable regulations of the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve System and
the Pennsylvania Department of Banking, First Star wishes to acquire NSB and NSB
wishes to be acquired by First Star by means of a "merger conversion"
transaction whereby NSB will (i) convert from the mutual to stock form and (ii)
subsequently merge with and into the Bank (such transaction being hereinafter
referred to as the "Merger Conversion");
WHEREAS, on July 6, 1998, First Star, the Bank and NSB entered into a
letter of intent setting forth the proposed terms of the Merger Conversion;
WHEREAS, NSB's Board of Directors has adopted a plan of conversion (the
"Plan of Conversion") in the form attached hereto as Exhibit "A";
WHEREAS, the Board of Directors of First Star believes that the
transactions contemplated hereby will be in the best interests of First Star's
shareholders;
WHEREAS, the Board of Directors of the Bank believes that the
transactions contemplated hereby will be in the best interests of the Bank and
its sole shareholder and the community served by the Bank; and
WHEREAS, the Board of Trustees of NSB believes that the transactions
contemplated hereby will be in the best interests of the depositors of NSB and
the communities served by NSB.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, and for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE I
DEFINITIONS
-----------
1.01 Definitions. Any term used herein and not defined shall have the
meaning given to such term in the Plan of Conversion. As used in this Agreement,
the following terms shall have the indicated meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
<PAGE>
(1) Affiliate means, with respect to any corporation, any person,
partnership, corporation or other legal entity that, directly, or indirectly,
through one or more intermediaries, controls, is controlled by or is under
common control with, such corporation and, without limiting the generality of
the foregoing, includes any executive officer, director or 10% equity owner of
any such partnership, corporation or other legal entity.
(2) Agreement means this Agreement and the related Plan of Conversion,
dated the date hereof, as each may from time to time be amended, restated or
supplemented.
(3) Applications means the applications or notices to be filed with,
among others, the FDIC, the FRB, and the Department for regulatory approvals
which are required in connection with the transactions contemplated hereby.
(4) BIF means the Bank Insurance Fund as administered by the FDIC.
(5) Closing Date means the day of the Effective Time.
(6) Community Offering means the process by which First Star will offer
the Conversion Stock if the Subscription Offering is not fully subscribed.
(7) Conversion Stock means the First Star Common Stock to be offered by
First Star to eligible depositors of NSB and in the Community Offering, if any,
as part of the Merger Conversion.
(8) Department means the Pennsylvania Department of Banking.
(9) Effective Time means such date and time as First Star, in
consultation with the Bank, selects within 30 days after the occurrence of the
following: (i) expiration of all applicable waiting periods in connection with
all approvals from Regulatory Authorities; (ii) the satisfaction or waiver of
all conditions to the consummation of the Merger Conversion; and (iii) the
execution and filing with all Regulatory Authorities of all documents necessary
to effect the Merger Conversion or on such earlier or later date as may be
agreed by the parties and reflected in any such filings.
(10) Environmental Laws means (i) any federal, state and local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection, preservation or restoration of the environment, (including, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource), or to human health or safety, or (b) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Material, in each case as
amended and as now in effect and includes, without limitation, the federal
Comprehensive Environmental Response Act, Comprehensive Environmental and
2
<PAGE>
Liability Act, Water Pollution Control Act of 1972, the federal Clean Air Act,
the federal Clean Water Act, the federal Resource Conservation and Recovery Act
of 1976 (including the Hazardous and Solid Waste Amendments thereto), the
federal Solid Waste Disposal Act, the federal Toxic Substances Control Act, the
federal Insecticide, Fungicide and Rodenticide Act, the federal Occupational
Safety and Health Act of 1970, and any similar state or local laws each as
amended and as now in effect, and (ii) any common law or equitable doctrine
(including. without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Material.
(11) ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
(12) FDIC means the Federal Deposit Insurance Corporation.
(13) First Star Common Stock means the common stock of First Star
Bancorp, Inc., par value $1.00 per share.
(14) First Star Disclosure Schedule means, collectively, the disclosure
schedules delivered by First Star and the Bank to NSB pursuant to this
Agreement.
(15) First Star Financials means (i) the audited financial statements
of First Star Bancorp, Inc. as of June 30, 1996 and June 30, 1997 and for each
of the years then ended and (ii) the unaudited interim financial statements of
First Star as of and for each calendar quarter thereafter.
(16) First Star Regulatory Reports means all reports, registrations,
documents and statements, together with any amendments required to be made with
respect thereto, that First Star and the Bank were required to file or otherwise
submit since June 30, 1994 with or to (i) the Federal Reserve Bank of
Philadelphia, (ii) the FDIC, (iii) the Department, (iv) the SEC, and (v) any
other Regulatory Authority, pursuant to the laws, rules or regulations of the
United States, the Commonwealth of Pennsylvania, the FRB, the FDIC, the
Department or any other Regulatory Authority.
(17) FRB means the Board of Governors of the Federal Reserve System.
(18) GAAP means generally accepted accounting principles.
(19) Hazardous Material means any substance, waste or other material
presently listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, under any Environmental Law,
and includes, without limitation, any oil or other petroleum product, toxic
waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous
waste, special waste, solid waste or petroleum or any derivative or by-product
3
<PAGE>
thereof, radon, radioactive material, asbestos, asbestos containing material,
urea formaldehyde foarn insulation, lead and polychlorinated biphenyl.
(20) IRC means the Internal Revenue Code of 1986, as amended.
(21) IRS means the Internal Revenue Service.
(22) Just Cause means, in the good faith determination of the Board of
Directors of the applicable entity, the employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or willful violation of
any law, rule or regulation (other than traffic violations or similar offenses)
or final cease-and-desist order.
(23) Market Price means the average closing price per share of the last
10 real time trades (i.e., closing price) of the First Star Common Stock as
reported on the OTC Bulletin Board prior to the mailing of the Prospectus, but
no lower than book value.
(24) Material Adverse Effect means. with respect to an entity, any
condition, event change or occurrence that is reasonably likely to have a
material adverse effect upon (i) the financial condition, properties, assets,
business, prospects or results of operations of such entity or (ii) the ability
of such entity to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Plan of Conversion;
provided, however, that Material Adverse Effect shall not be deemed to include
the impact of (a) changes in banking, thrift and similar laws and/or regulations
of general applicability or interpretations thereof by courts or (b) changes in
GAAP or regulatory accounting requirements applicable to banks and thrifts
generally.
(25) Merger Conversion means the transactions whereby NSB will (i)
convert to a Pennsylvania-chartered stock savings bank, and (ii) merge with and
into the Bank.
(26) NSB means, as the context requires, either Nesquehoning Savings
Bank in its current form as a Pennsylvania-chartered mutual savings bank or as a
Pennsylvania-chartered stock savings bank.
(27) NSB Disclosure Schedule means collectively, the disclosure
schedules delivered by NSB to First Star pursuant to this Agreement.
(28) NSB Financials means (i) the audited financial statements of NSB
as of December 31, 1996 and December 31, 1997 and for each of the years then
ended and (ii) the unaudited interim financial statements of NSB as of and for
each calendar quarter thereafter.
(29) NSB Regulatory Reports means all reports, registrations, documents
and statements, together with any amendments required to be made with respect
thereto, that NSB was required to file or otherwise submit since December 31,
1994 and will be required to submit
4
<PAGE>
prior to the Effective Time with or to the Department of FDIC and any other
Regulatory Authority pursuant to the laws, rules or regulations of the United
States, the FDIC or any other Regulatory Authority.
(30) Offerings mean the Subscription Offering and the Community
Offering.
(31) Offering Documents mean the Prospectus, proxy materials and all
offering circulars, schedules, statements, forms, reports and other documents
required to be filed under the applicable securities and related laws in
connection with the Merger Conversion.
(32) Plan of Conversion means the plan of conversion (as it may from
time to time be amended, restated or supplemented hereafter) adopted by NSB and
to be filed with the Department and the FDIC, a copy of which plan is attached
hereto as Exhibit "A," pursuant to which NSB will (i) convert to a
Pennsylvania-chartered stock savings bank, and (ii) merge with and into the
Bank.
(33) Prospectus means the prospectus, together with any supplements
thereto, to be sent to certain eligible depositors of NSB and others in
connection with the transactions contemplated by this Agreement.
(34) Proxy Statement means the proxy statement of NSB to be delivered
to the Voting Depositors (as such term is defined in the Plan of Conversion) of
NSB in connection with the special meeting of such Voting Depositors to be held
in connection with their consideration of the Agreement and the Plan of
Conversion and the transactions contemplated hereby and thereby.
(35) Registration Statement means the registration statement, together
with all amendments and supplements thereto, filed with the SEC to register the
Conversion Stock.
(36) Regulatory Authority. means any agency or department of any
federal, state or local government, including, without limitation, the FDIC, the
FRB, the SEC and the Department or the respective staffs thereof.
(37) Rights means warrants, options, rights, convertible securities and
other capital stock equivalents which obligate an entity to issue its
securities.
(38) SAIF means the Savings Association Insurance Fund as administered
by the FDIC.
(39) SEC means the Securities and Exchange Commission.
(40) Subsidiary means any corporation, 50% or more of the capital stock
of which is owned, either directly or indirectly, by another entity, except any
corporation the stock of which is held in the ordinary course of the lending
activities of a bank.
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(41) Subscription Offering means the process by which First Star will
offer the Conversion Stock to the eligible depositors of NSB.
(42) Tax Return means any return, report, information return or
document (including any related or supporting information) required to be filed
or otherwise provided with respect to Taxes.
(43) Taxes means all taxes, charges, fees, levies, penalties or other
assessments imposed or required to be collected by any United States federal,
state, local or foreign taxing authority or political subdivision thereof,
including, but not limited to, income, excise, property, sales, transfer,
franchise, payroll, withholding, social security or other taxes, including any
interest, penalties, fines, assessments or additions attributable thereto.
ARTICLE II
ACQUISITION AND CONVERSION
--------------------------
2.01 Acquisition. Subject to the terms and conditions of this Agreement
and the Plan of Conversion, First Star shall acquire NSB by means of the Merger
Conversion.
2.02 Issuance of First Star Stock. Subject to regulatory approval and
the terms and conditions of this Agreement and the Plan of Conversion, First
Star shall issue rights to subscribe for Conversion Stock to NSB's eligible
depositors as provided for in the Plan of Conversion. The number of shares of
the Conversion Stock to be issued in the Subscription Offering shall be
determined in accordance with the Plan of Conversion and the price per share
shall be equal to 90% of the Market Price of First Star Common Stock. In the
event that all of the Conversion Stock is not subscribed for in the Subscription
Offering, First Star shall offer the remaining shares of Conversion Stock for
sale in the Community Offering which shall be a direct community offering, a
syndicated community offering or an underwritten public offering in accordance
with the Plan of Conversion, and the price per share shall be equal to 100% of
the Market Price of First Star Common Stock. Subject to regulatory approval,
current shareholders of First Star shall be given a preference in the Community
Offering.
2.03 Reasonable Efforts to Effect Transactions. Subject to the terms
and conditions of this Agreement, each of First Star and NSB agrees to use its
reasonable best efforts to take, or cause to be taken, all actions necessary,
proper or advisable to consummate and make effective the transactions
contemplated by this Agreement.
2.04 Compliance with Banking Laws. The acquisition of NSB by First Star
through the Merger Conversion shall be accomplished in accordance with this
Agreement, the Plan of Conversion and with all applicable federal and state
statutes and regulations, including those of the FDIC, the FRB and the
Department. The consummation of the transactions contemplated by this Agreement
is specifically conditioned upon receipt of all necessary regulatory approvals.
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2.05 Deposit Accounts. At the Effective Time, all deposit accounts of
NSB shall be and become deposit accounts in the Bank without change in their
respective terms, maturities, minimum required balances or withdrawal values. At
the Effective Time and at all times thereafter until such account ceases to be a
deposit account of the Bank, each deposit account of NSB shall be considered for
dividend or interest purposes as if it had been a deposit account of the Bank at
the time such deposit account was opened.
2.06 Transfer of Assets and Assumption of Liabilities. At the Effective
Time, all of the assets and properties of every kind and character, real,
personal and mixed, tangible and intangible, choses in action, rights and
credits then owned by or which would inure to NSB, shall immediately, by
operation of law and without any conveyance or transfer and without any further
act or deed on the part of First Star, the Bank or NSB, be vested in and become
the properties of the Bank, which shall have, hold and enjoy the same in its own
right as fully and to the same extent as the same were possessed, held and
enjoyed by NSB immediately prior to the consummation of the Merger Conversion.
At the Effective Time, the Bank shall assume and succeed to all of the rights,
obligations, duties and liabilities of NSB.
2.07 Offices. After the Effective Time, the current office of NSB at
301 West Catawissa Street, Nesquehoning, Pennsylvania, shall become a branch
office of the Bank. The principal office of First Star and the Bank shall
continue to be 418 West Broad Street, Bethlehem, Pennsylvania.
2.08 Liquidation Account. At the Effective Time, the Bank shall
establish on its books a liquidation account in accordance with the Plan of
Conversion and applicable regulations of the Department for the benefit of, and
in order to ensure a limited priority claim in the event of the liquidation of
the Bank for, certain depositors of NSB who shall become depositors of the Bank
as a result of the transactions contemplated by this Agreement and the Plan of
Conversion and who, following the Effective Date, remain as depositors of the
Bank.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NSB
-------------------------------------
NSB hereby represents and warrants to First Star that, except as set
forth in the NSB Disclosure Schedule, which NSB Disclosure Schedule shall be
delivered to First Star within ten days following the date of this Agreement:
3.01 Organization.
(a) General. NSB is a Pennsylvania-chartered mutual savings
bank duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. NSB has all requisite power and authority and is
duly qualified and licensed to conduct its business and operations as now being
conducted and to own, lease and operate the properties and assets now owned or
leased by it as presently operated. NSB is qualified to do
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business as a foreign corporation and is in good standing in each jurisdiction
in which qualification is necessary under applicable law, except to the extent
that any failures to so qualify would not, in the aggregate, have a Material
Adverse Effect on the business, financial condition or results of operations of
NSB.
(b) NSB Subsidiaries. The NSB Disclosure Schedule lists each
direct and indirect subsidiary of NSB (individually a "NSB Subsidiary" and
collectively the "NSB Subsidiaries"). Except as set forth in the NSB Disclosure
Schedule, all outstanding shares of the capital stock of the NSB Subsidiaries
are validly issued, fully paid, nonassessable and owned beneficially and of
record by NSB free and clear of any encumbrance. Except as set forth in the NSB
Disclosure Schedule, all of the outstanding capital stock or other ownership
interests in all of the NSB Subsidiaries is owned by NSB. There are no options,
convertible securities, warrants, or other Rights (preemptive or otherwise) to
purchase or acquire any capital stock of any NSB Subsidiary and no contracts to
which NSB or any of its Affiliates is subject with respect to the issuance,
voting or sale of issued or unissued shares of the capital stock of any of the
NSB Subsidiaries. Each of the NSB Subsidiaries is duly organized, validly
existing and in good standing under the laws of the respective jurisdiction
under which it is organized, as set forth in the NSB Disclosure Schedule. Each
NSB Subsidiary has all requisite power and authority and is duly qualified and
licensed to conduct its business and operations as now being conducted and to
own, lease and operate the properties and assets now owned or leased by it as
presently operated. Each NSB Subsidiary is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which qualification
is necessary under applicable law, except to the extent that any failures to so
qualify would not, in the aggregate, have a Material Adverse Effect on NSB and
the NSB Subsidiaries, as a whole.
(c) Deposit Insurance. The deposits of NSB are insured by the
SAIF to the extent provided in the Federal Deposit Insurance Act.
(d) Minute Books. The minute books of NSB and the NSB
Subsidiaries accurately record, in all material respects, all material corporate
actions of their Boards of Directors (including committees thereof), members and
shareholders, and such minute books, together with all other books and records
of NSB, have been, and are being, maintained in accordance with applicable legal
requirements.
(e) Charters and Bylaws. NSB has delivered to First Star true
and correct copies of the Charter, Articles of Incorporation or other organizing
document, and the Bylaws, of NSB and each NSB Subsidiary.
3.02 Affiliations. Except as disclosed in the NSB Disclosure Schedule,
NSB does not own any equity interest, directly or indirectly, in any other
company or control any other company, except for equity interests held in the
investment portfolio of NSB, equity interests held by NSB in a fiduciary
capacity and equity interests held in connection with the mortgage, home equity
and other loan activities of NSB. There are no subscriptions, options, warrants,
calls, commitments, agreements or other Rights outstanding and held by NSB with
respect to
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any other company's capital stock. Except as disclosed in the NSB Disclosure
Schedule, NSB is not a party to any transaction with any member of the NSB Board
of Directors or any officer of NSB.
3.03 Authority: No Violation.
(a) Authority. NSB has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby and by the Plan of Conversion. The execution and delivery of
this Agreement by NSB and the consummation by NSB of the transactions
contemplated hereby and by the Plan of Conversion have been duly and validly
approved by the Board of Directors of NSB and, except for the approval by the
affirmative vote of a majority of the Voting Depositors of NSB, no other
corporate proceedings on the part of NSB are necessary for the due authorization
of the Agreement and the consummation of the transactions contemplated hereby
and by the Plan of Conversion. Subject to receipt of all required approvals of
Regulatory Authorities and the approval of the Voting Depositors of NSB, this
Agreement constitutes the valid and binding obligation of NSB, enforceable
against NSB in accordance with its terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and subject,
as to enforceability, to general principles of equity.
(b) No Conflict or Breach. Except as disclosed in the NSB
Disclosure Schedule, neither the execution and delivery of this Agreement by NSB
nor the consummation of the transactions contemplated hereby and by the Plan of
Conversion, will (i) violate, conflict with or result in a breach of any
provision of the Charter or Bylaws of NSB or the Articles of Incorporation or
other organizing document or Bylaws of any NSB Subsidiary, (ii) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to NSB or any NSB Subsidiary or to any of their properties
or assets or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of NSB or any NSB Subsidiary
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement, commitment or other
instrument or obligation to which NSB or any NSB Subsidiary is a party or by
which NSB or any NSB Subsidiary or any of their properties or assets may be
bound or affected, except for such violations, conflicts, breaches or defaults
under this clause (iii) none of which, either individually or in the aggregate,
will have a Material Adverse Effect on NSB and its NSB Subsidiaries, as a whole,
or NSB's ability to perform any of its obligations under this Agreement.
3.04 Consents. No consents or approvals of, notices to, exemptions or
waivers by, or. filings or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are necessary, in
connection with the execution, delivery and performance of this Agreement by NSB
and the consummation by NSB of the transactions
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contemplated hereby and by the Plan of Conversion, except for the approval of
this Agreement and the Plan of Conversion by the Voting Depositors of NSB, the
FDIC, the FRB and the Department.
3.05 Regulatory Reports and Financial Statements.
(a) NSB Regulatory Reports. NSB has previously delivered, and
will deliver, to First Star the NSB Regulatory Reports set forth in the NSB
Disclosure Schedule. The NSB Regulatory Reports have been, and will be, prepared
in accordance with applicable regulatory accounting principles and practices
applied on a consistent basis throughout the periods covered by such reports,
and fairly present, and will fairly present, the financial position, results of
operations and changes in retained earnings of NSB as of and for the periods
ended on the dates thereof, in accordance with applicable regulatory accounting
principles applied on a consistent basis (except for the omission of notes to
unaudited statements, year end adjustments to interim results and changes to
generally accepted accounting principles). All NSB Regulatory Reports are, and
will be, true and correct in all material respects and were, or will be, filed
on a timely basis.
(b) NSB Financials. NSB has previously delivered to First Star
the NSB Financials set forth in the NSB Disclosure Schedule. As soon as
available, NSB will furnish First Star with the NSB Financials for the fiscal
years and/or calendar quarters ending after the date hereof. The annual
financial statements of NSB have been, and will be, prepared in accordance with
GAAP applied on a consistent basis throughout the period covered by such
statements. The quarterly Thrift Financial Reports of NSB, and any other form of
quarterly report, are true and correct in all material respects and accurately
reflect the financial state of NSB. The NSB Financials fairly present, or will
fairly present, the financial position, results of operations and cash flows of
NSB as of and for the periods ending on the dates thereof, except that the NSB
Financials will not be deemed to fail to fairly present the financial position,
results of operations and cash flows of NSB if a Regulatory Authority requires
NSB to increase its allowance for loan losses by any amount or amounts up to an
aggregate increase of $100,000.
(c) No Undisclosed Liabilities. At the date of any balance
sheet included or to be included in the NSB Financials or the NSB Regulatory
Reports, NSB did not have, and will not have, any liabilities or obligations
which are not reflected or reserved against therein or disclosed in a footnote
thereto, except for liabilities and obligations which are not material in the
aggregate and which are incurred in the ordinary course of business, consistent
with past practice, and except for liabilities and obligations which are
disclosed in the NSB Disclosure Schedule.
3.06 Taxes. All federal, state, local and foreign Tax Returns and
estimates required to be filed by or on behalf of NSB or any NSB Subsidiary have
been, or will be, timely filed or requests for extension shall have been granted
and not have expired, and all such filed Tax Returns are complete and accurate
in all material respects. All Taxes shown or required to be shown on Tax Returns
filed or required to be filed (as determined without regard to extensions)
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by or on behalf of NSB or any NSB Subsidiary have been, or will be, paid in full
or adequate provision has been made for any such Taxes in the annual financial
statements of NSB (in accordance with GAAP) and in the quarterly Thrift
Financial Reports. There is no audit examination, deficiency or refund
litigation with respect to any Taxes of NSB or any NSB Subsidiary that could
result in a determination that would have a Material Adverse Effect on NSB and
the NSB Subsidiaries, as a whole. All Taxes, interest, additions and penalties
due with respect to completed and settled examinations or concluded litigation
relating to it have been, or will be prior to mailing date of the Proxy
Statement and the Prospectus, paid in full or adequate provision has been, or
will be, made for any such Taxes in the NSB annual financial statements (in
accordance with GAAP) and in the quarterly Thrift Financial Reports. NSB has not
executed an extension or waiver of any statute of limitations on the assessment
or collection of any material Taxes due that is currently in effect.
3.07 No Material Adverse Effect. Since December 31, 1997, except as
disclosed in the NSB Disclosure Schedule, neither NSB nor any NSB Subsidiary has
incurred any material liability, except in the ordinary course of its business
consistent with past practice, nor has there been any change in the financial
condition, properties, business or results of operations of NSB or any NSB
Subsidiary which, individually or in the aggregate, has had, or is reasonably
likely to have, a Material Adverse Effect on NSB and the NSB Subsidiaries, as a
whole.
3.08 Contracts.
(a) General. Except as disclosed in the NSB Disclosure
Schedule, or as otherwise specified herein, neither NSB nor any NSB Subsidiary
is a party to or subject to: (i) any employment, consulting or severance
contract or arrangement with any officer, director or employee thereof, except
for "at will" arrangements; (ii) any plan, arrangement or contract providing for
bonuses, pensions, deferred compensation, retirement payments, profit sharing or
similar arrangements for or with the officers, directors or employees thereof;
(iii) any collective bargaining with any labor union relating to employees
thereof; (iv) any indebtedness disclosed in the NSB Disclosure Schedule, any
instrument evidencing or related to indebtedness for borrowed money, whether
directly or indirectly, by way of purchase money obligation, conditional sale,
lease purchase, guaranty or otherwise, in respect of which NSB or any NSB
Subsidiary is an obligor to any person, which instrument evidences or relates to
indebtedness other than deposits, repurchase agreements, bankers acceptances and
"treasury tax and loan" accounts established in the ordinary course of business
and transactions in "federal funds" or which contain financial covenants or
other restrictions (other than those relating to the payment of principal and
interest when due) which would be applicable on or after the Closing Date to
First Star, the Bank or NSB or any NSB Subsidiary; (v) any contract, plan or
arrangement which provides for payments or benefits in certain circumstances
which, together with other payments or benefits payable to any participant
therein or party thereto, might render any portion of any such payments or
benefits subject to disallowance of deduction therefor as a result of the
application of IRC Section 28OG; (vi) any contract, plan, arrangement or
instrument that is material to the financial condition, results of operations,
business or prospects of NSB and the NSB Subsidiaries, as a whole; (vii) any
agreement containing covenants that limit the ability of
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NSB or any NSB Subsidiary to engage in any particular line of business or to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, NSB or any NSB
Subsidiary may carry on its business (other than as may be required by law or
any regulatory agency); or (viii) any contract or agreement, or amendment
thereto, that would be required to be filed as an exhibit to a NSB Regulatory
Report that has not been filed as an exhibit thereto. Copies of all documents
set forth in the NSB Disclosure Schedule have been delivered to First Star as
provided herein.
(b) No Breach or Default. All the contracts, plans,
arrangements and instruments identified in the NSB Disclosure Schedule are duly
and validly executed and delivered by NSB or a NSB Subsidiary and, to the
knowledge of NSB and the NSB Subsidiaries, duly executed and delivered by the
other parties thereto, and neither NSB nor any NSB Subsidiary has breached any
provision of, or defaulted in any respect under any term of, any such contract,
plan, arrangement or instrument, and no party to any such contract, plan,
arrangement or instrument will have the right to terminate any or all of the
provisions of any such contract, plan, arrangement or instrument as a result of
the transactions contemplated by this Agreement. Except as otherwise described
in the NSB Disclosure Schedule, no plan, employment agreement, termination
agreement or similar agreement or arrangement to which NSB or a NSB Subsidiary
is a party or under which they may be liable (i) contains provisions which
permit an employee or independent contractor to terminate it without cause and
continue to accrue future benefits thereunder; (ii) provides for acceleration in
the vesting of benefits thereunder upon the occurrence of a change in ownership
or control of NSB or a NSB Subsidiary or (iii) provides for benefits which may
cause the disallowance of a federal income tax deduction under IRC Section 280G.
3.09 Ownership Of Property; Insurance Coverage.
(a) Title to Assets. NSB and each NSB Subsidiary has, and will
have as to property acquired after the date hereof, good and, as to real
property, marketable title to all assets and properties owned by it or used by
it in the conduct of its business, whether real or personal, tangible or
intangible, including assets and property reflected in the balance sheets
contained in the NSB Regulatory Reports and in the NSB Financials or acquired
subsequent thereto (except to the extent that such assets and properties have
been disposed of for fair value, in the ordinary course of business, since the
date of such balance sheets), subject to no encumbrances, liens, mortgages,
security interests or pledges, except (i) those items that secure liabilities
for borrowed money and that are described in the NSB Disclosure Schedule and
(ii) statutory liens for amounts not yet delinquent or which are being contested
in good faith. NSB and each NSB Subsidiary, as lessee, has the right under valid
and subsisting leases of properties (whether real or personal) used by it in the
conduct of its businesses to occupy and/or use such properties as presently
occupied and/or used by it.
(b) Insurance. NSB and each NSB Subsidiary is presently
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,
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customarily be insured. All of the insurance policies and bonds maintained by
NSB or any NSB Subsidiary are in full force and effect, neither NSB nor any NSB
Subsidiary is in default thereunder, and all material claims thereunder have
been filed in due and timely fashion. In the best judgment of NSB management,
such insurance coverage is adequate and will be available in the future under
terms and conditions substantially similar to those in effect on the date
thereof. A description of all currently maintained insurance is set forth in the
NSB Disclosure Schedule. Neither NSB nor any NSB Subsidiary has received notice
from any insurance carrier that (i) such insurance will be canceled or that
coverage thereunder will be reduced or eliminated or (ii) premium costs with
respect to such insurance will be substantially increased.
3.10 Legal Proceedings. Except as disclosed in the NSB Disclosure
Schedule, neither NSB nor any NSB Subsidiary is a party to, and there are not
pending, or, to their knowledge, threatened, legal, administrative, arbitration
or other proceedings, claims, actions or governmental investigations or
inquiries of any nature (i) against NSB or any NSB Subsidiary or their officers
and directors; (ii) to which NSB's or any NSB Subsidiary's assets are subject;
(iii) challenging the validity or propriety of any of the transactions
contemplated by this Agreement; or (iv) which could adversely affect the ability
of NSB to perform its obligations under this Agreement, except for any
proceedings, claims actions, investigations or inquiries which, individually or
in the aggregate, could not be reasonably expected to have Material Adverse
Effect on NSB and the NSB Subsidiaries, as a whole.
3.11 Compliance with Applicable Law.
(a) General. NSB and each NSB Subsidiary holds all licenses,
franchises, permits and authorizations necessary for the lawful conduct of its
business under, and has complied in all material respects with, applicable laws,
statutes, orders, rules and regulations of any federal, state or local
governmental authority relating to it, other than where such failure to hold or
failure to comply would neither result in a limitation in any material respect
on the conduct of any of NSB's or the NSB Subsidiaries' business nor otherwise
have a Material Adverse Effect on NSB and the NSB Subsidiaries, as a whole. All
of such licenses, franchises, permits and authorizations are in full force and
effect, and no suspension or cancellation of any of them is pending or, to the
best of NSB's knowledge, threatened.
(b) No Notices. Except as disclosed in the NSB Disclosure
Schedule, neither NSB nor any NSB Subsidiary has received any notification or
communication from any Regulatory Authority (i) asserting that it is not in
substantial compliance with any of the statutes, regulations or ordinances which
such Regulatory Authority enforces, which noncompliance has or could reasonably
be expected to have a Material Adverse Effect on NSB and the NSB Subsidiaries,
as a whole, (ii) threatening to revoke any license, franchise, permit or
governmental authorization which is material to it, (iii) requiring or
threatening to require it, or indicating that it may be required, to enter into
a cease and desist order, agreement or memorandum of understanding or any other
agreement restricting or limiting, or purporting to restrict or limit in any
manner its operations or (iv) directing, restricting or limiting, or purporting
to direct, restrict or limit in any manner its operations (any such notice,
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communication, memorandum, agreement or order described in this sentence shall
be referred to herein as a "Regulatory Agreement"). Neither NSB nor any NSB
Subsidiary has consented to or entered into any Regulatory Agreement.
3.12 ERISA. NSB has previously delivered to First Star true and
complete copies of all employee pension benefit plans within the meaning of
ERISA Section 3(2), profit sharing plans, deferred compensation and supplemental
income plans, supplemental executive retirement plans, employment agreements,
annual or long term incentive plans, settlement plans, policies and agreements,
group insurance plans, and all other employee welfare benefit plans within the
meaning of ERISA Section 3(l) and all other employee benefit plans, policies,
agreements and arrangements, all of which are set forth in the NSB Disclosure
Schedule, maintained or contributed to for the benefit of the employees or
former employees (including retired employees) and any beneficiaries thereof or
trustees or former trustees of NSB or a NSB Subsidiary, together with (i) the
most recent actuarial (if any) and financial reports relating to those plans
which constitute "qualified plans" under IRC Section 40 1 (a); (ii) the most
recent annual reports relating to such plans filed by it, respectively, with any
government agency and (iii) all rulings and determination letters which pertain
to any such plans. Neither NSB or any NSB Subsidiary nor any pension plan
maintained by NSB or any NSB Subsidiary has incurred, directly or indirectly,
any liability under Title IV of ERISA (including to the Pension Benefit Guaranty
Corporation) or to the IRS with respect to any pension plan qualified under IRC
Section 401 (a), except liabilities to the Pension Benefit Guaranty Corporation
pursuant to ERISA Section 4007, all of which have been fully paid, nor has any
reportable event under ERISA Section 4043(b) occurred with respect to any such
pension plan. With respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan, based upon the
actuarial assumptions used for funding purposes in the plan's most recent
actuarial report, did not, as of its latest valuation date, exceed the then
current value of the assets of such plan allocable to such accrued benefits.
Neither NSB nor any NSB Subsidiary has incurred or is subject to any liability
under ERISA Section 4201 for a complete or partial withdrawal from a
multi-employer plan. All "employee benefit plans," as defined in ERISA Section
3(3), comply in all material respects with ERISA and the IRS. Except as
disclosed in the NSB Disclosure Schedule, neither NSB nor any NSB Subsidiary has
any material liability under any such plan which pursuant to GAAP is required to
be reflected on or disclosed in (pursuant to a footnote or otherwise) the NSB
Financials and which is not so reflected or disclosed thereon. To the best
knowledge of NSB, except as disclosed in the NSB Disclosure Schedule, no
prohibited transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408) has occurred with respect to
any employee benefit plan maintained by NSB or any NSB Subsidiary that would be
taxed under IRC Section 4875. NSB and each NSB Subsidiary provides continuation
coverage under group health plans for separating employees and "qualified
beneficiaries" in accordance with the provisions of IRC Section 498OB(f). Such
group health plans are in compliance with Section 1862(b)(1) of the Social
Security Act.
3.13 Brokers and Finders. Except as disclosed in the NSB Disclosure
Schedule, neither NSB, any NSB Subsidiary nor any of their officers, directors,
employees or agents has employed
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any broker, finder or financial advisor, or incurred any liability for any fee
or commission to any such person, in connection with the transactions
contemplated by this Agreement.
3.14 Environmental Matters. Except as disclosed in the NSB Disclosure
Schedule, neither NSB nor any NSB Subsidiary is in violation of any
Environmental Law at any properties it owns or operates (a "Violation"), and no
properties owned or operated by NSB or any NSB Subsidiary, for which NSB or any
NSB Subsidiary could be subject to any liability under any Environmental Law,
are in or contain such condition or conditions, including the presence of any
Hazardous Materials thereon, thereat or thereunder, that would constitute a
basis of liability under any Environmental Law (a "Condition"), except for
Violations or Conditions that, individually or in the aggregate, would not have
a Material Adverse Effect on the business or condition (financial or otherwise)
of NSB and the NSB Subsidiaries, as a whole. Except as disclosed in the NSB
Disclosure Schedule, there are no actions, suits or proceedings, or demands,
claims, notices or investigations (including, without limitation, notices,
demand letters or requests for information from any environmental agency)
instituted, pending or threatened relating to any actual or potential Condition
or Violation.
3.15 Business of NSB. Except as disclosed in the NSB Disclosure
Schedule, since December 31, 1997, NSB and each NSB Subsidiary has conducted its
business only in the ordinary course and has not taken any action which would
otherwise be prohibited by the provisions of Section 5.01 hereof.
3.16 Loan Portfolio. The allowances for loan losses reflected, and to
be reflected, in the NSB Regulatory Reports, and shown, and to be shown, on the
balance sheets contained in the NSB Financials are, and will be, adequate in
accordance with the requirements of GAAP, and no Regulatory Authority has
required or requested NSB or any NSB Subsidiary to increase any allowance for
loan losses. NSB has disclosed to First Star in writing prior to the date hereof
the amounts of all loans, leases, advances, credit enhancements, other
extensions of credit, commitments and interest-beating assets of NSB or any NSB
Subsidiary that have been classified as "Other Loans Specifically Monitored",
"Special Mention", "Substandard", "Doubtful , "Loss", "Classified",
"Criticized", "Credit Risk Assets", "Concerned Loans" or words of similar
import, and NSB shall, promptly after the end of any month between the date
hereof and the Effective Date, inform First Star of any additional loans so
classified at any time after the date hereof. The "Real Estate Owned" included
in any nonperforming assets of NSB or any NSB Subsidiary is carried net of
reserves at the lower of cost or market value based on current independent
appraisals or current management appraisals.
3.17 Information to be Supplied. The information to be supplied by NSB
for inclusion in the Proxy Statement, at the time the Proxy Statement is
authorized for use and as of the date of the special meeting of Voting
Depositors convened by NSB for the purpose of considering and approving this
Agreement and the Plan of Conversion and the transactions contemplated hereunder
and thereunder, will not contain any statement which, at the time and in the
light of the circumstances under which ft is made, is false or misleading with
respect to any material fact, or which omits to state a material fact necessary
in order to make the statements therein
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not false or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for such special
meeting which has become false or misleading. The information to be supplied by
NSB for inclusion in the Registration Statement, at the time the Registration
Statement is declared effective, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading. The information to
be supplied by NSB for inclusion in the Offering Documents, as of their date and
at the Closing Date, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading. The information
supplied, or to be supplied, by NSB for inclusion in the Applications will, at
the time such documents are filed with any Regulatory Authority, be accurate in
all material aspects.
3.18 Reorganization. As of the date hereof, NSB is aware of no reason
why the Merger Conversion will fail to qualify as a reorganization under Section
368(a) of the IRC.
3.19 Unused Vacation and Sick Time. Except as disclosed in the NSB
Disclosure Schedule, no NSB employee has any accrued but unused vacation or sick
leave time.
3.20 Representations True and Correct. No representations made by NSB
in this Agreement or in the NSB Disclosure Schedule contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made not misleading. None of the information contained in the NSB
Financials, the NSB Regulatory Reports or any other documents or reports
provided by or for NSB to First Star contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements therein
not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FIRST STAR
--------------------------------------------
First Star hereby represents and warrants to NSB that, except as set
forth in the First Star Disclosure Schedule:
4.01 Organization.
(a) General. First Star is a corporation duly organized,
validly existing and in good standing under the laws of Pennsylvania. First Star
has all requisite power and authority and is duly qualified and licensed to
conduct its business and operations as now being conducted and to own, lease and
operate the properties and assets now owned or leased by it as presently
operated. First Star is qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which qualification is necessary under
applicable law, except to the extent that any failures to so qualify would not,
in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of First Star.
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(b) First Star Subsidiaries. The First Star Disclosure
Schedule lists each direct and indirect subsidiary of First Star, including the
Bank (individually a "First Star Subsidiary" and collectively the "First Star
Subsidiaries"). Except as set forth in the First Star Disclosure Schedule, all
outstanding shares of the capital stock of the First Star Subsidiaries are
validly issued, fully paid, nonassessable and owned beneficially and of record
by First Star free and clear of any encumbrance. Except as set forth in the
First Star Disclosure Schedule, all of the outstanding capital stock or other
ownership interests in all of the First Star Subsidiaries is owned by First
Star. There are no options, convertible securities, warrants, or other Rights
(preemptive or otherwise) to purchase or acquire any capital stock of any First
Star Subsidiary and no contracts to which First Star or any of its Affiliates is
subject with respect to the issuance, voting or sale of issued or unissued
shares of the capital stock of any of the First Star Subsidiaries. Each of the
First Star Subsidiaries is duly organized, validly existing and in good standing
under the laws of the respective jurisdiction under which it is organized, as
set forth in the First Star Disclosure Schedule. Each First Star Subsidiary has
all requisite power and authority and is duly qualified and licensed to conduct
its business and operations as now being conducted and to own, lease and operate
the properties and assets now owned or leased by it as presently operated. Each
First Star Subsidiary is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a Material Adverse Effect on First Star and the
First Star Subsidiaries, as a whole.
(c) Deposit Insurance. The deposits of the Bank are insured by
the SAIF to the extent provided in the Federal Deposit Insurance Act.
(d) Minute Books. The minute books of First Star and the First
Star Subsidiaries accurately record, in all material respects, all material
corporate actions of their Boards of Directors (including committees thereof),
members and shareholders, and such minute books, together with all other books
and records of First Star, have been, and are being, maintained in accordance
with applicable legal requirements.
(e) Charters and Bylaws. First Star has delivered to NSB true
and correct copies of the Charter, Articles of Incorporation or other organizing
document, and the Bylaws, of First Star and the Bank.
4.02 Capitalization.
(a) Capitalization. As of the date of this Agreement, the
authorized capital stock of First Star consists of 2,500,000 shares of common
stock, par value $1.00 per share, of which 372,088 shares are issued and
outstanding, and 1,000,000 shares of serial preferred stock, par value $0.01 per
share, of which 43,592 shares of Permanent Non-Cumulative Convertible Preferred
Stock, Series A ("Series A Preferred Stock") are issued and outstanding. All
shares of First Star Common Stock and Series A Preferred Stock issued and
outstanding are validly issued, fully paid and nonassessable and free of
preemptive rights. Except as set forth in the First Star Disclosure Schedule,
First Star is not bound by any subscriptions, options, warrants,
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calls, commitments, agreements or other Rights of any character relating to the
purchase, sale or issuance or voting of, or right to receive dividends or other
distributions on, any shares of First Star Common Stock or any other First Star
securities representing the right to vote, purchase or otherwise receive any
shares of First Star Common Stock or any other security of First Star.
(b) Five Percent Shareholders. To the best of First Star's
knowledge, except as disclosed in the First Star Disclosure Schedule, no person
or group, as of the date of this Agreement, is the beneficial owner of five
percent (5%) or more of the outstanding shares of First Star Common Stock.
(c) Affiliations. Except as disclosed in the First Star
Disclosure Schedule, First Star does not own any equity interest, directly or
indirectly, in any other company or control any other company, except for equity
interests held in the investment portfolio of First Star, equity interests held
by First Star in a fiduciary capacity and equity interests held in connection
with the mortgage, home equity and other loan activities of First Star. Except
as disclosed in the First Star Disclosure Schedule, there are no subscriptions,
options, warrants, calls, commitments, agreements or other Rights outstanding
and held by First Star with respect to any other company's capital stock. Except
as disclosed in the First Star Disclosure Schedule, First Star is not a party to
any transaction with any member of the First Star Board of Directors or any
officer of First Star.
4.03 Authority: No Violation.
(a) Authority. Each of First Star and the Bank has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby and by the Plan of Conversion.
The execution and delivery of this Agreement by each of First Star and the Bank
and the consummation by them of the transactions contemplated hereby and by the
Plan of Conversion have been duly and validly approved by the Boards of
Directors of First Star and the Bank and no other corporate proceedings on the
part of First Star are necessary for the due authorization of the Agreement and
the consummation of the transactions contemplated hereby and by the Plan of
Conversion. Subject to receipt of all required approvals of Regulatory
Authorities, this Agreement constitutes the valid and binding obligation of
First Star, enforceable against First Star in accordance with its terms, subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles of
equity.
(b) No Conflict or Breach. Neither the execution and delivery
of this Agreement by First Star nor the consummation of the transactions
contemplated hereby and by the Plan of Conversion, will (i) violate, conflict
with or result in a breach of any provision of the Articles of Incorporation or
Bylaws of First Star or the Articles of Incorporation or other organizing
document or Bylaws of any First Star Subsidiary, (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to First Star or any First Star Subsidiary or to any of their
properties or assets or (iii) violate, conflict with,
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result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in a right of termination or acceleration or the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets of
First Star or any First Star Subsidiary under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement, commitment or other instrument or obligation to which First
Star or any First Star Subsidiary is a party or by which First Star or any First
Star Subsidiary or any of their properties or assets may be bound or affected,
except for such violations, conflicts, breaches or defaults under this clause
(iii) none of which, either individually or in the aggregate, will have a
Material Adverse Effect on First Star and its First Star Subsidiaries, as a
whole, or First Star's ability to perform any of its obligations under this
Agreement.
4.04 Consents. No consents or approvals of, notices to, exemptions or
waivers by, or. filings or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are necessary, in
connection with the execution, delivery and performance of this Agreement by
First Star and the consummation by First Star of the transactions contemplated
hereby and by the Plan of Conversion, except for the approval of this Agreement
and the Plan of Conversion by the Voting Depositors of NSB, the FDIC, the FRB
and the Department.
4.05 Regulatory Reports and Financial Statements.
(a) First Star Regulatory Reports. The First Star Regulatory
Reports have been, and will be, prepared in accordance with applicable
regulatory accounting principles and practices applied on a consistent basis
throughout the periods covered by such reports, and fairly present, and will
fairly present, the financial position, results of operations and changes in
stockholders' equity of First Star as of and for the periods ended on the dates
thereof, in accordance with applicable regulatory accounting principles applied
on a consistent basis. All First Star Regulatory Reports are, and will be, true
and correct in all material respects and were, or will be, filed on a timely
basis.
(b) First Star Financials. First Star has previously delivered
to NSB the First Star Financials set forth in the First Star Disclosure
Schedule. As soon as available, First Star will furnish NSB with the First Star
Financials for the fiscal years and/or calendar quarters ending after the date
hereof. The annual financial statements of First Star have been, and will be,
prepared in accordance with GAAP applied on a consistent basis throughout the
period covered by such statements. The quarterly Call Reports of First Star, and
any other form of quarterly report, are true and correct in all material
respects and accurately reflect the financial state of First Star. The First
Star Financials fairly present or will fairly present, the financial position,
results of operations and cash flows of First Star as of and for the periods
ending on the dates thereof.
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(c) No Undisclosed-Liabilities. At the date of any balance
sheet included in the First Star Financials or the First Star Regulatory
Reports, First Star did not have, and will not have, any liabilities or
obligations which are not reflected or reserved against therein or disclosed in
a footnote thereto, except for liabilities and obligations which are not
material in the aggregate and which are incurred in the ordinary course of
business, consistent with past practice, and except for liabilities and
obligations which are disclosed in the First Star Disclosure Schedule.
(d) Shareholder Documents. First Star has heretofore
delivered, or will deliver, to NSB copies of its (i) annual reports for the
years ended June 30, 1996 and 1997 and (ii) proxy materials used in connection
with its 1997 annual meeting of shareholders.
4.06 Taxes. All federal, state, local and foreign Tax Returns and
estimates required to be filed by or on behalf of First Star or any First Star
Subsidiary have been, or will be, timely filed or requests for extension shall
have been granted and not have expired, and all such filed Tax Returns are
complete and accurate in all material respects. All Taxes shown or required to
be shown on Tax Returns filed or required to be filed (as determined without
regard to extensions) by or on behalf of First Star or any First Star Subsidiary
have been, or will be, paid in full or adequate provision has been made for any
such Taxes in the annual financial statements of First Star (in accordance with
GAAP) and in the quarterly Call Reports. There is no audit examination,
deficiency or refund litigation with respect to any Taxes of First Star or any
First Star Subsidiary that could result in a determination that would have a
Material Adverse Effect on First Star and the First Star Subsidiaries, as a
whole. All Taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation relating to it have
been, or will be prior to mailing date of the Proxy Statement and the
Prospectus, paid in full or adequate provision has been, or will be, made for
any such Taxes in the First Star annual financial statements (in accordance with
GAAP) and in the quarterly Call Reports. First Star has not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any material Taxes due that is currently in effect.
4.07 No Material Adverse Effect. Since June 3O, 1997, neither First
Star nor any First Star Subsidiary has incurred any material liability, except
in the ordinary course of its business consistent with past practice, nor has
there been any change in the financial condition, properties, business or
results of operations of First Star or any First Star Subsidiary which,
individually or in the aggregate, has had, or is reasonably likely to have, a
Material Adverse Effect on First Star and the First Star Subsidiaries, as a
whole.
4.08 Contracts.
(a) General. Except as disclosed in the First Star Disclosure
Schedule, or as otherwise specified herein, neither First Star nor any First
Star Subsidiary is a party to or subject to: (i) any employment, consulting or
severance contract or arrangement with any officer, director or employee
thereof, except for "at will" arrangements; (ii) any plan, arrangement or
contract providing for bonuses, pensions, deferred compensation, retirement
payments, profit
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sharing or similar arrangements for or with the officers, directors or employees
thereof, (iii) any collective bargaining with any labor union relating to
employees thereof; (iv) any indebtedness disclosed in the First Star Disclosure
Schedule, any instrument evidencing or related to indebtedness for borrowed
money, whether directly or indirectly, by way of purchase money obligation,
conditional sale, lease purchase, guaranty or otherwise, in respect of which
First Star or any First Star Subsidiary is an obligor to any person, which
instrument evidences or relates to indebtedness other than deposits, repurchase
agreements, bankers acceptances and "treasury tax and loan" accounts established
in the ordinary course of business and transactions in "federal funds" or which
contain financial covenants or other restrictions (other than those relating to
the payment of principal and interest when due) which would be applicable on or
after the Closing Date to NSB or First Star or any First Star Subsidiary; (v)
any contract, plan or arrangement which provides for payments or benefits in
certain circumstances which, together with other payments or benefits payable to
any participant therein or party thereto, might render any portion of any such
payments or benefits subject to disallowance of deduction therefor as a result
of the application of IRC Section 28OG; (vi) any contract, plan, arrangement or
instrument that is material to the financial condition, results of operations,
business or prospects of First Star and the First Star Subsidiaries, as a whole;
(vii) any agreement containing covenants that limit the ability of First Star or
any First Star Subsidiary to engage in any particular line of business or to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, First Star or
any First Star Subsidiary may carry on its business (other than as may be
required by law or any regulatory agency); or (viii) any contract or agreement,
or amendment thereto, that would be required to be filed as an exhibit to a
First Star Regulatory Report that has not been filed as an exhibit thereto.
(b) No Breach or Default. All the contracts, plans,
arrangements and instruments identified in the First Star Disclosure Schedule
are duly and validly executed and delivered by First Star or a First Star
Subsidiary and, to the knowledge of First Star and the First Star Subsidiaries,
duly executed and delivered by the other parties thereto, and neither First Star
nor any First Star Subsidiary has breached any provision of, or defaulted in any
respect under any term of, any such contract, plan, arrangement or instrument,
and no party to any such contract, plan, arrangement or instrument will have the
right to terminate any or all of the provisions of any such contract, plan,
arrangement or instrument as a result of the transactions contemplated by this
Agreement. Except as otherwise described in the First Star Disclosure Schedule,
no plan, employment agreement, termination agreement or similar agreement or
arrangement to which First Star or a First Star Subsidiary is a party or under
which they may be liable (i) contains provisions which permit an employee or
independent contractor to terminate it without cause and continue to accrue
future benefits thereunder; (ii) provides for acceleration in the vesting of
benefits thereunder upon the occurrence of a change in ownership or control of
First Star or a First Star Subsidiary or (iii) provides for benefits which may
cause the disallowance of a federal income tax deduction under IRC Section 280G.
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4.09 Ownership Of Coverage.
(a) Title to Assets. First Star and each First Star Subsidiary
has, and will have as to property acquired after the date hereof, good and, as
to real property, marketable title to all assets and properties owned by it or
used by it in the conduct of its business, whether real or personal, tangible or
intangible, including assets and property reflected in the balance sheets
contained in the First Star Regulatory Reports and in the First Star Financials
or acquired subsequent thereto (except to the extent that such assets and
properties have been disposed of for fair value, in the ordinary course of
business, since the date of such balance sheets), subject to no encumbrances,
liens, mortgages, security interests or pledges, except (i) those items that
secure liabilities for borrowed money and that are described in the First Star
Disclosure Schedule and (ii) statutory liens for amounts not yet delinquent or
which are being contested in good faith. First Star and each First Star
Subsidiary, as lessee, has the right under valid and subsisting leases of
properties (whether real or personal) used by it in the conduct of its
businesses to occupy and/or use such properties as presently occupied and/or
used by it.
(b) Insurance. First Star and each First Star Subsidiary is
presently 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. All of the insurance policies and bonds maintained by First Star or any
First Star Subsidiary are in full force and effect, neither First Star nor any
First Star Subsidiary is in default thereunder, and all material claims
thereunder have been filed in due and timely fashion. In the best judgment of
First Star's management, such insurance coverage is adequate and will be
available in the future under terms and conditions substantially similar to
those in effect on the date thereof. Neither First Star nor any First Star
Subsidiary has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated or (ii) premium costs with respect to such insurance will be
substantially increased.
4.10 Legal Proceedings. Except as disclosed in the First Star
Disclosure Schedule, neither First Star nor any First Star Subsidiary is a party
to, and there are not pending, or, to their knowledge, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental investigations or inquiries of any nature (i) against First Star or
any First Star Subsidiary or their officers and directors; (ii) to which First
Star's or any First Star Subsidiary's assets are subject; (iii) challenging the
validity or propriety of any of the transactions contemplated by this Agreement;
or (iv) which could adversely affect the ability of First Star to perform its
obligations under this Agreement, except for any proceedings, claims actions,
investigations or inquiries which, individually or in the aggregate, could not
be reasonably expected to have Material Adverse Effect on First Star and the
First Star Subsidiaries, as a whole.
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4.11 Compliance with Applicable Law.
(a) General. First Star and each First Star Subsidiary holds
all licenses, franchises, permits and authorizations necessary for the lawful
conduct of its business under, and has complied in all material respects with,
applicable laws, statutes, orders, rules and regulations of any federal, state
or local governmental authority relating to it, other than where such failure to
hold or failure to comply would neither result in a limitation in any material
respect on the conduct of any of First Star's or the First Star Subsidiaries'
business nor otherwise have a Material Adverse Effect on First Star and the
First Star Subsidiaries, as a whole. All of such licenses, franchises, pen-nits
and authorizations are in full force and effect, and no suspension or
cancellation of any of them is pending or, to the best of First Star's
knowledge, threatened.
(b) No Notices. Except as disclosed in the First Star
Disclosure Schedule, neither First Star nor any First Star Subsidiary has
received any notification or communication from any Regulatory Authority (i)
asserting that it is not in substantial compliance with any of the statutes,
regulations or ordinances which such Regulatory Authority enforces, which
noncompliance has or could reasonably be expected to have a Material Adverse
Effect on First Star and the First Star Subsidiaries, as a whole, (ii)
threatening to revoke any license, franchise, permit or governmental
authorization which is material to it, (iii) requiring or threatening to require
it, or indicating that it may be required, to enter into a cease and desist
order, agreement or memorandum of understanding or any other agreement
restricting or limiting, or purporting to restrict or limit, in any manner its
operations or (iv) directing, restricting or limiting, or purporting to direct,
restrict or limit in any manner its operations (any such notice, communication,
memorandum, agreement or order described in this sentence shall be referred to
herein as a "Regulatory Agreement"). Neither First Star nor any First Star
Subsidiary has consented to or entered into any Regulatory Agreement.
4.12 ERISA. First Star has previously delivered to NSB a list of all
employee pension benefit plans within the meaning of ERISA Section 3(2), profit
sharing plans, deferred compensation and supplemental income plans, supplemental
executive retirement plans, employment agreements, annual or long ten-n
incentive plans, settlement plans, policies and agreements, group insurance
plans, and all other employee welfare benefit plans within the meaning of ERISA
Section 3(l) and all other employee benefit plans, policies, agreements and
arrangements, all of which are set forth in the First Star Disclosure Schedule,
maintained or contributed to for the benefit of the employees or former
employees (including retired employees) and any beneficiaries thereof or
trustees or former trustees of First Star or a First Star Subsidiary. Neither
First Star or any First Star Subsidiary nor any pension plan maintained by First
Star or any First Star Subsidiary has incurred, directly or indirectly, any
liability under Title IV of ERISA (including to the Pension Benefit Guaranty
Corporation) or to the IRS with respect to any pension plan qualified under IRC
Section 401 (a), except liabilities to the Pension Benefit Guaranty Corporation
pursuant to ERISA Section 4007, all of which have been fully paid, nor has any
reportable event under ERISA Section 4043(b) occurred with respect to any such
pension plan. With respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan, based upon the
actuarial assumptions used
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for funding purposes in the plan's most recent actuarial report, did not, as of
its latest valuation date, exceed the then current value of the assets of such
plan allocable to such accrued benefits. Neither First Star nor any First Star
Subsidiary has incurred or is subject to any liability under ERISA Section 4201
for a complete or partial withdrawal from a multi-employer plan. All "employee
benefit plans," as defined in ERISA Section 3(3), comply in all material
respects with ERISA and the IRS. Except as disclosed in the First Star
Disclosure Schedule, neither First Star nor any First Star Subsidiary has any
material liability under any such plan which pursuant to GAAP is required to be
reflected on or disclosed in (pursuant to a footnote or otherwise) the First
Star Financials and which is not so reflected or disclosed thereon. To the best
knowledge of First Star, except as disclosed in the First Star Disclosure
Schedule, no prohibited transaction (which shall mean any transaction prohibited
by ERISA Section 406 and not exempt under ERISA Section 408) has occurred with
respect to any employee benefit plan maintained by First Star or any First Star
Subsidiary that would be taxed under IRC Section 4875. First Star and each First
Star Subsidiary provides continuation coverage under group health plans for
separating employees and "qualified beneficiaries" in accordance with the
provisions of IRC Section 498OB(f). Such group health plans are in compliance
with Section 1862(b)(1) of the Social Security Act.
4.13 Brokers and Finders. Neither First Star, any First Star Subsidiary
nor any of their officers, directors, employees or agents has employed any
broker, finder or financial advisor, or incurred any liability for any fee or
commission to any such person, in connection with the transactions contemplated
by this Agreement.
4.14 Environmental Matters. Except as disclosed in the First Star
Disclosure Schedule, neither First Star nor any First Star Subsidiary is in
violation of any Environmental Law at any properties it owns or operates (a
"Violation"), and no properties owned or operated by First Star or any First
Star Subsidiary, for which First Star or any First Star Subsidiary could be
subject to any liability under any Environmental Law, are in or contain such
condition or conditions, including the presence of any Hazardous Materials
thereon, thereat or thereunder, that would constitute a basis of liability under
any Environmental Law (a "Condition"), except for Violations or Conditions that,
individually or in the aggregate, would not have a Material Adverse Effect on
the business or condition (financial or otherwise) of First Star and the First
Star Subsidiaries, as a whole. Except as disclosed in the First Star Disclosure
Schedule, there are no actions, suits or proceedings, or demands, claims,
notices or investigations (including, without limitation, notices, demand
letters or requests for information from any environmental agency) instituted,
pending or threatened relating to any actual or potential Condition or
Violation.
4.15 Loan Portfolio. The allowances for loan losses reflected, and to
be reflected, in the First Star Regulatory Reports, and shown, and to be shown,
on the balance sheets contained in the First Star Financials are, and will be,
adequate in accordance with the requirements of GAAP, and no Regulatory
Authority has required or requested First Star or any First Star Subsidiary to
increase any allowance for loan losses. First Star has disclosed to NSB in
writing prior to the date hereof the amounts of all loans, leases, advances,
credit enhancements, other
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extensions of credit, commitments and interest-bearing assets of First Star or
any First Star Subsidiary that have been classified as "Other Loans Specifically
Monitored", "Special Mention", "Substandard", "Doubtful", "Loss , "Classified",
"Criticized", "Credit Risk Assets", "Concerned Loans" or words of similar
import, and First Star shall, promptly after the end of any month between the
date hereof and the Effective Date, inform NSB of any additional loans so
classified at any time after the date hereof. The "Real Estate Owned" included
in any nonperforming assets of First Star or any First Star Subsidiary is
carried net of reserves at the lower of cost or market value based on current
independent appraisals or current management appraisals.
4.16 Information to be Supplied. The information to be supplied by
First Star for inclusion in the Proxy Statement, at the time the Proxy Statement
is authorized for use and as of the date of the special meeting of Voting
Depositors convened by NSB for the purpose of considering and approving this
Agreement and the Plan of Conversion and the transactions contemplated hereunder
and thereunder, will not contain any statement which, at the time and in the
light of the circumstances under which it is made, is false or misleading with
respect to any material fact, or which omits to state a material fact necessary
in order to make the statements therein not false or misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of a proxy for such special meeting which has become false or
misleading. The information to be supplied by First Star for inclusion in the
Registration Statement, at the time the Registration Statement is declared
effective, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein not misleading. The information to be supplied by First
Star for inclusion in the Offering Documents, as of their date and at the
Closing Date, will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied, or to be supplied, by First Star for inclusion in the Applications
will, at the time such documents are filed with any Regulatory Authority, be
accurate in all material aspects.
4.17 Reorganization. As of the date hereof, First Star is aware of no
reason why the Merger Conversion will fail to qualify as a reorganization under
Section 368(a) of the IRC.
4.18 Representations True and Correct. No representations made by First
Star in this Agreement or in the First Star Disclosure Schedule contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made not misleading. None of the information contained in
the First Star Financials, the First Star Regulatory Reports or any other
documents or reports provided by or for First Star to NSB contains any untrue
statements of a material fact or omits to state a material fact necessary to
make the statements therein not misleading.
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ARTICLE V
COVENANTS OF THE PARTIES
------------------------
5.01 Conduct of NSB's Business.
(a) Ordinary Course. From the date of this Agreement to the
Closing Date, NSB will conduct its business and engage in transactions only in
the ordinary course of business and consistent with past practice, except as
otherwise required by this Agreement or with the prior written consent of First
Star. NSB will use its best efforts to (i) maintain and preserve intact its
business organization, properties, assets, leases, employees and advantageous
business relationships and retain the services of its officers and key
employees; (ii) take no action which would adversely affect or delay the ability
of NSB, First Star or the Bank to obtain any necessary approvals, consents or
waivers of the Regulatory Authorities required for the transactions contemplated
hereby and by the Plan of Conversion or to perform its covenants and agreements
on a timely basis under this Agreement and the Plan of Conversion; and (iii)
take no action that is reasonably likely to have a Material Adverse Effect on
NSB. Without limiting the foregoing, from the date of this Agreement to the
Closing Date, except as otherwise consented to or approved by First Star in
writing or as permitted or required by this Agreement or the Plan of Conversion,
NSB will not:
(i) Compensation. Grant any severance or termination
pay to (other than pursuant to the existing plans and policies of NSB disclosed
in Section 5.01(a)(i) of the NSB Disclosure Schedule), or enter into or amend
any employment or severance agreement with, any employee, officer or director of
NSB, or increase the rate of compensation of the directors, officers and
employees of NSB except as described in Section 5.01(a)(i) of the NSB Disclosure
Schedule;
(ii) Extraordinary Transactions. Except as provided
for in this Agreement merge or consolidate with any other corporation or other
entity, sell or lease all or any substantial portion of the assets or business
of NSB, make any acquisition of all or any substantial portion of the business
or assets of any other person, firm, association, corporation or business
organization other than in connection with the collection of any loan or credit
arrangement between NSB and any other person, enter into a purchase and
assumption transaction with respect to deposits and liabilities, permit the
revocation or surrender by NSB of its certificate of authority to maintain, or
file an application for the relocation of, its existing office or file an
application for a certificate of authority to establish a new branch office;
(iii) Liens, Indebtedness and Other Matters. Sell
or otherwise dispose of any asset of NSB other than in the ordinary course of
business consistent with past practice, subject any asset of NSB to a lien,
pledge, security interest or other encumbrance (other than in connection with
deposits, repurchase agreements, bankers acceptances, "treasury tax and loan"
accounts established in the ordinary course of business, transactions in
"federal funds" and any lien, pledge, security interest or other encumbrance
incurred in the ordinary course of business consistent with past practice which
does not have or could not reasonably be expected to have
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a Material Adverse Effect on NSB and the NSB Subsidiaries, as a whole), modify
in any material respect the manner in which NSB has heretofore conducted its
business, enter into any new line of business or incur any indebtedness for
borrowed money (or guarantee any indebtedness for borrowed money), except in the
ordinary course of business consistent with past practice;
(iv) Representations and Warranties. Take any action
which would result in any of the representations and warranties of NSB set forth
in this Agreement becoming untrue as of any date after the date hereof or in any
of the conditions set forth in Article VI hereof not being satisfied;
(v) Accounting Matters. Change any method, practice
or principle of accounting, or change any assumption underlying, or any method
of calculation of, depreciation of any type of asset or establishment of any
reserve;
(vi) Modification of Agreements, Waive, release,
grant or transfer any rights of value or modify or change in any material
respect any existing agreement to which NSB or any NSB Subsidiary, is a party,
other than in the ordinary course of business, consistent with past practice;
(vii) Employee Benefits Plans. Implement any pension,
retirement, profit sharing, bonus, welfare benefit or similar plan or
arrangement that was not in effect on the date of this Agreement, or amend any
existing plan or arrangement except as required by law or to the extent such
amendments do not result in an increase in cost; and
(viii) Amendment of Organizational Documents. Amend
the Charter or Articles of Incorporation or Bylaws of NSB or any NSB Subsidiary
except as may be required to effect the Merger Conversion.
(b) Specific Prohibitions. For purposes of this Section 5.01,
it shall not be considered in the ordinary course of business for NSB to do any
of the following: (i) make any capital expenditure of $10,000 or more not
disclosed in Section 5.01(b) of the NSB Disclosure Schedule without the prior
written consent of First Star; (ii) make any sale, assignment, transfer, pledge,
hypothecation or other disposition of any assets having a book or market value,
whichever is greater, in the aggregate in excess of $25,000, other than pledges
of assets to secure government deposits, sales of assets received in
satisfaction of debts previously contracted in the normal course of business,
issuance of loans, or transactions in the investment securities portfolio of NSB
or repurchase agreements made, in each case, in the ordinary course of business
or (iii) undertake or enter into any lease, contract or other commitment for its
account involving a payment by NSB of more than $10,000 annually, or containing
a material financial commitment and extending beyond six months from the date
hereof, other than in the normal course of providing credit to customers as part
of its banking business, and agreements for professional services incurred in
connection with the transactions contemplated by this Agreement.
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5.02 Access: Confidentiality.
(a) Reasonable Access. From the date of this Agreement through
the Closing Date, NSB, on one hand, and First Star and the Bank, on the other
hand, shall each afford to the other party and its authorized agents and
representatives, reasonable access to their respective properties, assets, books
and records and personnel, at reasonable hours following reasonable notice; and
the officers of NSB or First Star and the Bank, as the case may be, will furnish
any party making such investigation with such financial and operating data and
other information with respect to their respective businesses, properties,
assets, books and records and personnel as the party making such investigation
shall from time to time reasonably request. Neither NSB, on one hand, nor First
Star and the Bank, on the other hand, shall be required to provide access to or
disclose information where such access or disclosure would jeopardize the
attorney-client privilege of the institution in possession or control of such
information or would contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior to the date of
this Agreement. The parties hereto will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the proceeding
sentence apply.
(b) Conduct of Investigation. First Star, the Bank and NSB
agree to conduct such investigation and discussions hereunder in a manner so as
not to interfere unreasonably with normal operations and customer and employee
relationships of the parties hereto.
(c) Confidentiality. All information furnished pursuant to
this Agreement by each of NSB, First Star or the Bank to the other shall be
treated as the sole property of the furnishing party. If the transactions
contemplated by this Agreement shall not be consummated, each party will, and
will cause its agents to, return all documents, records or other materials
containing, reflecting, referring to or prepared on the basis of such
information to be kept confidential, except to the extent such information
becomes public through no fault of First Star, the Bank or NSB, as the case may
be, or any of their representatives or agents and except to the extent
disclosure of any such information is legally required. Each party shall give
prompt notice to the other of any contemplated disclosure where such disclosure
is so legally required.
5.03 Regulatory Matters and Consents.
(a) Applications. First Star, the Bank and NSB will prepare
all Applications and make all filings for, and use their best efforts to obtain
as promptly as practicable after the date hereof, all necessary permits,
consents, approvals, waivers and authorizations of all Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement.
(b) Required Information. Each of First Star and the Bank, on
one hand, and NSB, on the other hand, will furnish the other with all
information concerning itself as may be necessary or advisable in connection
with any Application or filing made by or on behalf of
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either party to any Regulatory Authority in connection with the transactions
contemplated by this Agreement.
(c) Communications. First Star and the Bank, on one hand, and
NSB, one the other hand, will each promptly furnish the other with copies of
written communications addressed to, or received by it from any Regulatory
Authority in connection with the transactions contemplated hereby.
(d) Cooperation. First Star, the Bank and NSB will cooperate
with each other in the foregoing matters and will furnish each other with all
information concerning it as may be necessary or advisable in connection with
any Application or filing (including the Registration Statement and Offering
Documents) made by or on behalf of either party to any Regulatory Authority in
connection with the transactions contemplated by this Agreement, and such
information will be accurate and complete in all material respects.
5.04 Taking of Necessary Action. Subject to the terms and conditions
herein provided, and in addition to any specific agreements contained herein,
each party hereto shall use commercially reasonable efforts to take, or cause to
be taken, all action and to do, or cause to be done all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement upon all of the terms and conditions set forth herein.
5.05 Employment Issues and Related Matters. First Star hereby agrees
that:
(a) Employees. The employees of NSB will continue to be
employed by the Bank after the Effective Date and at pay levels at least equal
to their salaries as of December 31, 1997. Except as otherwise noted herein,
employees of NSB shall continue to be employees "at will."
(b) Employee Benefits. All NSB employees who become employees
of First Star or the Bank, other than Stephen Koomar whose employment with First
Star will be governed by the terms of an employment agreement pursuant to
Section 5.05(c) below, will begin to participate in the same benefit plans and
compensatory programs that are generally afforded to other employees of First
Star and the Bank who hold similar positions, subject to the terms and
conditions under which those plans and programs are made available to employees
of First Star and the Bank; provided that (i) employment with NSB shall be
treated as employment with the Bank for purposes of determining eligibility,
vesting and benefit accruals, under all welfare plans and programs, provided
that employment with NSB shall not be treated as employment with the Bank for
purposes of determining benefit accruals with respect to First Star's benefit
plans, (ii) nothing in this Section shall be construed to limit the right of
First Star or the Bank either to terminate the employment of any NSB employee or
to revise any benefit plan or compensatory program in any manner that does not
differentiate, in terms of aggregate benefits, between employees of NSB and
those of First Star and the Bank, (iii) First Star will not subject the NSB
employees (or dependents) to any uninsured waiting period or exclusion for
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pre-existing conditions, which exclusions were not in effect, on the Effective
Date, under a medical or dental insurance plan maintained by First Star and the
Bank, and (iv) NSB employees shall receive full credit for claims arising prior
to the Effective Date for purposes of individual and family deductibles,
out-of-pocket maximums, benefits maximums and other similar limitations for the
applicable plan year under the medical/dental reimbursement plans to the extent
allowed by First Star's insurer.
(c) Employment Agreements. First Star shall offer Stephen
Koomar an employment agreement in the form attached hereto as Exhibit "C".
(d) Stock Options. In connection with the Merger Conversion,
First Star will, subject to the required approval of the FDIC and First Star's
shareholders, implement a new stock option and incentive plan ("New Option
Plan") authorizing the granting of options to purchase shares of Stock in an
amount equal to 10% of the shares of Conversion Stock issued in the Merger
Conversion. Under the New Option Plan, the three non-employee directors of NSB
as of the date of this Agreement will each receive 5% of the options and the two
employee directors of NSB as of the date of this Agreement will each receive 25%
of the options to the maximum extent permitted by regulation.
(e) Employee Stock Ownership Plan ("ESOP"). At or prior to the
effective date of Merger Conversion, the Bank's existing tax-qualified ESOP will
use its best efforts to purchase up to 10% of the shares of Conversion Stock
issued in the Merger Conversion. All full-time employees of the Bank upon
completion of the Merger Conversion will be eligible to participate in the ESOP.
(f) NSB shall develop a plan and timetable for terminating
NSB's pension plan as of a date on or before the Closing Date. With the advance
written consent of First Star, which consent shall not be unreasonably withheld,
NSB shall proceed with the implementation of said termination plan and
timetable. If the Closing Date has not occurred by December 22, 1998, NSB shall
make the contribution for the plan year ending December 23, 1999 in the ordinary
course.
5.06 Officers and Directors of First Star and the Bank. The officers
and directors of First Star immediately following the Effective Time shall be
the same persons who served in these positions immediately prior to the
Effective Time. Except for the addition of Stephen Koomar, the officers of the
Bank immediately following the Effective Time shall be the same persons who
served in these positions immediately prior to the Effective Time. The Board of
Directors of the Bank following the Effective Time shall take such actions as
may be necessary to amend the Bank's bylaws to add five additional positions on
the Bank's Board of Directors to allow for the appointment of the five current
directors of NSB ("NSB Directors"). First Star, as sole stockholder of the Bank,
shall elect such directors in accordance with applicable law. The NSB Directors
will receive fees equal to such fees paid to current directors of the Bank for
service on the Board of Directors of the Bank.
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5.07 No Solicitation. NSB shall not nor shall it permit any officer,
director or employee of NSB, or any investment banker, attorney, accountant or
other representative retained by NSB to, directly or indirectly, solicit,
encourage, initiate or engage in discussions or negotiations with, or respond
favorably to requests for information, inquiries, or other communications from,
any person other than First Star concerning the fact of, or the terms and
conditions of, this Agreement, or concerning any acquisition of NSB, or any
assets or business of NSB, except that NSB's officers and directors may respond
to inquiries from depositors in the ordinary course of business. Notwithstanding
anything to the contrary contained in this Section 5.08, the NSB Board of
Directors may furnish information to, or enter into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide proposal to
merge, consolidate, buy all or substantially all of the assets of or otherwise
acquire NSB if and only to the extent that (i) the NSB Board of Directors
determines in good faith with the advice of counsel to NSB that such action is
required to comply with its fiduciary duties to members imposed by law; (ii)
prior to finishing such information to, or entering into discussions or
negotiations with such person or entity, unless it would be a breach of
fiduciary obligations to do so, NSB provides written notice to First Star to the
effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, with such written notice to contain,
at a minimum, the identity of the persons submitting the proposal, a copy of any
written inquiry or other communication, the terms of any proposal, any
information requested or discussions sought to be initiated and the status of
any requests, negotiations or expressions of interest; and (iii) NSB continues
to keep First Star informed of the status of any such discussions or
negotiations.
5.08 Disclosure Obligations. First Star and NSB shall each promptly
advise the other party of any change or event having a Material Adverse Effect
on it or which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations, warranties or
covenants contained herein. First Star and NSB shall each update any schedule
provided pursuant to this Agreement as promptly as practicable after the
occurrence of an event or fact which, if such event or fact had occurred prior
to the date of this Agreement, would have been disclosed on such schedule. The
delivery of such additional schedules by a party shall not relieve such party
from any breach or violation of this Agreement and shall not have any effect for
the purposes of determining the satisfaction of the conditions set forth in
Sections 6.01 and 6.02 hereof, as the case may be.
5.9 Reorganization. Neither First Star, the Bank nor NSB shall
knowingly take any action that would, or is reasonably likely to, prevent or
impede the Merger Conversion from qualifying as a reorganization under Section
368(a) of the IRC.
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5.10 Undertakings by First Star and NSB.
(a) NSB Undertakings. NSB shall:
(i) Charter Conversion. Take all actions necessary
with the appropriate Regulatory Authorities and otherwise use its best efforts
to cause the conversion of NSB from a Pennsylvania chartered mutual savings and
bank to a Pennsylvania-chartered stock savings bank.
(ii) Special Meeting. Take all actions necessary,
in accordance with applicable law and its Bylaws, to convene a special meeting
of Voting Depositors, as promptly as practicable after all necessary regulatory
approvals are obtained, for the purpose of considering and approving this
Agreement and the Plan of Conversion and the transactions contemplated hereunder
and thereunder. Subject to the discharge of its fiduciary duty, NSB shall
recommend that the Voting Depositors vote in favor of this Agreement and the
Plan of Conversion;
(iii) Voting by Trustees. Use its best efforts to
obtain the agreement of all members of NSB's Board of Trustees, in their
capacity as Voting Depositors, to vote in favor of this Agreement and the Plan
of Conversion at the Special Meeting;
(iv) Phase I Environmental Audit. Permit First Star,
if First Star elects to do so, at First Star's own expense, to cause a "phase I
environmental audit" to be performed at any physical location owned or occupied
by NSB on the date hereof. In the event that such "phase 1 environmental audit"
reveals a Violation or Condition that would have a Material Adverse Effect,
First Star may, without any further obligation hereunder, terminate this
Agreement.
(v) Delivery of Financial Statements. Deliver to
First Star, as soon as practicable after the end of each fiscal year and/or
calendar quarter the applicable NSB Financials, which NSB Financials shall
fairly reflect NSB's financial condition and results of operations and cash
flows for the periods presented;
(vi) Provision for Loan Losses. For each fiscal
quarter ending between the date of this Agreement and the Closing Date, make a
normal provision for loan losses consistent with GAAP and regulatory
requirements.
(vii) Affiliate Letters and Restrictive Legend. NSB
agrees to obtain and furnish to First Star, prior to the Effective Time, all of
the affiliate letters referred to in Section 6.02(p) hereof. Certificates
representing shares of the First Star Common Stock issued in the Merger
Conversion to the affiliates of NSB, referred to in Section 6.02(n) hereof,
shall be subjected to stop transfer orders and shall bear a restrictive legend
in substantially the following form:
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"These shares are affiliate or control shares and, so long as
they are beneficially owned by an affiliate or control person,
may not be sold, offered, pledged or hypothecated except (i)
in conjunction with an effective registration statement as to
such securities under the Securities Act of 1933, as amended;
(ii) pursuant to the terms of Rule 145 under said Act; or
(iii) pursuant to an opinion of counsel satisfactory to the
issuer that such registration or compliance is not required."
(b) First Star Undertakings. First Star shall:
(i) Delivery of Financial Statements. Deliver to
NSB, as soon as practicable after the end of each fiscal year and/or calendar
quarter, the applicable First Star Financials, which First Star Financials shall
fairly reflect First Star's financial condition and results of operations and
cash flows for the periods presented.
(ii) Registration Statement. First Star agrees to
prepare and file with the SEC, and to use all reasonable efforts to cause to
become effective, the Registration Statement, under the Securities Act of 1933,
as amended (the "Securities Act"), for the purpose of registering the offer and
sale of the shares of First Star Common Stock to be issued as contemplated by
the Plan of Conversion.
(iii)Registration of Common Stock. First Star agrees
to maintain the effectiveness of the registration of the First Star Common Stock
under the Securities Exchange Act of 1934, as amended, for a period of one year
following the Effective Time or such later date as may be required by the
regulations of the FDIC or the Department.
(c) Joint Undertakings. First Star and NSB shall each:
(i) Filings and Approvals. Cooperate with the other
in the preparation and filing, as soon as practicable, of (A) the Applications;
(B) the Offering Documents and related filings under state securities laws
covering the Conversion Stock to be issued pursuant to the Plan of Conversion;
(C) the Registration Statement, including the Prospectus; (D) all other
documents necessary to obtain any other approvals and consents required to
effect consummation of the Merger Conversion and (E) all other documents
contemplated by this Agreement;
(ii) Public Announcements. Agree upon the form and
substance of any press release related to this Agreement and the transactions
contemplated hereby and upon the form and substances of other public disclosures
related thereto, including without limitation, communications to NSB depositors,
NSB internal announcements and customer disclosures, but nothing contained
herein shall prohibit either party from making any disclosure which its counsel
deems necessary, subject to applicable regulatory requirements; and
(iii) Taxes. File all federal, state. and local tax
returns required to be filed by them on or before the date such returns are due
(including any extensions) and pay all taxes shown to be due on such return on
or before the date such payment is due.
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5.12 Indemnification. From and after the Effective Time, through the
fourth anniversary of the Effective Date, First Star shall indemnify, defend and
hold harmless the existing directors and officers of NSB against (i) all losses,
claims, damages, costs, expenses, liabilities or judgments or amounts that are
paid in settlement of or in connection with any claim, action, suit, proceeding
or investigation based in whole or in part on or arising in whole or in part out
of the fact that such person is or was a director, officer or employee of NSB,
whether pertaining to any matter existing or occurring at or prior to the
Closing Date and whether asserted or claimed prior to, at or after, the Closing
Date ("Indemnified Liabilities") and (ii) all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby; except that no such
person shall be entitled to indemnification where the act or failure to act is
determined by a court to have constituted willful misconduct or recklessness or
is otherwise prohibited by applicable state law. First Star shall maintain the
directors' and officers' liability insurance coverage in effect for NSB's
directors and officers prior to the Closing Date (or a policy providing
comparable coverage on terms no less favorable, including First Star's existing
policy if it meets the foregoing criteria) for a period of three years after the
Effective Date. In the event of any such claim, action, suit, proceeding or
investigation First Star shall have the right to assume the defense thereof and
upon such assumption First Star shall not be liable to any party entitled to
indemnification hereunder (an "Indemnified Party") for any legal expenses of
other counsel or any other expenses subsequently incurred by any Indemnified
Party in connection with the defense thereof, except that if counsel for the
Indemnified Parties reasonably advises that there are issues which raise
conflicts of interest between First Star and such Indemnified Parties, First
Star shall be obligated pursuant to this Section 5.12 to pay the fees and
expenses for only one firm of counsel for the Indemnified Parties in any
jurisdiction, which counsel shall be reasonably satisfactory to the Indemnified
Parties, unless counsel so chosen reasonably advises First Star that the use of
one counsel for all Indemnified Parties would present such counsel with a
conflict of interest. First Star shall not be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld). Any Indemnified Party wishing to claim indemnification under this
Section 5.12, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify First Star thereof, provided that the failure to so
notify shall not affect the obligations of First Star under this Section 5.12
except to the extent such failure to notify materially prejudices First Star.
5.13 Due Diligence. For a period of 15 business days commencing on the
business day following receipt of the NSB Disclosure Schedule, NSB shall permit
First Star and its representatives to conduct a due diligence investigation of
NSB and the NSB Subsidiaries. NSB and the NSB Subsidiaries shall provide First
Star and its representatives full access during normal business hours to review
the properties, books and records of NSB and the NSB Subsidiaries.
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ARTICLE VI
CONDITIONS
----------
6.01 Conditions to NSB's Obligations under this Agreement. The
obligations of NSB hereunder shall be subject to satisfaction at or prior to the
Closing Date of each of the following conditions, unless waived by NSB pursuant
to Section 8.03 hereof.
(a) Representations, Warranties and Covenants. The obligations
of First Star and the Bank required by this Agreement to be performed by First
Star or the Bank at or prior to the Closing Date shall have been duly performed
and complied with in all material respects, except where the failure to perform
or comply with such obligations would not, individually or in the aggregate,
constitute (i) a Material Adverse Effect on First Star or (ii) a material
adverse change in First Star's financial condition, results of operation or
business from that represented herein; and the representations and warranties of
First Star and the Bank set forth in this Agreement shall be true and correct as
of the date of this Agreement, and (except as to any representation or warranty
that specifically relates to an earlier date) as of the Closing Date as though
made on and as of the Closing Date, except as to representations, warranties or
covenants where the facts which cause the failure of any representations,
warranties or covenants to be so true and correct would not, either individually
or in the aggregate, constitute (i) a Material Adverse Effect on First Star or
(ii) a material adverse change in First Star's financial condition, results of
operation or business from that represented herein;
(b) Approvals of Regulatory Authorities. All approvals of
Regulatory Authorities required in connection with the transactions contemplated
hereby shall have been received, including, without limitation, the approvals of
the Regulatory Authorities referred to in Section 3.04 hereof, which approvals,
in the good faith judgment of NSB's Board of Directors, shall not impose any
condition or requirement that would materially reduce the benefit of the
transactions contemplated hereby to NSB; and all notice and waiting periods
required thereunder shall have expired or been terminated;
(c) No Litigation or Injunction. There shall be no suit,
action, or other proceeding initiated by any governmental agency seeking to
enjoin or prohibit the consummation of the transactions contemplated hereby.
There shall not be in effect any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(d) No Material Adverse Change. Since June 30, 1997, there
shall not have occurred any Material Adverse Effect with respect to First Star;
(e) Officer's Certificate. First Star shall have delivered to
NSB a certificate, dated the Closing Date and signed, without personal
liability, by its chairman or president, to the effect that the conditions set
forth in Section 6.01 (a) herein have been satisfied, to the best knowledge of
the officer executing the same;
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(f) Opinion of Special Counsel to First Star. NSB shall have
received the opinion of Malizia, Spidi, Sloane & Fisch, P.C., special counsel to
First Star, dated the Closing Date, substantially to the effects set forth at
Exhibit "E" hereto;
(g) Tax Opinion. NSB shall have received an opinion from
Malizia, Spidi, Sloane & Fisch, P.C., special counsel to First Star;
(h) Effectiveness of Registration Statement. The Registration
Statement shall have been declared effective and shall not be subject to a stop
order of the SEC and, if the offer and sale of the Conversion Stock in the
Merger Conversion pursuant to this Agreement is subject to the Blue Sky laws of
any state, shall not be subject to a stop order of any state securities
commissioner;
(i) Approval of Voting Depositors and Shareholders. This
Agreement and the Plan of Conversion shall have been approved by the Voting
Depositors of NSB by such vote as is required under the Plan of Conversion; and
(j) Completion of Offerings. The Offerings shall have been
completed in accordance with the Plan of Conversion.
6.02 Conditions to First Star's Obligations under this Agreement. The
obligations of First Star hereunder shall be subject to satisfaction at or prior
to the Closing Date of each of the following conditions, unless waived by First
Star pursuant to Section 8.03 hereof:
(a) Covenants, Representations and Warranties. The obligations
of NSB required by this Agreement to be performed by it at or prior to the
Closing Date shall have been duly performed and complied with in all material
respects, and the representations, warranties and covenants of NSB set forth in
this Agreement shall be true and correct as of the date of this Agreement, and
(except as to any representation, warranty or covenant that specifically relates
to an earlier date) as of the Closing Date as though made on and as of the
Closing Date, except as to any representations, warranties and covenants where
the facts which cause the failure of any representations, warranties or
covenants to be so true and correct would not, either individually or in the
aggregate, constitute (i) a Material Adverse Effect on NSB or (ii) a material
adverse change in NSB's financial condition, results of operation or business
from that represented herein;
(b) Approvals of Regulatory Authorities. All approvals of
Regulatory Authorities required in connection with the transactions contemplated
hereby shall have been received, including, without limitation, the approvals of
the Regulatory Authorities referred to in Section 4.04 hereof, which approvals,
in the good faith judgment of First Star's Board of Directors, shall not impose
(i) any term or condition that could reasonably be expected to have a Material
Adverse Effect on First Star and the First Star Subsidiaries, taken as a whole
or (ii) any condition or requirement that would materially reduce the benefit of
the transactions
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contemplated hereby to First Star; and all notice and waiting periods required
thereunder shall have expired or been terminated;
(c) No Litigation or Injunction. There shall be no suit,
action, or other proceeding initiated by any governmental agency seeking to
enjoin the consummation of the transactions contemplated hereby or by the Plan
of Conversion. There shall not be in effect any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated hereby or by the Plan of
Conversion;
(d) No Material Adverse Change. Since December 31, 1997, there
shall not have occurred any Material Adverse Effect with respect to NSB;
(e) Officer's Certificate. NSB shall have delivered to First
Star a certificate, dated the Closing Date and signed, without personal
liability, by its chairman of the board or president to the effect that the
conditions set forth in subsection (a) of this Section 6.02 have been satisfied,
to the best knowledge of the officer executing the same;
(f) Opinion of NSB's Counsel. First Star shall have received
the opinion of Anthony Roberti, special counsel to NSB, dated the Closing Date,
substantially to the effects set forth at Exhibit "F" hereto;
(g) Tax Opinion. First Star shall have received an opinion
from Malizia, Spidi, Sloane & Fisch, P.C., special counsel to First Star;
(h) Effectiveness Registration Statement. The Registration
Statement shall have been declared effective and shall not be subject to a stop
order of the SEC and, if the offer and sale of the Conversion Stock in the
Merger Conversion pursuant to this Agreement is subject to the Blue Sky laws of
any state, shall not be subject to a stop order of any state securities
commissioner;
(i) Approval of Voting, Depositors. This Agreement and the
Plan of Conversion shall have been approved by the Voting Depositors of NSB by
such vote as is required under the Plan of Conversion;
(j) Phase I Environmental Audit Results. The results of any
"phase I environmental audit" conducted pursuant to Section 5.11(a)(v) hereof
shall be reasonably satisfactory to First Star;
(k) Completion of Offerings. The Offerings shall have been
completed in accordance with the Plan of Conversion;
(l) Comfort Letters. First Star shall (at its expense) have
received a letter or letters from NSB's independent certified public accountants
or such other accountant as First Star may choose, dated (i) the date of mailing
the Offering Documents and (ii) the Closing Date, in
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form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72; and
(m) Affiliate Letters. First Star shall have received from
each of the persons who may be deemed an "affiliate" of NSB within the meaning
of the General Rules and Regulations promulgated under the Securities Act, a
written letter agreement regarding restrictions on resale of the shares of First
Star Common Stock received by such persons in the Merger Conversion to ensure
compliance with applicable resale restrictions imposed under the federal
securities laws and pooling of interests accounting requirements.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
---------------------------------
7.01 Termination. This Agreement may be terminated and the Merger
Conversion abandoned on or at any time prior to the Closing Date:
(a) Mutual Consent. By the mutual written consent of the
parties hereto, if the Board of Directors of each of NSB, First Star and the
Bank so determines by vote of a majority of the members of its entire Board; or
(b) Unilateral Termination. By First Star or NSB:
(i) if there shall have been any material breach
of any representation, warranty, covenant or other obligation of First Star, on
the one hand, or NSB, on the other hand, and such breach cannot be, or shall not
have been, remedied within thirty (30) days after receipt by such other party of
notice in writing specifying the nature of such breach and requesting that it be
remedied, provided, however, that neither party shall have the right to
terminate this Agreement pursuant to this Section 7.01(b) unless the breach of
the representation or warranty or covenant would entitle the party receiving
such representation or warranty or benefitted by such covenant not to consummate
the transactions contemplated hereby under Section 6.01 (a) (in the case of a
breach of representation or warranty or covenant by First Star) or Section
6.02(a) (in the case of a breach of representation or warranty or covenant by
NSB);
(ii) if the Closing Date shall not have occurred
prior to September 30, 1999, which date shall be subject to extension by mutual
consent, unless the failure of such occurrence shall be due to the failure of
the party seeking to terminate this Agreement to perform or observe its
agreements set forth in this Agreement required to be performed or observed by
such party on or before the Closing Date;
(iii) if this Agreement and the Plan of Conversion
are not approved by the Voting Depositors of NSB by such vote as is required
under the Plan of Conversion;
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(iv) if final action has been taken by a Regulatory
Authority whose approval is required in connection with this Agreement and the
Plan of Conversion and the transactions contemplated hereby and thereby, which
final action (a) has become unappealable and (b) does not approve this Agreement
or the Plan of Conversion or the transactions contemplated hereby or thereby;
(v) if any court of competent jurisdiction or other
governmental authority shall have issued an order, decree, or ruling or taken
any other action restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and nonappealable; or
(vi) in the event that any of the conditions
precedent to the obligations of First Star, on the one hand, or NSB, on the
other hand, to consummate the transactions contemplated by this Agreement cannot
be satisfied or fulfilled by the date specified in Section 7.01(b)(ii) of this
Agreement (provided that the terminating party is not then in material breach of
any representation, warranty, covenant or other agreement contained herein).
(c) Due Diligence. By First Star at any time prior to the
close of business on the last date of the 15 business day period described in
Section 5.13 herein, if First Star, in its sole and absolute discretion, shall
not be satisfied with either the results of its due diligence investigation
conducted pursuant to Section 5.13 herein or the information set forth in the
NSB Disclosure Schedule.
7.02 Effect of Termination. If this Agreement is terminated pursuant to
Section 7.01 hereof, this Agreement shall forthwith become void (other than
Section 5.02(c) and Section 8.01 hereof, which shall remain in full force and
effect), and there shall be no further liability on the part of First Star or
NSB to the other, except for any liability of First Star or NSB arising out of a
willful breach of any provision contained in this Agreement.
ARTICLE VIII
MISCELLANEOUS
-------------
8.01 Expenses
(a) Each party will pay its own expenses in connection with
the preparation of this Agreement. If the transactions are not consummated,
except as set forth below in this Section 8.01, each party hereto shall bear and
pay all costs and expenses incurred by it in connection with this Agreement and
the transactions contemplated hereby including appraisal fees, filing fees,
legal, accounting and underwriting fees and other expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if this Agreement is terminated because of the failure to obtain
regulatory approval of the transactions contemplated hereby (other than because
of noncompliance by NSB with any non-merger
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conversion regulatory requirements, including without limitation the Community
Reinvestment Act and the various consumer lending and savings laws and
regulations), First Star shall pay all reasonable expenses of NSB in excess of
$50,000, including fees of legal counsel to NSB, incurred by the Bank in
connection with the transaction.
(c) Notwithstanding any provision in this Agreement to the
contrary, in order to induce the parties to enter into this Agreement and as a
means of compensating First Star for the substantial direct and indirect
monetary and other costs incurred and to be incurred in connection with this
Agreement and the transactions contemplated hereby, NSB agrees that if this
Agreement is terminated by First Star pursuant to the terms of this Agreement as
a result of a knowing breach by NSB of any of the representations or warranties
of NSB set forth herein or as a result of any breach by NSB of any of its
agreements or covenants set forth herein (and such breach would otherwise have
entitled First Star to terminate this Agreement as a result thereof), and prior
to such termination a Termination Event, as defined in paragraph (d) of this
Section 8.01, shall have occurred, NSB will upon demand pay to First Star in
immediately available funds $ 100,000.
(d) For purposes of this Agreement, a Termination Event shall
mean either of the following:
(i) NSB, without having received First Star's prior
written consent, shall have entered into an agreement to engage in an
Acquisition Transaction with any person (the term "person" for purposes of this
Agreement having the meaning assigned thereto in Sections 3(a)((9) and 13(d)(3)
of the Securities Exchange Act of 1934, and the rules and regulations
thereunder) other than First Star or any Affiliate of First Star or the Board of
Directors of NSB shall have recommended that the members of NSB approve or
accept any Acquisition Transaction with any person other than First Star or any
Affiliate of First Star. For purposes of this Agreement "Acquisition
Transaction" shall mean (x) a merger or consolidation, or any similar
transaction, involving NSB, or (y) a purchase, lease or other acquisition of all
or substantially all of NSB's assets; or
(ii) After a bona fide proposal is made by any person
other than First Star or any Affiliate of First Star to NSB or its members to
engage in an Acquisition Transaction, either (A) NSB shall have breached any
covenant or obligation contained in this Agreement and such breach would entitle
First Star to terminate this Agreement or (B) the members of NSB shall not have
approved this Agreement at the meeting of such shareholders held for the purpose
of voting on this Agreement, such meeting shall not have been held within 90
days of First Star's written request for such meeting to be called or shall have
been cancelled prior to termination of this Agreement or NSB's Board of
Directors shall have withdrawn or modified in a manner adverse to First Star the
recommendation of NSB's Board of Directors with respect to this Agreement.
8.02 Non-Survival of Representations, Warranties and Covenants. All
representations, warranties, agreements and covenants shall terminate on the
Closing Date, except to the extent
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specifically provided otherwise herein. No representation, warranty or covenant
shall be interpreted or construed to confer rights upon any third party except
the covenant of First Star contained in Section 5.13 hereof regarding
indemnification.
8.03 Amendment Extension and Waiver. Subject to applicable law, at any
time prior to the consummation of the transactions contemplated by this
Agreement, the parties may (a) amend, restate or supplement this Agreement; (b)
extend the time for the performance of any of the obligations or other acts of
either party hereto; (c) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or (d)
waive compliance with any of the agreements or conditions contained in Articles
V and VI hereof or otherwise. This Agreement may not be amended except by an
instrument in writing signed by duly authorized officers on behalf of the
parties hereto. Any agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in writing signed by a
duly authorized officer on behalf of such party, but such waiver or failure to
insist on strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
8.04 Entire Agreement. This Agreement, including the documents and
other writings referred to herein or delivered pursuant hereto, contains the
entire agreement and understanding of the parties with respect to its subject
matter. This Agreement supersedes all prior arrangements and understandings
between the parties, both written or oral with respect to its subject matter.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors; provided, however, that nothing in this
Agreement, except as provided in Section 5.12 regarding indemnification,
expressed or implied, is intended to confer upon any party, other than the
parties hereto and their respective successors, any rights, remedies,
obligations or liabilities.
8.05 No Assignment. Neither party hereto may assign any of its rights
or obligations hereunder to any other person, without the prior written consent
of the other party hereto.
8.06 Notices. All notices or other communications hereunder shall be,
in writing and shall be deemed given if delivered personally, mailed by prepaid
registered or certified mail (return receipt requested), sent by overnight
national delivery service or sent by telecopy, confirmation received, addressed
as follows or addressed to such other address as may be specified by any party
in a notice delivered pursuant to this Section 8.06:
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If to First Star or the Bank, to:
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
Attention: Joseph T. Svetik, President
Telecopy: (610) 691-5658
With a copy to :
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Attention: John J. Spidi, Esq.
Telecopy: (202) 434-4661
If to NSB, to:
Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
Attention: Francis X. Koomar
Telecopy: (717) 669-6521
With a copy to:
Anthony Roberti, Esq.
56 Broadway
Jim Thorpe, Pennsylvania 18229
Attention: Anthony Roberti, Esq.
Telecopy: (717) 325-3623
8.07 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
8.08 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute one instrument.
8.09 Severability. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be construed as
if such invalid, illegal or unenforceable provision or provisions had never been
contained herein unless the deletion of such provision or provisions would
result
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in such a material change as to cause continued performance of this Agreement as
contemplated herein to be unreasonable or materially and adversely frustrate the
objectives of the parties as expressed in this Agreement.
8.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the Commonwealth of Pennsylvania without
reference to its conflicts of laws principles.
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EXHIBIT A
NESQUEHONING SAVINGS BANK
Nesquehoning, Pennsylvania
Plan of Conversion
I. General.
On August 14, 1998, the Board of Trustees of Nesquehoning Savings Bank
("NSB"), after careful study and consideration, adopted by unanimous vote this
Plan of Conversion (the "Plan"), which provides for the acquisition of NSB by
First Star Savings Bank (the "Bank") by means of a "merger conversion
transaction" whereby: NSB will (i) convert to a Pennsylvania- chartered stock
savings bank, and (ii) merge with and into the Bank (the "Merger"). The terms of
the merger of NSB with and into the Bank are set forth in the Agreement, which
has been approved by the Boards of Trustees of NSB, First Star Bancorp, Inc.
("First Star") and the Bank. All capitalized terms used in this Article I are
defined in Article 11 hereof.
Pursuant to the Plan, shares of Conversion Stock in First Star will be
offered in a Subscription Offering pursuant to non-transferable Subscription
Rights at a predetermined and uniform price first to Eligible Account Holders of
record as of July 31, 1997, second to Supplemental Eligible Account Holders of
record as of the last day of the calendar quarter preceding FDIC written notice
of non-objection of NSB's application to effect the Merger Conversion, and third
to Voting Depositors of NSB. Concurrently with or following the Subscription
Offering, shares not subscribed for in the Subscription Offering may be offered
to the general public in a Community Offering. Shares remaining will then be
offered to the general public in an underwritten public offering or otherwise.
The aggregate Purchase Price of the Conversion Stock will be based upon an
independent appraisal of NSB and will reflect the estimated pro forma market
value of NSB as an entity merged with and into the Bank.
The Merger Conversion is subject to the regulations of the FDIC
pursuant to the Federal Deposit Insurance Act ("FDIA") and Sections 303.15 and
333.4 of the FDIC Rules and Regulations and to the regulations of the
Commissioner. Consummation of the Merger Conversion is subject to the prior
written notice of non-objection of the FDIC, the prior approval of the FRB, and
the approval of this Plan, the Agreement and the Merger Conversion by the
Commissioner, by the Members of NSB at a special meeting of the Members to be
called to consider the Merger Conversion by the affirmative vote of Members of
NSB holding not less than a majority of the total votes eligible to be cast.
The deposits of NSB's depositors will not be affected by the Merger
Conversion provided for in this Plan. Their deposits will become deposits in the
Bank at least equivalent in amount, interest rate and terms (other than with
respect to voting and liquidation rights) to their present deposits in NSB. All
deposits of the Bank following the Merger Conversion will continue to be insured
up to the legal maximum by the Savings Association Insurance Fund of the FDIC.
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Loans made by NSB will be unaffected by the Merger Conversion and the amount,
rate, maturity, security and other conditions of the loans will remain
contractually fixed on the same basis as they existed prior to the Merger
Conversion. Upon the effective date of the Merger Conversion, the Bank will
succeed to all of the presently existing rights, interests, duties and
obligations of NSB pursuant to applicable law, including, but not limited to,
all of its rights and interests in and to its assets and properties, both real
and personal.
II. Definitions.
Acting in Concert: The term "Acting in Concert" means: (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. Any
Person (as defined by 12 C.F.R. ss.563b.2(a)(26)) Acting in Concert with another
Person ("other party") shall also be deemed to be Acting in Concert with any
Person who is also Acting in Concert with that other party.
Aggregate Purchase Price: The term "Aggregate Purchase Price" means the
total dollar amount to be paid for Conversion Stock by all subscribers in the
Subscription Offering and purchasers in the Community Offering, if any.
Agreement: The term "Agreement" means the Merger Conversion Agreement,
dated as of August 14, 1998, by and among NSB, First Star and the Bank.
Applications: The term "Applications" means the application or
applications to be submitted to the Department, the FDIC and/or the FRB for
approval of the Merger Conversion.
Associate: The term "Associate," when used to indicate a relationship
with any Person, means: (i) any corporation or organization (other than NSB,
First Star, or a majority-owned subsidiary of NSB or First Star of which such
Person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities; (ii) any trust or other
estate in which such Person has a substantial beneficial interest or as to which
such Person serves as trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such Person, or any relative of such spouse, who has the
same home as such Person or who is a director of NSB or First Star, or any of
their subsidiaries.
Bank: The term "Bank" means First Star Bank, a Pennsylvania-chartered
stock savings bank, in its current form and as the surviving institution
following the consummation of the merger of Interim with and into the Bank.
Community Offering: The term "Community Offering" means the offering of
shares of Conversion Stock to the general public by First Star concurrently with
or following the Subscription Offering, giving preference to shareholders of
First Star and to natural persons and
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trusts of natural persons (including individual retirement and Keogh retirement
accounts and personal trusts in which such natural persons have substantial
interests) who are permanent Residents in NSB's Local Community.
Conversion Stock: The term "Conversion Stock" means the shares of First
Star Common Stock to be issued and sold by First Star pursuant to the Plan in
connection with the Merger Conversion.
Department: The term "Department" means the Pennsylvania Department of
Banking, or any successor office or agency having jurisdiction over the Merger
Conversion.
Eligibility Record Date: The term "Eligibility Record Date" means the
close of business on July 31, 1997.
Eligible Account Holder: The term "Eligible Account Holder" means the
holder of a Qualifying Deposit in NSB on the Eligibility Record Date.
First Star: The term "First Star" means First Star Bancorp, Inc., a
Pennsylvania corporation and a bank holding company registered with the FRB and
owning 100% of the issued and outstanding common stock of the Bank.
First Star Common Stock: The term "First Star Common Stock" means First
Star's common stock, par value $1.00 per share.
FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation
or any successor federal agency having jurisdiction over the Merger Conversion.
FRB: The term "FRB" means the Board of Governors of the Federal Reserve
System.
Independent Appraiser: The term "Independent Appraiser" means a person
independent of NSB, First Star and the Bank, experienced and expert in the area
of corporate appraisal, and acceptable to the FDIC and the Department, retained
by the Bank to prepare an appraisal of the pro forma market value of NSB as an
entity merged with the Bank.
Local Community: The term "Local Community" means Carbon County
Pennsylvania and the counties that are contiguous to Carbon County.
Market Maker: The term "Market Maker" means a dealer (i.e., any person
who engages, either for all or part of such person's time, directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security: (i)(a) regularly publishes bona
fide, competitive bid and offer quotations in a recognized interdealer quotation
system or (b) furnishes bona fide competitive bid and offer quotations on
request; and (ii) is ready, willing
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and able to effect transactions in reasonable quantities at its quoted prices
with other brokers or dealers.
Market Price: The term "Market Price" means average closing price per
share of the last 10 real time trades (i.e., closing price) of the First Star
Common Stock as reported in the OTC Bulletin Board prior to the mailing of the
Prospectus but no lower than book value.
Merger: The term "Merger" means the merger of NSB with and into the
Bank.
Merger Application: The term "Merger Application" means the application
to the Department and the FDIC for approval of the merger of NSB with and into
the Bank.
Merger Conversion: The term "Merger Conversion" means the transaction
whereby: NSB will (i) convert to a Pennsylvania-chartered stock savings bank,
and (ii) merge with and into the Bank.
Notice: The term "Notice" means the Notice of Intent to Convert to
Stock Form submitted to the FDIC to obtain written notice of non-objection to
the Merger Conversion.
NSB: The term "NSB" means, as the context requires, either Nesquehoning
Savings Bank in its current form as a Pennsylvania-chartered mutual savings bank
or as a Pennsylvania- chartered stock savings bank.
Offerings: The term "Offerings" means the Subscription Offering and the
Community Offering.
Officer: The term "Officer" means an executive officer of NSB,
including the Chairman of the Board, President, Executive Vice Presidents,
Senior Vice Presidents in charge of principal business functions, Secretary and
Treasurer.
Order Form: The term "Order Form" means the order form or forms to be
used by Eligible Account Holders, Supplemental Eligible Account Holders and
other Persons eligible to purchase Conversion Stock pursuant to the Plan.
Person: The term "Person" means an individual, a corporation, a
partnership, an association, a joint stock company, a trust (including
Individual Retirement Accounts and Keogh Accounts), any unincorporated
organization or a government or political subdivision thereof
Plan: The term "Plan" means this Plan of Conversion, which provides for
the acquisition of NSB by the Bank by means of a "merger conversion transaction"
whereby: NSB will (i) convert to a Pennsylvania-chartered stock savings bank,
and (ii) merge with and into the Bank.
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Qualifying Deposit: The term "Qualifying Deposit" means a savings
balance in any Savings Account in NSB as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
Registration Statement on Form SB-2 and any amendments thereto filed by First
Star with the SEC pursuant to the Securities Act of 1933, as amended, to
register shares of Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
preference afforded natural persons and trusts of natural persons in the Local
Community, means any natural person who occupies a dwelling within the Local
Community, has an intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non- transitory presence
within the Local Community) and continues to reside therein at the time of the
Offerings. NSB may utilize deposit or loan records or such other evidence
provided to it to make the determination as to whether a person is residing in
the Local Community. To the extent the "person" is a personal benefit plan, the
circumstances of the beneficiary shall apply with respect to this definition. In
the case of all other benefit plans, circumstances of the trustee shall be
examined for purposes of this definition. In all cases, such determination shall
be in the sole discretion of NSB and First Star.
Sale: The terms "sale" and "sell" mean every contract to sell or
otherwise dispose of a security or an interest in a security for value, but such
terms do not include an exchange of securities in connection with a merger or
acquisition approved by the FDIC or the Department or any other state or federal
agency having jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable
deposit, including a demand deposit, in NSB and a withdrawable deposit,
including a demand deposit, in the Bank after the Merger Conversion.
SEC: The term "SEC" means the Securities and Exchange Commission or any
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting
of Voting Depositors to be called for the purpose of submitting the Plan to the
Voting Depositors, for their approval.
Subscription Offering: The term "Subscription Offering" means the
offering of shares of Conversion Stock to the Eligible Account Holders,
Supplemental Eligible Account Holders and Voting Depositors under the Plan.
Subscription and Community Prospectus: The term "Subscription and
Community Prospectus" means the final prospectus to be used in connection with
the Subscription and Community Offerings.
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Subscription Rights: The term "Subscription Rights" means
non-transferable, non-negotiable, personal rights of Eligible Account Holders,
Supplemental Eligible Account Holders and Voting Depositors to purchase
Conversion Stock offered under the Plan in connection with the Merger
Conversion.
Supplemental Eligibility Record Date: The term "Supplemental
Eligibility Record Date" means the last day of the calendar quarter preceding
the approval of the Plan by the Department.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
Account Holder" means the holder of a Qualifying Deposit in NSB (other than
Officers and directors and their Associates) on the Supplemental Eligibility
Record Date.
Voting Depositor: The term "Voting Depositor" means any Person, other
than an Eligible Account Holder or a Supplemental Eligible Account Holder, who
is a depositor as of the Voting Record Date.
Voting Record Date: The term "Voting Record Date" means the date fixed
by the Board of Trustees of NSB to determine depositors of NSB entitled to vote
at the Special Meeting.
III. Steps Prior to Submission of the Plan to the Members for Approval.
Prior to submission of the Plan to its Voting Depositors for approval,
NSB must receive notice from the FDIC of its intent to issue a notice of
non-objection to the Merger Conversion, approval of the Applications from the
Department, approval of the Merger Application by the FDIC and the Department,
and approvals from the appropriate regulatory authorities for consummation of
the Merger Conversion in accordance with applicable laws and regulations. The
following steps must be taken prior to receipt of such regulatory approvals:
A. The Board of Trustees of NSB shall adopt the Plan twice in
accordance with Pennsylvania law by not less than a two-thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors, NSB
shall notify its Members of the adoption of the Plan by publishing a statement
in a newspaper having a general circulation in each community in which NSB
maintains an office and/or by mailing a letter to each of its Qualifying
Depositors.
C. A press release relating to the proposed Merger Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at the office of NSB.
E. As soon as practicable following the adoption of this Plan, the Bank
shall file the Applications with the Department and the Notice with the FDIC and
First Star shall file the
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Registration Statement with the SEC. Upon receipt of notification from the
Department and the FDIC that the Applications and the Notice, respectively, are
property executed and not materially incomplete, if required by the regulations
of the Department, NSB shall publish notice of the filing of the Applications in
a newspaper having a general circulation in each community in which NSB
maintains an office and shall publish such other notices of the Merger
Conversion as may be required in connection with the Applications by the
regulations and policies of the Department, the FDIC and the FRB, as applicable.
NSB also shall prominently display a copy of such notice in each of its offices.
In addition, the Bank shall publish such notices of the proposed merger of
Interim with and into the Bank as may be required in connection with the Merger
Application.
F. First Star shall obtain an opinion of its tax advisors which shall
state that the Merger Conversion will not result in any gain or loss for federal
income tax purposes to NSB, First Star or the Bank. Receipt of a favorable
opinion is a condition precedent to completion of the Merger Conversion.
IV. Meetings of Voting Depositors.
Following receipt of written notice of intent to issue notice of
non-objection to the Plan by the FDIC and approval of the Department, the
Special Meeting to vote on the Plan shall be scheduled in accordance with NSB's
charter and bylaws and applicable regulations. Notice of the Special Meeting
will be given by means of a proxy statement authorized for use by the FDIC and
the Department. Following receipt of approval of the Applications and at least
20 days but not more than 45 days prior to the Special Meeting, NSB will
distribute proxy solicitation materials to all Voting Depositors as of the
Voting Record Date established for voting at the Special Meeting. Proxy
materials will also be sent to each beneficial holder of an Individual
Retirement Account or beneficiary of any other trust account where the name of
the beneficial holder is disclosed on NSB's records. The proxy solicitation
materials will include a copy of the Proxy Statement and other documents
authorized for use by the regulatory authorities and may also include a
Subscription and Community Prospectus as provided in Paragraph VI below. NSB
will also advise each Eligible Account Holder and Supplemental Eligible Account
Holder not entitled to vote at the Special Meeting of the proposed Merger
Conversion and the scheduled Special Meeting and provide a postage paid card on
which to indicate whether he or she wishes to receive the Subscription and
Community Prospectus, if the Subscription Offering is not held concurrently with
the proxy solicitation of Voting Depositors for the Special Meeting.
Pursuant to applicable regulations, an affirmative vote of at least a
majority of the total outstanding votes of the Voting Depositors will be
required for approval of the Plan. Voting may be in person or by proxy.
By voting in favor of the adoption of the Plan and the Merger
Conversion, the Voting Depositors will be voting in favor of (i) the Merger
Conversion and (ii) the Agreement.
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The Department shall be notified of the actions of the Members at the
Special Meeting promptly following the Special Meeting.
V. Summary Proxy Statement.
The Proxy Statement furnished to Voting Depositors may be in summary
form, provided that a statement is made in bold-faced type that a more detailed
description of the proposed transaction may be obtained by returning an enclosed
postage paid card or other written communication requesting a supplemental
information statement. Without prior approval from the FDIC and the Department,
the Special Meeting shall not be held fewer than 20 days after the last day on
which the supplemental information statement is mailed to Voting Depositors
requesting the same. The supplemental information statement may be combined with
the Subscription and Community Prospectus if the Subscription Offering is
commenced concurrently with the proxy solicitation of Members for the Special
Meeting.
VI. Offering Documents.
First Star may commence the Subscription Offering and, provided that
the Subscription Offering has commenced, may commence the Community Offering
concurrently with or during the proxy solicitation of Voting Depositors and may
close the Offerings before the Special Meeting, provided that the offer and sale
of the Conversion Stock shall I be conditioned upon approval of the Plan by the
Voting Depositors at the Special Meeting.
First Star may require Eligible Account Holders, Supplemental Eligible
Account Holders and Voting Depositors to return to First Star by a reasonable
date certain a postage-paid written communication requesting receipt of a
Subscription and Community Prospectus in order to be entitled to receive a
Subscription and Community Prospectus, provided that the Subscription Offering
shall not be closed until the expiration of 30 days after mailing proxy
solicitation materials to Voting Depositors and a postage-paid written
communication to non-voting Eligible Account Holders and Supplemental Eligible
Account Holders. If the Subscription Offering is commenced within 45 days after
the Special Meeting, First Star shall transmit, no more than 30 days prior to
the commencement of the Subscription Offering, to each Voting Depositor who had
been furnished with proxy solicitation materials and to each non-voting Eligible
Account Holder and Supplemental Eligible Account Holder written notice of the
commencement of the Subscription Offering which shall state that First Star is
not required to furnish a Subscription and Community Prospectus to them unless
they return by a reasonable date certain a postage-paid written communication
requesting the receipt of the Subscription and Community Prospectus.
Prior to commencement of the Offerings, First Star shall file the
Registration Statement with the SEC pursuant to the Securities Act of 1933, as
amended. First Star shall not distribute the Subscription and Community
Prospectus until the Registration Statement containing the same has been
declared effective by the SEC and the aforementioned documents have been
approved
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or authorized for use by the FDIC and the Department. The Subscription
and Community Prospectus may be combined with the Proxy Statement for the
Special Meeting.
VII. Consummation of Merger Conversion.
The date of consummation of the Merger Conversion will be the effective
date of the time and date at which the Department has issued articles of merger
to the Bank as the surviving entity following the merger of Interim with and
into the Bank, which shall be the date of the issuance and sale of the
Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, NSB will merge with and into the Bank,
with the Bank as the surviving entity, and articles of merger will be filed with
the Pennsylvania Department of Assessments and Taxation. Immediately following
acceptance by the Pennsylvania Department of Assessments and Taxation of the
articles of merger evidencing the merger of NSB with and into the Bank, the
Conversion Stock will be issued and sold by First Star.
VIII. The Offerings.
A. General.
The Aggregate Purchase Price of all shares of Conversion Stock which
will be offered and sold will be equal to the estimated pro forma market value
of NSB as an entity merged with the Bank, as determined by an independent
appraisal. The exact number of shares of Conversion Stock to be offered will be
determined by the Board of Directors of NSB and the Board of Directors of First
Star, or their respective designees, in conjunction with the determination of
the per share purchase price (as determined pursuant to Paragraph VIII.B.
below). The number of shares to be offered may be subsequently adjusted prior to
completion of the Merger Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
The Aggregate Purchase Price and the total number of shares of
Conversion Stock to be offered in the Offerings will be determined by the Board
of Directors of NSB and the Board of Directors of First Star, or their
respective designees, immediately prior to the simultaneous completion of all
such sales contemplated by this Plan on the basis of the estimated pro forma
market value of NSB as an entity merged with the Bank, at such time. The
estimated pro forma market value of NSB will be determined for such purpose by
an Independent Appraiser on the basis of such appropriate factors as are not
inconsistent with applicable regulations. Immediately prior to the Offerings, a
subscription price range for the Offerings will be established (the "Valuation
Range"), which will vary from 15% above to 15% below the midpoint of the
estimated pro forma market value of NSB as an entity merged with the Bank. The
number of shares of Conversion Stock ultimately issued and sold will be
determined at the close of the Offerings. The subscription price range and the
number of shares to be offered may be changed subsequent to the Offerings as the
result of any appraisal updates prior to the completion of the Merger
Conversion, without notice eligible purchasers in the Offerings and without a
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resolicitation of subscriptions, provided the aggregate purchase price is not
below the low end or more than 15 percent above the high end of the Valuation
Range previously approved by the FDIC and the Department.
The price per share for the Conversion Stock in the Subscription
Offering shall be equal to 90% of the Market Price of First Star Common Stock.
The price per share for the Conversion Stock in the Community Offering shall be
equal to 100% of the Market Price of First Star Common Stock. The number of
shares to be sold to each subscriber will be determined promptly after the final
pricing. First Star, in consultation with NSB, will divide the total dollar
amount of each subscriber's order by the purchase price per share to determine
the total number of shares to be issued to each subscriber, with a cash refund
for any difference in lieu of the issuance of fractional or additional shares.
First Star and NSB reserve the right to permit subscribers to elect to receive
additional whole shares in such process.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to NSB and First Star and to the FDIC and the Department that, to the
best knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Aggregate Purchase Price is incompatible with its estimate of the
pro forma market value of NSB as an entity merged with the Bank, at such time.
If such confirmation is not received, NSB and First Star may cancel the
Offerings and/or any other offering, extend the solicitation period, establish a
new Valuation Range, extend, reopen or hold new Subscription and Community
Offerings and/or other offerings or take such other action as the FDIC and the
Department may permit.
C. Subscription Offering.
Non-transferable Subscription Rights to purchase shares of Conversion
Stock will be issued at no cost to Eligible Account Holders, Supplemental
Eligible Account Holders and Voting Depositors of NSB pursuant to priorities
established herein and by applicable regulations. All shares must be sold, and,
to the extent that Conversion Stock is available, no subscriber will be allowed
to purchase fewer than 25 shares of Conversion Stock, provided that this number
shall be decreased if the aggregate purchase price exceeds $500. The priorities
established by applicable regulations for the purchase of shares are as follows:
1 . Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder, including individuals on a
joint account, shall receive, without payment, non-transferable Subscription
Rights to purchase Conversion Stock in an amount equal to the maximum purchase
limitation in the Community Offering.
b. Non-transferable Subscription Rights to purchase Conversion
Stock received by Officers and directors of NSB and their Associates based on
their increased deposits
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in NSB in the one-year period preceding the Eligibility Record Date shall be
subordinated to all other subscriptions involving the exercise of
non-transferable Subscription Rights to purchase shares pursuant to this
Category.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders as follows:
(I) Shares of Conversion Stock shall be allocated
among subscribing Eligible Account Holders so as to permit each such Eligible
Account Holder, to the extent possible, to purchase a number of shares of
Conversion Stock sufficient to make its total allocation equal to 100 shares or
the total amount of its subscription, whichever is less.
(II) Any shares not so allocated shall be allocated
among the subscribing Eligible Account Holders on an equitable basis, related to
the amounts of their respective Qualifying Deposits, as compared to the total
Qualifying Deposits of all subscribing Eligible Account Holders.
2. Category No. 2: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is more than
15 months prior to the date of the latest amendment of the Applications filed
prior to Department and FDIC approval, then each Supplemental Eligible Account
Holder, including individuals on a joint account, shall receive, without
payment, non-transferable Subscription Rights to purchase Conversion Stock in an
amount equal to the maximum purchase limitation in the Community offering.
b. Subscription Rights received pursuant to this Category
shall be subordinated to the Subscription Rights received by the Eligible
Account Holders pursuant to Category No. 1.
c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No. I shall
reduce to the extent thereof the Subscription Rights to be distributed to such
Eligible Account Holder pursuant to this Category.
d. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders as
follows:
(I) Shares of Conversion Stock shall be allocated
among subscribing Supplemental Eligible Account Holders so as to permit each
such Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares of Conversion Stock sufficient to make its total allocation
(including the number of shares of Conversion Stock, if any,
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allocated in accordance with Category No. 1) equal to 100 shares of Conversion
Stock or the total amount of its subscription, whichever is less.
(II) Any shares of Conversion Stock not allocated in
accordance with
subparagraph (1) above shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis, related to the amounts of their
respective Qualifying Deposits on the Supplemental Eligibility Record Date as
compared to the total Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders in each case on the Supplemental Eligibility Record
Date.
3. Category No. 3: Voting Depositors.
a. Each Voting Depositor, including individuals on a joint
account, other than those Voting Depositors who are Eligible Account Holders or
Supplemental Eligible Account Holders, shall receive, without payment,
non-transferable Subscription Rights to purchase Conversion Stock in an amount
equal to the maximum purchase limitation in the Community Offering.
b. Subscription Rights received pursuant to this Category
shall be subordinated to the Subscription Rights received by Eligible Account
Holders and Supplemental Eligible Account Holders pursuant to Category Nos. I
and 2.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, the shares of Conversion Stock
available shall be allocated among subscribing Voting Depositors as to permit
each subscribing Voting Depositor, to the extent possible, to purchase a number
of shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by the
Voting Depositor. The shares remaining thereafter will be allocated among
subscribing Voting Depositors whose subscriptions remain unsatisfied on an
equitable basis as determined by the Board of Directors.
Order Forms may provide that the maximum purchase limitation shall be
based on the midpoint of the Valuation Range. In the event the Aggregate
Purchase Price of the Conversion Stock issued and sold is below the midpoint of
the Valuation Range, that portion of subscriptions in excess of the maximum
purchase limitation will be refunded. In the event the Aggregate Purchase Price
of Conversion Stock issued and sold is above the midpoint of the Valuation
Range, persons who have subscribed for the maximum purchase limitation may be
given the opportunity to increase their subscriptions so as to purchase the
maximum number of shares subject to the availability of shares. Neither NSB nor
First Star will not otherwise notify subscribers of any change in the number of
shares of Conversion Stock offered.
D. Community Offering.
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights in the Subscription Offering may be sold in a Community
Offering, which
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may commence concurrently with the Subscription Offering. Shares of Conversion
Stock will be offered in the Community Offering to the general public, giving
preference to shareholders of First Star and to natural persons and the trusts
of natural persons (including individual retirement and Keogh retirement
accounts and personal trusts in which such natural persons have substantial
interests) who are permanent Residents of the Local Community. The Community
Offering may commence concurrently with or as soon as practicable after the
completion of the Subscription Offering and must be completed within 45 days
after the last day of the Subscription Offering, unless extended by First Star
with the approval of the FDIC and the Department. If sufficient shares are not
available to satisfy all orders in the Community Offering, the shares available
will be allocated by First Star in its discretion. First Star shall have the
right to accept or reject orders in the Community Offering in whole or in part.
2. Individual orders accepted in the Community Offering shall be filled
up to a maximum of 2% of the Conversion Stock, and thereafter remaining shares
shall be allocated on an equal number of shares basis per order until all orders
have been filled.
3. The Conversion Stock to be offered in the Community Offering will be
offered and sold in a manner that will achieve the widest distribution of the
Conversion Stock.
E. Other Offering
In the event a Community Offering does not appear feasible, NSB and
First Star will immediately consult with the FDIC and the Department to
determine the most viable alternative available to effect the completion of the
Merger Conversion. Should no viable alternative exist, NSB may terminate the
Merger Conversion with the concurrence of the FDIC and the Department.
F. Limitations of Conversion Stock.
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares of Conversion Stock in
the Merger Conversion, to the extent such shares are available, subject to the
provisions of Paragraph VIII.C herein.
2. Purchases of Conversion Stock in the Community Offering by any
Person, when aggregated with purchases by an Associate of that Person, or a
group of Persons Acting in Concert, shall not exceed $50,000 of the Conversion
Stock.
3. Officers and directors of NSB, and Associates thereof, may not
purchase in the aggregate more than 35% of the shares of Conversion Stock issued
in the Conversion, or such greater amount as may be permitted under applicable
legal limits.
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4. Directors of First Star, the Bank and NSB shall not be deemed to be
Associates or a group Acting in Concert with other directors solely as a result
of membership on the Board of Directors of First Star, the Bank or NSB or any of
their subsidiaries.
5. Purchases of shares of Conversion Stock in the Merger Conversion by
any Person, when aggregated with purchases by an Associate of that Person, or a
group of Persons Acting in Concert, shall not exceed $50,000 of the Conversion
Stock.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, First Star and NSB may increase or decrease any
of the purchase limitations set forth herein at any time. In the event that the
individual purchase limitation is increased after commencement of the Offerings,
First Star and NSB shall permit any Person who subscribed for the maximum number
of shares of Conversion Stock to purchase an additional number of shares, such
that such Person shall be permitted to subscribe for the then maximum number of
shares permitted to be subscribed for by such Person, subject to the rights and
preferences of any Person who has priority Subscription Rights. In the event
that either the individual purchase limitation or the number of shares of
Conversion Stock to be sold in the Merger Conversion is decreased after
commencement of the Subscription and Community Offerings, the orders of any
Person who subscribed for the maximum number of shares of Conversion Stock shall
be decreased by the minimum amount necessary so that such Person shall be in
compliance with the then maximum number of shares permitted to be subscribed for
by such Person.
Each Person purchasing Conversion Stock in the Merger Conversion shall
be deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation. In
the event that such purchase limitations are violated by any Person (including
any Associate or group of Persons affiliated or otherwise Acting in Concert with
such Person), First Star shall have the right to purchase from such Person at
the actual purchase price per share all shares acquired by such Person in excess
of such purchase limitations or, if such excess shares have been sold by such
Person, to receive the difference between the actual purchase price per share
paid for such excess shares and the price at which such excess shares were sold
by such Person. This right of First Star to purchase such excess shares shall be
assignable by First Star.
G. Restrictions on and Other Characteristics of Stock Being Sold.
1. Transferability.
Except as provided in Article XIII below, Conversion Stock purchased by
Persons other than directors and Officers of NSB will be transferable without
restriction. Conversion Stock purchased by such directors or Officers of NSB
shall not be sold for a period of one year from the date of consummation of the
Merger Conversion except for any sale of such shares (i) following the death of
the original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition of First Star approved by the applicable regulatory
authorities.
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The Conversion Stock issued by First Star to such directors and
Officers shall bear the following legend giving appropriate notice of
the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are
restricted as to transfer for a period of one year from the
date of this Certificate. Except in the event of the death of
the registered holder, the shares represented by this
Certificate may not be sold prior thereto without a legal
opinion of counsel for the First Star Bancorp, Inc. that said
sale is permissible under the provisions of applicable laws
and regulations."
In addition, First Star shall give appropriate instructions to the
transfer agent for the First Star Common Stock with respect to the applicable
restrictions relating to the transfer of restricted stock. Any shares of First
Star Common Stock subsequently issued as a stock dividend, stock split or
otherwise, with respect to any such restricted stock, shall be subject to the
same holding period restrictions for such directors and Officers as may be then
applicable to such restricted stock.
2. Voting Rights.
After the Merger Conversion, holders of Savings Accounts in and
obligors on loans of NSB will not have voting rights in the Bank. Exclusive
voting rights with respect to First Star shall be vested in the holders of First
Star Common Stock, holders of Savings Accounts in and obligors on loans of NSB
will not have any voting rights in First Star except and to the extent that such
persons become stockholders of First Star, and First Star will have exclusive
voting rights with respect to the Bank's capital stock. Each stockholder of
First Star will be entitled to vote on any matters coming before the
stockholders of First Star for consideration and will be entitled to one vote
for each share of First Star Common Stock owned by said stockholder.
3. Purchases by Officers, Directors and Associates Following Merger
Conversion.
Without the prior written approval of the FDIC and the Department,
Officers and directors of NSB and their Associates shall be prohibited for a
period of three years following completion of the Merger Conversion from
purchasing outstanding shares of First Star Common Stock, except from a broker
or dealer registered with the SEC. Notwithstanding the preceding sentence, this
restriction shall not apply to negotiated transactions involving more than 1% of
the total outstanding shares of First Star Common Stock.
H. Mailing of Offering Materials and Collation of Subscriptions.
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the appropriate regulatory authorities
and the declaration of the effectiveness of the Subscription and Community
Prospectus by the SEC, First Star shall distribute such
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Subscription and Community Prospectus and Order Forms for the purchase of shares
in accordance with the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to First Star.
Self-addressed, postage paid return envelopes will accompany these forms when
mailed. First Star will collate the returned executed Order Forms upon
completion of the Subscription Offering. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such person of any rights to
purchase shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be completed within 45
days after the last day of the Subscription Offering unless extended by First
Star and NSB with the approval of the FDIC and the Department.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by First Star,
together with properly completed and executed Order Forms, indicating thereon
the number of shares being subscribed for and such other information as may be
required thereon, and, in the case of orders submitted at an office of First
Star, executed Forms of Certification as required by regulations, on or prior to
the expiration date specified on the Order Forms, unless such date is extended
by First Star and NSB.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has a
Savings Account in NSB (including a certificate of deposit), the subscriber may
authorize First Star and NSB to charge the subscriber's Savings Account for the
purchase amount. No wired funds shall be accepted. First Star shall pay interest
at not less than the passbook rate on all amounts paid in cash or by check or
money order to purchase shares of Conversion Stock in the Offerings from the
date payment is received until the Merger Conversion is completed or terminated.
Neither First Star, the Bank nor NSB shall knowingly loan funds or otherwise
extend credit to any Person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes First Star to charge its Savings Account,
the funds may remain in the subscriber's Savings Account and continue to earn
interest, but may not be used by the subscriber until all Conversion Stock has
been sold or the Merger Conversion is terminated, whichever is earlier. The
withdrawal will be given effect only concurrently with the sale of all shares of
Conversion Stock in the Merger Conversion and only to the extent necessary to
satisfy the subscription at a price equal to the purchase price. First Star and
NSB will allow subscribers to purchase shares of Conversion Stock by withdrawing
funds from certificate accounts at NSB without the assessment of early
withdrawal penalties. In the case of early withdrawal of only a portion of such
account, the certificate evidencing such account shall be canceled if the
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remaining balance of the account is less than the applicable minimum balance
requirement. In that event, the remaining balance will earn interest at the
passbook rate. This waiver of the early withdrawal penalty is applicable only to
withdrawals made in connection with the purchase of Conversion Stock under the
Plan.
J. Undelivered, Defective or Late Order Forms, Insufficient Payment.
In the event an Order Form: (i) is not delivered and is returned to
First Star or NSB by the United States Postal Service (or First Star or NSB is
unable to locate the addressee); (ii) is not received by First Star or NSB, or
is received by First Star or NSB after termination of the date specified
thereon; (iii) is defectively completed or executed; or (iv) is not accompanied
by the total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are insufficient to
cover the authorized withdrawal for the required payment), the Subscription
Rights of the Person to whom such rights have been granted will not be honored
and will be treated as though such Person failed to return the completed Order
Form within the time period specified therein. Alternatively, First Star and NSB
may, but will not be required to, waive any irregularity relating to any Order
Form or require the submission of a corrected Order Form or the remittance of
full payment for subscribed shares of Conversion Stock by such date as First
Star and NSB may specify. Subscription orders, once tendered, cannot be revoked.
First Star's and NSB's interpretation of the terms and conditions of this Plan
and acceptability of the Order Forms will be final and conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
First Star will make reasonable efforts to comply with the securities
laws of all states in the United States in which Persons entitled to subscribe
for Conversion Stock pursuant to the Plan reside. However, no such Person will
be offered or receive any Conversion Stock under this Plan who resides in a
foreign country or who resides in a state of the United States with respect to
which any or all of the following apply: (i) a small number of Persons otherwise
eligible to subscribe for shares of Conversion Stock under this Plan reside in
such state or foreign country; (ii) the granting of Subscription Rights or the
offer or sale of shares of Conversion Stock to such Person would require First
Star or its employees to register, under the securities laws of such state, as a
broker, dealer, salesman or agent or to register or otherwise qualify its
securities for sale in such state or foreign country; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of Subscription
Rights to any such Person.
L. Sales Commissions.
Sales commissions may be paid as determined by the Board of Directors
of First Star or its designees to securities dealers assisting subscribers in
making purchases of Conversion Stock in the Subscription Offering or in the
Community Offering, if the securities dealer is named by the subscriber on the
Order Form. In addition, a sales commission may be paid to a securities
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dealer for advising and consulting with respect to, or for managing the sale of
Conversion Stock in, the Subscription Offering, the Community Offering or any
other offering.
IX. Registration and Market Making.
The First Star Common Stock will continue to be registered with the SEC
pursuant to the Securities Exchange Act of 1934, as amended following the Merger
Conversion, and First Star hereby undertakes not to deregister the First Star
Common Stock for a period of one year thereafter.
First Star shall use its best efforts to encourage and assist various
Market Makers to establish and maintain a market for First Star Common Stock.
First Star shall also use its best efforts to have First Star Common Stock
quoted on the Nasdaq or listed on a national or regional securities exchange.
X. Status of Savings Accounts and Loans Subsequent to Merger Conversion.
All Savings Accounts in NSB will retain the same status after the
Merger Conversion as those accounts had prior to the Merger Conversion. Subject
to Paragraph VIII.J. hereof, each holder of a Savings Account in NSB shall
retain, without payment, a withdrawable Savings Account or Savings Accounts in
the Bank following the Merger Conversion, equal in dollar amount and on the same
terms and conditions (except with respect to voting and liquidation rights) as
in effect prior to consummation of the Merger Conversion. All Savings Accounts
will continue to be insured by the Savings Association Insurance Fund up to the
applicable limits of insurance coverage. All loans shall retain the same status
after the Merger Conversion as these loans had prior to Merger Conversion.
XI. Effect of Merger Conversion.
Upon consummation of the Consolidation, the corporate existence of NSB
shall cease, and Interim shall be deemed to be a continuation of NSB, and shall
succeed to all the rights, interests, duties and obligations of NSB as in
existence as of immediately prior to the consummation of the Consolidation,
including but not limited to all rights and interests of NSB in and to its
assets and properties, whether real, personal or mixed.
Upon consummation of the Merger and the Merger Conversion, the
corporate existence of Interim shall cease, and the Bank shall be deemed to be a
continuation of Interim, and shall succeed to all the rights, interests, duties
and obligations of interim as in existence as of immediately prior to the
consummation of the Merger and the Merger Conversion, including but not limited
to all rights and interests of Interim in and to its assets and properties,
whether real, personal or mixed.
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XII. Liquidation Account.
A. Establishment of a Liquidation Account.
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders of NSB a limited priority claim in the event
of a complete liquidation of the Bank after the completion of the
Merger Conversion, the Bank shall, at the time of the consummation of
the Merger Conversion, establish a Liquidation Account in an amount
equal to the net worth of NSB as reflected in the most recent statement
of financial condition of NSB contained in the final Subscription and
Community Prospectus or such other amount as shall be determined by
applicable regulations of the Department and the FDIC. The function of
the liquidation account is to establish a priority on liquidation, and
the creation and maintenance of the liquidation account shall not
operate to restrict the use or application of any of the net worth
accounts of NSB, except that the Bank shall not declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect
thereof would cause its net worth to be reduced below the amount
required for the liquidation account.
B. Maintenance of the Liquidation Account.
The liquidation account shall be maintained by the Bank subsequent to
the Merger Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who maintain savings accounts in
the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to each savings account held, have a
related inchoate interest in a portion of the liquidation account
balance (the "subaccount balance").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder and/or a Supplemental Eligible Account Holder
shall be determined by multiplying the opening balance in the
liquidation account by a fraction of which the numerator is the amount
of the qualifying deposit in the related Savings Account and the
denominator is the total amount of the qualifying deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders in
NSB. Such initial subaccount balance shall not be increased but shall
be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder to which the subaccount
relates at the close of business on any annual closing date subsequent
to the Eligibility Record Date or Supplemental Eligibility Record Date
is less than the lesser of (i) the deposit balance in such Savings
Account at the close of business on any annual closing date subsequent
to the Eligibility Record Date or the Supplemental Eligibility Record
Date, or (ii) the amount of the Qualifying Deposit in such Savings
Account on the Eligibility Record Date or the Supplemental Eligibility
Record Date, then the subaccount balance for such savings account shall
be adjusted by reducing such subaccount balance in an amount
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<PAGE>
proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the
related subaccount balance shall be reduced to zero.
C. Distribution in the Event of Complete Liquidation
In the event of a complete liquidation of the Bank (and only in such
event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then-current adjusted
subaccount balances for Savings Accounts then held before any
liquidation distribution may be made to stockholders. No merger,
consolidation, sale of bulk assets or similar combination or
transaction with another institution insured by the FDIC, in which
First Star is not the surviving institution, shall be considered to be
a complete liquidation for these purposes. In such transactions, the
Liquidation Account shall be assumed by the surviving institution.
XIII. Interpretation and Amendment or Termination of the Plan.
NSB's Board of Directors and First Star's Board of Directors shall have
the sole discretion to interpret and apply the provisions of the Plan to
particular facts and circumstances and to make all determinations necessary or
desirable to implement such provisions, and any and all interpretations,
applications and determinations made by such Boards of Directors in good faith
and on the basis of such information and assistance as was then reasonably
available for such purpose shall be conclusive and binding upon NSB and its
depositors and subscribers in the Subscription and Community Offerings, subject
to the authority of the FDIC and the Department.
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to submission of the Plan and proxy materials to the Voting
Depositors by a two-thirds vote of Boards of Directors of NSB and First Star.
After submission of the Plan and proxy materials to the Voting Depositors, the
Plan may be amended by a two-thirds vote of the Boards of Directors of NSB and
First Star at any time prior to the Special Meeting and at any time following
such Special Meeting with the concurrence of the FDIC and the Department. In
their discretion, the Boards of Directors of NSB and First Star may modify or
terminate the Plan upon the order of the regulatory authorities without a
resolicitation of proxies or another Special Meeting.
In the event that mandatory new regulations pertaining to the Merger
Conversion are adopted by the FDIC, the Department or the FRB, or any successor
agency, prior to the completion of the Merger Conversion, the Plan will be
amended to conform to the new mandatory regulations without a resolicitation of
proxies or another Special Meeting. In the event that new conversion regulations
adopted by the FDIC, the Department or the FRB, or any successor agency, prior
to completion of the Merger Conversion contain optional provisions, the
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Plan may be amended to utilize such optional provisions at the discretion of the
Boards of Directors of NSB and First Star without a resolicitation of proxies or
another Special Meeting.
By adoption of the Plan, NSB's Voting Depositors authorize the Boards
of Directors of NSB and First Star to amend and/or terminate the Plan under the
circumstances set forth above.
XIV. Expenses of the Merger Conversion.
First Star and NSB will use their best efforts to assure that expenses
incurred in connection with the Merger Conversion shall be reasonable.
XV. Consummation of the Merger Conversion.
The Merger Conversion shall be deemed to take place and be effective
upon the Effective Date, as described in the Agreement.
XVI. Charter and Bylaws.
Upon consummation of the Merger Conversion, the Articles of
Incorporation and Bylaws of the Bank as then in effect shall continue to be the
Articles of Incorporation and Bylaws of the Bank as the surviving institution
following the merger of Interim with and into the Bank.
XVII. Conditions to Merger Conversion
A. The Merger Conversion is conditioned upon the following:
1. Prior receipt by NSB and First Star of opinions of counsel
or an accountant, substantially to the effect that the Merger
Conversion will not result in certain adverse federal or state tax
consequences to NSB or First Star, including, but not limited to, an
opinion that the Merger Conversion will not result in a taxable
reorganization of NSB under the Internal Revenue Code of 1986, as
amended;
2. Sale of all of the Conversion Stock offered in the
Merger Conversion; and
3. The completion of the Merger Conversion within the time
period specified in Paragraph VIII.I. of this Plan.
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EXHIBIT 3(i)
<PAGE>
ARTICLES OF INCORPORATION
OF
FIRST STAR BANCORP, INC.
Article 1. Name. The name of the corporation is First Star Bancorp,
Inc. (hereinafter referred to as the "Corporation").
Article 2. Registered Office. The address of the initial registered
office of the Corporation in the Commonwealth of Pennsylvania is 418 West Broad
Street, Bethlehem, Pennsylvania 18018.
Article 3. Nature of Business. The purpose of the Corporation is to act
as a bank holding company and to engage in any lawful act or activity for which
a corporation may be organized under the Business Corporation Law of 1988, as
amended, of the Commonwealth of Pennsylvania (the "BCL").
The Corporation is incorporated under the provisions of the BCL.
Article 4. Duration. The term of the existence of the Corporation shall
be perpetual.
Article 5. Capital Stock.
A. Authorized Amount. The total number of shares of capital stock which
the Corporation has authority to issue is 12,500,000 of which 2,500,000 shall be
serial preferred stock, no par value (hereinafter the "Preferred Stock") and
10,000,000 shall be common stock, par value $1.00 per share (hereinafter the
"Common Stock"). Except to the extent required by governing law, rule or
regulation, the shares of capital stock may be issued from time to time by the
Board of Directors without further approval of stockholders. The Corporation
shall have the authority to purchase its capital stock out of funds lawfully
available therefor.
B. Common Stock. Except as provided in this Article 5 (or in any
resolution or resolutions adopted by the Board of Directors pursuant hereto),
the exclusive voting power shall be vested in the Common Stock, with each holder
thereof being entitled to one vote for each share of such Common Stock standing
in the holder's name on the books of the Corporation. Subject to any rights and
preferences of any class of stock having preference over the Common Stock,
holders of Common Stock shall be entitled to such dividends as may be declared
by the Board of Directors out of funds lawfully available therefor. Upon any
liquidation, dissolution or winding up of the affairs of the Corporation,
whether voluntary or involuntary, holders of Common Stock shall be entitled to
receive pro rata the remaining assets of the Corporation after the holders of
any class of stock having preference over the Common Stock have been paid in
full any sums to which they may be entitled.
C. Authority of Board to Fix Terms of Preferred Stock. A description of
each class of shares and a statement of the voting rights, designations,
preferences, qualifications, privileges, limitations, options, conversion
rights, and other special rights granted to or imposed upon the shares of each
class and of the authority vested in the Board of Directors of the Corporation
to establish series of Preferred Stock or to determine that Preferred Stock will
be issued as a class without series and to fix and
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determine the voting rights, designations, preferences and other special rights
of the Preferred Stock as a class or of the series thereof are as follows:
Preferred Stock may be issued from time to time as a class without
series or in one or more series. Each series shall be designated by the Board of
Directors so as to distinguish the shares thereof from the shares of all other
series and classes. The Board of Directors may by resolution from time to time
divide shares of Preferred Stock into series, or determine that the Preferred
Stock shall be issued as a class without series, fix and determine the number of
shares in a series and the terms and conditions of the issuance of the class or
the series, and, subject to the provisions of this Article 5, fix and determine
the rights, preferences, qualifications, privileges, limitations and other
special rights, if any, of the class (if none of such shares of the class have
been issued) or of any series so established, including but not limited to,
voting rights (which may be limited, multiple, fractional or non-voting rights),
the rate of dividend, if any, and whether or to what extent, if any, such
dividends shall be cumulative (including the date from which dividends shall be
cumulative, if any), the price at and the terms and conditions on which shares
may be redeemed, if any, the preference and the amounts payable on shares in the
event of voluntary or involuntary liquidation, sinking fund provisions for the
redemption or purchase of shares in the event shares of the class or of any
series are issued with sinking fund provisions, and the terms and conditions on
which the shares of the class or of any series may be converted in the event the
shares of the class or of any series are issued with the privilege of
conversion.
The Board of Directors may, in its discretion, at any time or from time
to time, issue or cause to be issued all or any part of the authorized and
unissued shares of Preferred Stock for consideration of such character and value
as the Board of Directors shall from time to time fix or determine.
D. Repurchase of Shares. The Corporation may, from time to time,
pursuant to authorization by the board of directors of the Corporation and
without action by the stockholders, purchase or otherwise acquire shares of any
class, bonds, debentures, notes, scrip, warrants, obligations, evidences of
indebtedness, or other securities of the Corporation in such manner, upon such
terms, and in such amounts as the board of directors shall determine; subject,
however, to such limitations or restrictions, if any, as are contained in the
express terms of any class of shares of the Corporation outstanding at the time
of the purchase or acquisition in question or as are imposed by law or
regulation.
Article 6. Incorporator. The name and mailing address of the sole
incorporator is as follows:
Number and Class
of Shares
Name Address Subscribed For
- ---------------- --------------------- --------------
Joseph T. Svetik 418 West Broad Street 100 shares of
Bethlehem, PA 18018 Common Stock
Article 7. Directors. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors.
A. Number. The number of directors of the Corporation shall be such
number, not less than 5 nor more than 15 (exclusive of directors, if any, to be
elected by holders of preferred stock of the Corporation, voting separately as a
class), as shall be provided from time to time in or in accordance with the
bylaws, provided that no decrease in the number of directors shall have the
effect of shortening the term of any incumbent director, and provided further
that no action shall be taken to decrease or increase
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the number of directors from time to time unless at least sixty percent (60%) of
the directors then in office shall concur in said action.
B. Classified Board. The Board of Directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. Such classes shall
be as nearly equal in number as the then total number of directors constituting
the entire board of directors shall permit, with the terms of office of all
members of one class expiring each year. At the first annual meeting of
stockholders, directors in Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding meeting thereafter. At the third
annual meeting of stockholders, directors of Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each succeeding annual meeting, directors whose term shall expire
at any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes appropriate so that
the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the Board of Directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article 7. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
C. No Cumulative Voting. Stockholders of the Corporation shall not be
permitted to cumulate their votes for the election of directors.
D. Vacancies. Except as otherwise fixed pursuant to the provisions of
Article 5 hereof relating to the rights of the holders of any class or series of
stock having preference over the Common Stock as to dividends or upon
liquidation to elect directors, any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, shall be filled by a majority vote of the directors then in office,
whether or not a quorum is present, or by a sole remaining director, and any
director so chosen shall serve until the term of the class to which he was
appointed shall expire and until his successor is elected and qualified. When
the number of directors is changed, the Board of Directors shall determine the
class or classes to which the increased or decreased number of directors shall
be appointed, provided that no decrease in the number of directors shall shorten
the term of any incumbent director.
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<PAGE>
E. Removal. Any director (including persons elected by directors to
fill vacancies in the Board of Directors) may be removed from office only with
cause by an affirmative vote of not less than a majority of the total votes
eligible to be cast by stockholders. Cause for removal shall exist only if the
director whose removal is proposed has been either declared of unsound mind by
an order of a court of competent jurisdiction, convicted of a felony or of an
offense punishable by imprisonment for a term of more than one year by a court
of competent jurisdiction, or deemed liable by a court of competent jurisdiction
for gross negligence or misconduct in the performance of such director's duties
to the Corporation. At least 30 days prior to such meeting of stockholders,
written notice shall be sent to the director whose removal will be considered at
the meeting. Directors may also be removed from office in the manner provided in
Sections 1726(b) and 1726(c) of the BCL, or any successors to such sections.
F. Nominations of Directors. Nominations of candidates for election as
directors at any annual meeting of stockholders may be made (a) by, or at the
direction of, a majority of the Board of Directors or (b) by any stockholder
entitled to vote at such annual meeting. Only persons nominated in accordance
with the procedures set forth in this Article 7.F shall be eligible for election
as directors at an annual meeting. Ballots bearing the names of all the persons
who have been nominated for election as directors at an annual meeting in
accordance with the procedures set forth in this Article 7.F shall be provided
for use at the annual meeting.
Nominations, other than those made by or at the direction of the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Article 7.F. To be timely, a
stockholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the Corporation not less than 60 days prior to
the anniversary date of the immediately preceding annual meeting of stockholders
of the Corporation; provided, however, that with respect to the first scheduled
annual meeting, notice by the stockholder must be so delivered or received no
later than the close of business on the tenth day following the day on which
notice of the date of the scheduled meeting must be delivered or received no
later than the close of business on the fifth day preceding the date of the
meeting. Such stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or re-election as a director
and as to the stockholder giving the notice (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of Corporation
stock which are Beneficially Owned (as defined in Article 11.A(e)) by such
person on the date of such stockholder notice, and (iv) any other information
relating to such person that is required to be disclosed in solicitations of
proxies with respect to nominees for election as directors, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including, but not limited to, information required to be
disclosed by Items 4, 5, 6 and 7 of Schedule 14A and information which would be
required to be filed on Schedule 14B with the Securities and Exchange Commission
(or any successors of such items or schedules); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such stockholder and any other stockholders known by such stockholder
to be supporting such nominees and (ii) the class and number of shares of
Corporation stock which are Beneficially Owned by such stockholder on the date
of such stockholder notice and, to the extent known, by any other stockholders
known by such stockholder to be supporting such nominees on the date of such
stockholder notice. At the request of the Board of Directors, any person
nominated by, or at the direction of, the Board for election as a director at an
annual meeting shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee.
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The Board of Directors may reject any nomination by a stockholder not
timely made in accordance with the requirements of this Article 7.F. If the
Board of Directors, or a designated committee thereof, determines that the
information provided in a stockholder's notice does not satisfy the
informational requirements of this Article 7.F in any material respect, the
Secretary of the Corporation shall notify such stockholder of the deficiency in
the notice. The stockholder shall have an opportunity to cure the deficiency by
providing additional information to the Secretary within such period of time,
not to exceed five days from the date such deficiency notice is given to the
stockholder, as the Board of Directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the Board of
Directors or such committee reasonably determines that the additional
information provided by the stockholder, together with information previously
provided, does not satisfy the requirements of this Article 7.F in any material
respect, then the Board of Directors may reject such stockholder's nomination.
The Secretary of the Corporation shall notify a stockholder in writing whether
his nomination has been made in accordance with the time and informational
requirements of this Article 7.F. Notwithstanding the procedures set forth in
this paragraph, if neither the Board of Directors nor such committee makes a
determination as to the validity of any nominations by a stockholder, the
presiding officer of the annual meeting shall determine and declare at the
annual meeting whether the nomination was made in accordance with the terms of
this Article 7.F. If the presiding officer determines that a nomination was made
in accordance with the terms of this Article 7.F, he shall so declare at the
annual meeting and ballots shall be provided for use at the meeting with respect
to such nominee. If the presiding officer determines that a nomination was not
made in accordance with the terms of this Article 7.F, he shall so declare at
the annual meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing, and except as otherwise required by law,
whenever the holders of any one or more series of Preferred Stock shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the provisions of this Article 7.F shall not apply with respect to
the director or directors elected by such holders of Preferred Stock.
Article 8. Preemptive Rights. No holder of any of the shares of any
class or series of stock or of options, warrants or other rights to purchase
shares of any class or series or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued stock of any
class or series, or any unissued bonds, certificates of indebtedness, debentures
or other securities convertible into or exchangeable for stock of any class or
series or carrying any right to purchase stock of any class or series; but any
such unissued stock, bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for stock or carrying any right to
purchase stock may be issued pursuant to resolution of the board of directors of
the Corporation to such persons, firms, corporations or associations, whether or
not holders thereof, and upon such terms as may be deemed advisable by the board
of directors in the exercise of its sole discretion.
Article 9. Elimination of Directors' Liability. Directors of the
Corporation shall have no liability to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that this
Article 9 shall not eliminate liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders if such acts
or omissions are not made in good faith or involve intentional misconduct or a
knowing violation of law, or (ii) under Section 1713(b) of the BCL. If the BCL
is amended after the effective date of these Articles of Incorporation to
further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the BCL, as so amended.
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<PAGE>
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
Article 10. Indemnification, etc. of Officers, Directors, Employees and
Agents.
A. Persons. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, including actions by or in the right of
the Corporation, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
2. he acted in good faith in the transaction which is the
subject of the suit or action, and in a manner he reasonably believed to be in,
or not opposed to, the best interest of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article 12 of these
Articles) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has been
adjudged liable to the Corporation unless (and only to the extent that) the
court of common pleas or the court in which the suit was brought shall
determine, upon application, that despite the adjudication of liability but in
view of all the circumstances, he is fairly and reasonably entitled to indemnity
for such expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
person named in paragraph A shall be indemnified only if:
1. he is successful on the merits or otherwise; or
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2. he acted in good faith in the transaction which is the
subject of the nonderivative suit and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article 12 of these
Articles) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his conduct
was unlawful. The termination of a nonderivative suit by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, in itself, create a presumption that the person failed to satisfy the
standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in paragraph C.2 (second sentence), the determination may be
made by:
1. the board of directors by a majority vote of a quorum
consisting of directors of the Corporation who were not parties to the action,
suit or proceeding; or
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advancement of Expenses. Reasonable expenses incurred by a director,
officer, employee or agent of the Corporation in defending a civil or criminal
action, suit or proceeding described in Article 10.B may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Corporation.
I. Other Rights. The indemnification and advancement of expenses
provided by or pursuant to this Article 10 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any insurance or other agreement, vote of stockholders or
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
J. Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article 10.
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K. Security Fund; Indemnity Agreements. By action of the Board of
Directors (notwithstanding their interest in the transaction), the Corporation
may create and fund a trust fund or fund of any nature, and may enter into
agreements with its officers, directors, employees and agents for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article 10.
L. Modification. The duties of the Corporation to indemnify and to
advance expenses to any person as provided in this Article 10 shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article 10, and no amendment or
termination of any trust or other fund created pursuant to Article 10.K hereof,
shall alter to the detriment of such person the right of such person to the
advancement of expenses or indemnification related to a claim based on an act or
failure to act which took place prior to such amendment, repeal or termination.
M. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision in this Article 10, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated by (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
then in office.
N. Savings Clause. If this Article 10 or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article 10 that shall
not have been invalidated and to the full extent permitted by applicable law.
If the BCL is amended to permit further indemnification of the
directors, officers, employees and agents of the Corporation, then the
Corporation shall indemnify such persons to the fullest extent permitted by the
BCL, as so amended. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director, officer, employee or agent existing at the time of
such repeal or modification.
Article 11. Meetings of Stockholders and Stockholder Proposals.
A. Definitions.
(a) Acquire. The term "Acquire" includes every type of
acquisition, whether effected by purchase, exchange, operation of law or
otherwise.
(b) Acting in Concert. The term "Acting in Concert" means (a)
knowing participation in a joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express agreement, or (b) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
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(c) Affiliate. An "Affiliate" of, or a Person "affiliated
with," a specified Person, means a Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, the Person specified.
(d) Associate. The term "Associate" when used to indicate a
relationship with any Person means:
(i) Any corporation or organization (other than the
Corporation or a Subsidiary of the Corporation), or any
subsidiary or parent thereof, of which such Person is a
director, officer or partner or is, directly or indirectly,
the Beneficial Owner of 10% or more of any class of equity
securities;
(ii) Any trust or other estate in which such Person
has a 10% or greater beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity,
provided, however, such term shall not include any employee
stock benefit plan of the Corporation or a Subsidiary of the
Corporation in which such Person has a 10% or greater
beneficial interest or serves as a trustee or in a similar
fiduciary capacity;
(iii) Any relative or spouse of such Person (or any
relative of such spouse) who has the same home as such Person
or who is a director or officer of the Corporation or a
Subsidiary of the Corporation (or any subsidiary or parent
thereof); or
(iv) Any investment company registered under the
Investment Company Act of 1940 for which such Person or any
Affiliate or Associate of such Person serves as investment
advisor.
(e) Beneficial Owner (including Beneficially Owned). A Person
shall be considered the "Beneficial Owner" of any shares of stock (whether or
not owned of record):
(i) With respect to which such Person or any
Affiliate or Associate of such Person directly or indirectly
has or shares (A) voting power, including the power to vote or
to direct the voting of such shares of stock, and/or (B)
investment power, including the power to dispose of or to
direct the disposition of such shares of stock;
(ii) Which such Person or any Affiliate or Associate
of such Person has (A) the right to acquire (whether such
right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, and/or (B) the right to
vote pursuant to any agreement, arrangement or understanding
(whether such right is exercisable immediately or only after
the passage of time) (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of a
revocable proxy granted for a particular meeting of
stockholders pursuant to a public solicitation of proxies for
such meeting, with respect to shares which neither such person
nor any such affiliate is otherwise deemed the beneficial
owner); or
(iii) Which are Beneficially Owned within the meaning
of (i) or (ii) of this Article 11.A(e) by any other Person
with which such first-mentioned Person or any of its
Affiliates or Associates either (A) has any agreement,
arrangement or understanding,
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written or oral, with respect to acquiring, holding, voting or
disposing of any shares of stock of the Corporation or any
Subsidiary of the Corporation or acquiring, holding or
disposing of all or substantially all, or any Substantial
Part, of the assets or business of the Corporation or a
Subsidiary of the Corporation, or (B) is Acting in Concert.
For the purpose only of determining whether a Person is the
Beneficial Owner of a percentage specified in this Article 11
of the outstanding Voting Shares, such shares shall be deemed
to include any Voting Shares which may be issuable pursuant to
any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants,
options or otherwise and which are deemed to include any
Voting Shares which may be issuable pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants, options or
otherwise and which are deemed to be Beneficially Owned by
such Person pursuant to the foregoing provisions of this
Article 11.A(e), but shall not include any other Voting Shares
which may be issuable in such manner.
(iv) Provided, however, that (1) no director or
officer of the Corporation (or any Affiliate of any such
director or officer) shall, solely by reason of any or all of
such directors or officers acting in their capacities as such,
be deemed, for any purposes hereof, to beneficially own any
stock beneficially owned by any other such director or officer
(or any Affiliate thereof), and (2) neither any employee stock
ownership, stock option or similar plan of the Corporation or
any subsidiary of the Corporation, nor any trustee with
respect thereto or any Affiliate of such trustee (solely by
reason of such capacity of such trustee), shall be deemed, for
any purposes hereof, to beneficially own any stock held under
any such plan.
(f) Offer. The term "Offer" shall mean every written offer to
buy or acquire, solicitation of an offer to sell, tender offer or
request or invitation for tender of, a security or interest in a
security for value; provided that the term "Offer" shall not include
(i) inquiries directed solely to the management of the Corporation and
not intended to be communicated to stockholders which are designed to
elicit an indication of management's receptivity to the basic structure
of a potential acquisition with respect to the amount of cash and or
securities, manner of acquisition and formula for determining price, or
(ii) non-binding expressions of understanding or letters of intent with
the management of the Corporation regarding the basic structure of a
potential acquisition with respect to the amount of cash and/or
securities, manner of acquisition and formula for determining price.
(g) Person. The term "Person" shall mean any individual,
partnership, corporation, association, trust, group or other entity.
When two or more Persons act as a partnership, limited partnership,
syndicate, association or other group for the purpose of acquiring,
holding or disposing of shares of stock, such partnership, syndicate,
associate or group shall be deemed a "Person."
(h) Substantial Part. The term "Substantial Part" as used with
reference to the assets of the Corporation or of any Subsidiary means
assets having a value of more than 10% of the total consolidated assets
of the Corporation and its Subsidiaries as of the end of the
Corporation's most recent fiscal year ending prior to the time the
determination is being made.
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(i) Subsidiary. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the Person in question.
(j) Voting Shares. "Voting Shares" shall mean shares of
the Corporation entitled to vote generally in an election of directors.
B. Certain Determinations With Respect to Article 11. A majority of the
directors shall have the power to determine for the purposes of this Article 11,
on the basis of information known to them and acting in good faith: (A) the
number of Voting Shares of which any Person is the Beneficial Owner, (B) whether
a Person is an Affiliate or Associate of another, (C) whether a Person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of "Beneficial Owner" as hereinabove defined, and (D) such
other matters with respect to which a determination is required under this
Article 11.
C. Directors, Officers or Employees. Directors, officers or employees
of the Corporation or any Subsidiary thereof shall not be deemed to be a group
with respect to their individual acquisitions of any class of equity securities
of the Corporation solely as a result of their capacities as such.
D. Special Meetings of Stockholders. Special meetings of the
stockholders of the Corporation may be called only by (i) the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
directors then in office, (ii) the Chairman of the Board or (iii) the President.
E. Action Without a Meeting. Notwithstanding any other provision of
these Articles of Incorporation or the Bylaws of the Corporation, no action
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, and the power of
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied.
F. Stockholder Proposals. At an annual meeting of stockholders, only
such new business shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the annual meeting by, or at the
direction of, (a) the Board of Directors or (b) any stockholder of the
Corporation who complies with all the requirements set forth in this Article
11.F.
Proposals, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation as set forth in this Article 11.F. For stockholder proposals
to be included in the Corporation's proxy materials, the stockholder must comply
with all the timing and informational requirements of Rule 14a-8 of the Exchange
Act (or any successor regulation). With respect to stockholder proposals to be
considered at the annual meeting of stockholders but not included in the
Corporation's proxy materials, the stockholder's notice shall be delivered to,
or mailed and received at, the principal executive offices of the Corporation
not less than 60 days prior to the anniversary date of the immediately preceding
annual meeting of stockholders of the Corporation. Such stockholder's notice
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (a) a brief description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business and, to the extent known, any
other stockholders known by such stockholder to be supporting such proposal, (c)
the class and number of shares of the Corporation stock which are Beneficially
Owned by the stockholder on the date of such stockholder notice and, to the
extent known, by any other stockholders known by such
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stockholder to be supporting such proposal on the date of such stockholder
notice, and (d) any financial interest of the stockholder in such proposal
(other than interests which all stockholders would have).
The Board of Directors may reject any stockholder proposal not timely
made in accordance with the terms of this Article 11.F. If the Board of
Directors, or a designated committee thereof, determines that the information
provided in a stockholder's notice does not satisfy the informational
requirements of this Article 11.F in any material respect, the Secretary of the
Corporation shall promptly notify such stockholder of the deficiency in the
notice. The stockholder shall have an opportunity to cure the deficiency by
providing additional information to the Secretary within such period of time,
not to exceed five days from the date such deficiency notice is given to the
stockholder, as the Board of Directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the Board of
Directors or such committee determines that the additional information provided
by the stockholder, together with information previously provided, does not
satisfy the requirements of this Article 11.F in any material respect, then the
Board of Directors may reject such stockholder's proposal. The Secretary of the
Corporation shall notify a stockholder in writing whether his proposal has been
made in accordance with the time and informational requirements of this Article
11.F. Notwithstanding the procedures set forth in this paragraph, if neither the
Board of Directors nor such committee makes a determination as to the validity
of any stockholder proposal, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the stockholder proposal was
made in accordance with the terms of this Article 11.F. If the presiding officer
determines that a stockholder proposal was made in accordance with the terms of
this Article 11.F, he shall so declare at the annual meeting and ballots shall
be provided for use at the meeting with respect to any such proposal. If the
presiding officer determines that a stockholder proposal was not made in
accordance with the terms of this Article 11.F, he shall so declare at the
annual meeting and any such proposal shall not be acted upon at the annual
meeting.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of report of officers, directors and
committees of the Board of Directors, but in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
Article 12. Approval of Business Combinations.
A. General Requirement. The definitions and other provisions set forth
in Articles 11.A, 11.B and 11.C are also applicable to this Article 12. The
affirmative vote of the holders of not less than sixty six and two thirds
percent (66 2/3%) of the outstanding shares of "Voting Shares" shall be required
for the approval or authorization of any "Business Combination" as defined and
set forth below:
1. Any merger, consolidation, share exchange or division of
the Corporation or any Subsidiary of the Corporation with or into (i) any
Interested Shareholder (as hereinafter defined), or (ii) with, involving or
resulting in any other corporation (whether or not itself an Interested
Shareholder of the Corporation) which is, or after the merger, consolidation,
share exchange or division would be, an Affiliate or Associate of the Interested
Shareholder;
2. A sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or series of transactions) to or with the
Interested Shareholders or any Affiliate or Associate of such Interested
Shareholder of assets of the Corporation or any Subsidiary of the Corporation
(i) having an aggregate Market Value (as hereinafter defined) equal to 10% or
more of the aggregate Market
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Value of all the assets, determined on a consolidated basis, of the Corporation;
(ii) having an aggregate Market Value equal to 10% or more of the aggregate
Market Value of all outstanding shares of the Corporation; or (iii) representing
10% or more of the earning power or net income, determined on a consolidated
basis, of the Corporation.
3. The issuance or transfer by the Corporation or any
Subsidiary of the Corporation (in one or a series of transactions) of any shares
of the Corporation or any Subsidiary of the Corporation which has an aggregate
Market Value equal to 5% or more of the aggregate Market Value of all the
outstanding shares of the Corporation to the Interested Shareholder or any
Affiliate or Associate of such Interested Shareholder except pursuant to the
exercise of option rights to purchase shares, or pursuant to the conversion of
securities having conversion rights, offered, or a dividend or distribution paid
or made, pro rata to all shareholders of the Corporation.
4. The adoption at any time of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by, or pursuant to any
agreement, arrangement or understanding with the Interested Shareholder or any
Affiliate or Associate of such Interested Shareholder.
5. A reclassification of securities (including, without
limitation, any split of shares, dividend of shares, or other distribution of
shares in respect of shares, or any reverse split of shares), or
recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any Subsidiary of the Corporation, or any other transaction
(whether or not with or into or otherwise involving the Interested Shareholder),
proposed by, or pursuant to any agreement, arrangement or understanding (whether
or not in writing) with, the Interested Shareholder or any Affiliate or
Associate of the Interested Shareholder, which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding shares of
any class or series of Voting Shares or securities convertible into Voting
Shares of the Corporation or any Subsidiary of the Corporation which is,
directly or indirectly, owned by the Interested Shareholder or any Affiliate or
Associate of the Interested Shareholder, except as a result of immaterial
changes due to fractional share adjustments.
The affirmative vote required by this Article 12 shall be in addition
to the vote of the holders of any class or series of stock of the Corporation
otherwise required by law, by any other Article of these Articles of
Incorporation, as the same may be amended from time to time, by any resolution
of the Board of Directors providing for the issuance of a class or series of
stock, or by any agreement between the Corporation and any national securities
exchange.
B. Certain Definitions.
1. "Share Acquisition Date" means with respect to any Person
and the Corporation, the date that such person first became an Interested
Shareholder of the Corporation.
2. The "Market Value" of the common stock of the Corporation
shall be the highest closing sale price during the 30-day period immediately
preceding the date in question of the share on the composite tape for New York
Stock Exchange-listed shares, or, if the shares are not quoted on the composite
tape or if the shares are not listed on the exchange, on the principal United
States securities exchange registered under the exchange act on which such
shares are listed, or, if the shares are not listed on any such exchange, the
highest closing bid quotation with respect to the shares during the 30-day
period preceding the date in question on the National Association of Securities
Dealers, Inc. Automated Quotations System or any system then in use or, if no
quotations are available, the fair market value on
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the date in question of the shares as determined by the Board of Directors of
the Corporation in good faith. In the case of property other than cash or
shares, the fair market value of the property on the date in question as
determined by the Board of Directors of the Corporation in good faith.
3. The term "Interested Shareholder," means any Person (other
than the Corporation or any Subsidiary of the Corporation) that:
(i) Is the Beneficial Owner, directly or indirectly, of shares
entitling that Person to cast at least 20% of the Voting Shares (as defined in
Article 11.A);
(ii) Is an Affiliate or Associate of the Corporation and at
any time within the five-year period immediately prior to the date in question
was the Beneficial Owner, directly or indirectly, of shares entitling that
Person to cast at least 20% of the Voting Shares.
Exception - For the purpose of determining whether a Person is an
Interested Shareholder:
(1) The number of votes that would be entitled to be cast in
an election of directors of the Corporation shall be calculated by including
shares deemed to be beneficially owned by the Person through application of the
definition of "Beneficial Owner" in Article 11.A, but excluding any other
unissued shares of such Corporation which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion or
option rights or otherwise; and
(2) There shall be excluded from the Beneficial Ownership of
the Interested Shareholder any:
(i) Shares which were acquired pursuant to a stock split,
stock dividend, reclassification or similar recapitalization with respect to
shares described under this paragraph that have been held continuously since
their issuance by the Corporation by the natural Person or entity that acquired
them from the Corporation.
C. Exceptions. The provisions of this Article 12 shall not apply to a
Business Combination which is approved by two-thirds of those members of the
Board of Directors who were directors prior to the time when the Interested
Shareholder became an Interested Shareholder (the "Continuing Directors"). The
provisions of this Article 12 also shall not apply to a Business Combination:
(1) Approved by the affirmative vote of the holders of shares
entitling such holders to cast a majority of the votes that all shareholders
would be entitled to cast in an election of directors of the Corporation, not
including any Voting Shares beneficially owned by the Interested Shareholder or
any Affiliate or Associate of such Interested Shareholder, at a meeting called
for such purpose no earlier than three months after the Interested Shareholder
became, and if at the time of the meeting the Interested Shareholder is, the
Beneficial Owner, directly or indirectly, of shares entitling the Interested
Shareholder to cast at least sixty six and two thirds percent (66 2/3%) of the
votes that all shareholders would be entitled to cast in an election of
directors of the Corporation, and if the Business Combination satisfies all the
conditions of Article 13 herein; or
(2) Approved by the affirmative vote of all of the holders
of all of the outstanding common shares.
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(3) Approved by the affirmative vote of the holders of shares
entitling such holders to cast a majority of the votes that all shareholders
would be entitled to cast in an election of directors of the Corporation, not
including any Voting Shares beneficially owned by the Interested Shareholder or
any Affiliate or Associate of the Interested Shareholder, at a meeting called
for such purpose no earlier than five years after the Interested Shareholder's
Share Acquisition Date.
(4) Approved at a shareholders' meeting called for such
purpose no earlier than five years after the Interested Shareholder's Share
Acquisition Date that meets all of the conditions of Article 13 herein.
D. Additional Provisions. Nothing contained in this Article 12, shall
be construed to relieve an Interested Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article 12 shall prevent
any shareholder of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
shareholder.
E. Notwithstanding Article 14 or any provisions of these Articles of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by laws, these Articles of
Incorporation or the Bylaws of the Corporation), the affirmative vote of the
holders of at least sixty six and two thirds percent (66 2/3%) of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon separately, the affirmative vote of the holders of at
least sixty six and two thirds (66 2/3%) of the outstanding shares of each such
class or series) shall be required to amend or repeal this Article 12 or adopt
any provisions inconsistent with this Article.
Article 13. Fair Price Requirements
A. General Requirement. No "Business Combination" (as defined in
Article 12) shall be effected unless all of the following conditions, to the
extent applicable, are fulfilled.
1. The aggregate amount of the cash and the Market Value as of the
Consummation Date (as defined herein) of consideration other than cash to be
received per share by holders of outstanding common shares of the Corporation in
the Business Combination is at least equal to the higher of: (i) the highest per
share price paid by the Interested Shareholder at a time when the shareholder
was the Beneficial Owner, directly or indirectly, of shares entitling that
Person to cast at least 5% of the Voting Shares for any common shares of the
same class or series acquired by it within the five-year period immediately
prior to the Announcement Date (as hereinafter defined) or the transaction in
which the Interested Shareholder became an Interested Shareholder; whichever is
higher; plus, in either case, interest compounded annually from the earliest
date on which the highest per-share acquisition price was paid through the
Consummation Date at the rate of one-year United States treasury obligations
from time to time in effect; less the aggregate amount of any cash dividends
paid, and the Market Value of any dividends paid other than in cash, per common
share since such earliest date, up to the amount of the interest, or (ii) the
Market Value per common share on the Announcement Date with respect to the
Business Combination or on the Interested Shareholder's Share Acquisition Date,
whichever is higher; plus interest compounded annually from such date through
the Consummation Date at the rate of one-year United States treasury obligations
from time to time in effect; less the aggregate amount of any cash dividends
paid, and the Market Value of any dividends paid other than in cash, per common
share since such date, up to the amount of the interest.
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2. The aggregate amount of the cash and the Market Value as of the
Consummation Date of consideration other than cash to be received per share by
holders of outstanding shares of any class or series of shares, other than
common shares, of the Corporation is at least equal to the highest of the
following (whether or not the Interested Shareholder has previously acquired any
shares of such class or series of shares): (i) the highest per-share price paid
by the Interested Shareholder at a time when the shareholder was the Beneficial
Owner directly or indirectly, of shares entitling that Person to cast at least
5% of the Voting Shares for any shares of such class or series of shares
acquired by it within the five-year period immediately prior to the Announcement
Date; or the transaction in which the Interested Shareholder became an
Interested Shareholder; whichever is higher: plus, in either case, interest
compounded annually from the earliest date on which the highest per-share
acquisition price was paid through the Consummation Date at the rate for
one-year United States treasury obligations from time to time in effect; less
the aggregate amount of any cash dividends paid, and the Market Value of any
dividends paid other than in cash, per share of such class or series of shares
since such earliest date, up to the amount of the interest; or (ii) the highest
preferential amount per share to which the holders of shares of such class or
series of shares are entitled in the event of any voluntary liquidation,
dissolution or winding up of the Corporation, plus the aggregate amount of any
dividends declared or due as to which such holders are entitled prior to payment
of dividends on some other class or series of shares (unless the aggregate
amount of the dividends is included in such preferential amount), or (iii) the
Market Value per share of such class or series of shares on the Announcement
Date with respect to the Business Combination or on the Interested Shareholder's
Share Acquisition Date, whichever is higher; plus interest compounded annually
from such date through the Consummation Date at the rate for one-year United
States treasury obligations from time to time in effect; less the aggregate
amount of any cash dividends paid and the Market Value of any dividends paid
other than in cash, per share of such class or series of shares since such date,
up to the amount of the interest.
3. The consideration to be received by holders of a particular class or
series of outstanding shares (including common shares) of the Corporation in the
Business Combination is in cash or in the same form as the Interested
Shareholder has used to acquire the largest number of shares of such class or
series of shares previously acquired by it, and the consideration shall be
distributed promptly.
4. The holders of all outstanding shares of the Corporation not
beneficially owned by the Interested Shareholder immediately prior to the
consummation of the Business Combination are entitled to receive in the Business
Combination cash or other consideration for such shares in compliance with
paragraphs (1), (2) and (3).
5. After the Interested Shareholder's Share Acquisition Date and prior
to the Consummation Date with respect to the Business Combination, the
Interested Shareholder has not become the Beneficial Owner of any additional
Voting Shares of such Corporation except: (i) as part of the transaction which
resulted in such Interested Shareholder becoming an Interested Shareholder; (ii)
by virtue of proportionate splits of shares, share dividends or other
distributions of shares in respect of shares not constituting a Business
Combination as defined in Article 11; (iii) through a Business Combination
meeting all of the conditions of section 2555(1), (2), (3) or (4) of the BCL;
(iv) through purchase by the Interested Shareholder at any price which, if the
price had been paid in an otherwise permissible Business Combination the
Announcement Date and Consummation Date of which were the date of such purchase,
would have satisfied the requirements of paragraphs (1), (2) and (3); or (v)
through purchase required by and pursuant to the provisions of, and at no less
than the fair value (including interest to the date of payment) as determined by
a court-appointed appraiser under BCL section 2547 (relating to valuation
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procedures) or, if such fair value was not then so determined, then at a price
that would satisfy the conditions in subparagraph (4).
The conditions imposed by this Article 13 shall be in addition to all
other conditions (including, without limitation, the vote of the holders of any
class or series of stock of the Corporation) otherwise imposed by law, by any
other Article of these Articles of Incorporation, by any resolution of the Board
of Directors providing for the issuance of a class or series of stock, or by any
agreement between the Corporation and any national securities exchange.
B. Certain Definitions. For the purpose of this Article 13, the
definitions of "Beneficial Owner," "Business Combination," "Market Value,"
"Principal Shareholder," "Share Acquisition Date," "Substantial Part," and
"Voting Shares," set forth in Articles 11 and 12 will apply to this Article 13.
1. The term "Announcement Date," when used in reference to any
Business Combination, shall mean the date of the first public announcement of
the final definitive proposal for such Business Combination.
2. The term "Consummation Date" when used with respect to any
Business Combination, the date of consummation of the Business Combination, or,
in the case of a Business Combination as to which a shareholder vote is taken,
the later of the business day prior to the vote or 20 days prior to the date of
consummation of such Business Combination.
C. Additional Provisions. Nothing contained in this Article 13 shall be
construed to relieve an Interested Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in this Article 13 shall prevent
any shareholders of the Corporation from objecting to any Business Combination
and from demanding any appraisal rights which may be available to such
shareholders.
3. Notwithstanding Article 14 or any other provisions of these
Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding
the fact that a lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of the Corporation), the affirmative vote of the
holders of at least sixty six and two thirds percent (66 2/3%) of the
outstanding shares entitled to vote thereon (and, if any class or series is
entitled to vote thereon separately, the affirmative vote of the holders of at
least sixty six and two thirds percent (66 2/3%) of the outstanding shares of
each such class or series) shall be required to amend or repeal or adopt any
provisions inconsistent with this Article.
Article 14. Amendment of Articles and Bylaws.
A. Articles. The Corporation reserves the right to amend, alter, change
or repeal any provision contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred upon
stockholders herein are granted subject to this reservation. No amendment,
addition, alteration, change or repeal of these Articles of Incorporation shall
be made unless it is first approved by the Board of Directors of the Corporation
pursuant to a resolution adopted by the affirmative vote of a majority of the
directors then in office, and thereafter is approved by the holders of a
majority (except as provided below) of the shares of the Corporation entitled to
vote generally in an election of directors, voting together as a single class,
as well as such additional vote of the Preferred Stock as may be required by the
provisions of any series thereof. Notwithstanding anything contained in these
Articles of Incorporation to the contrary, the affirmative vote of the holders
of at least sixty six and two thirds percent (66 2/3%) of the shares of the
Corporation entitled to vote generally in an election of directors,
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voting together as a single class, as well as such additional vote of the
Preferred Stock as may be required by the provisions of any series thereof,
shall be required to amend, adopt, alter, change or repeal any provision
inconsistent with Articles 7, 8, 9, 10, 11, 12, 13 and 14.
B. Bylaws. The Board of Directors or stockholders may adopt, alter,
amend or repeal the Bylaws of the Corporation. Such action by the Board of
Directors shall require the affirmative vote of a majority of the directors then
in office at any regular or special meeting of the Board of Directors. Such
action by the stockholders shall require the affirmative vote of the holders of
a majority of the shares of the Corporation entitled to vote generally in an
election of directors, voting together as a single class, as well as such
additional vote of the Preferred Stock as may be required by the provisions of
any series thereof, provided that the affirmative vote of the holders of at
least sixty six and two thirds percent (66 2/3%) of the shares of the
Corporation entitled to vote generally in an election of directors, voting
together as a single class, as well as such additional vote of the Preferred
Stock as may be required by the provisions of any series thereof, shall be
required to amend, adopt, alter, change or repeal any provision inconsistent
with Sections 2.3, 4.1, 4.2, 4.4 and 4.5 of the Bylaws and Articles VIII, IX and
XIII of the Bylaws.
Article 15. Control Share Acquisitions. Subchapter G, "Control-Share
Acquisitions," of Chapter 25 of the BCL shall not apply to the Corporation.
Article 16. Disgorgement by Certain Controlling Shareholders Following
Attempts to Acquire Control. Subchapter H, "Disgorgement by Certain Controlling
Shareholders Following Attempts to Acquire Control," of Chapter 25 of the BCL
shall not apply to the Corporation.
IN WITNESS WHEREOF, said First Star Bancorp, Inc. has caused these
Articles of Incorporation to be signed by Joseph T. Svetik, its Incorporator,
this the 10th day of March, 1993.
FIRST STAR BANCORP, INC.
/s/ Joseph T. Svetik
------------------------------
Joseph T. Svetik, Incorporator
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EXHIBIT 3(ii)
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BYLAWS
OF
FIRST STAR BANCORP, INC.
ARTICLE I. OFFICES
1.1 Registered Office and Registered Agent. The registered office of
First Star Bancorp, Inc. ("Corporation") shall be located in the Commonwealth of
Pennsylvania at such place as may be fixed from time to time by the Board of
Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office.
1.2 Other Offices. The Corporation may have other offices within or
outside the Commonwealth of Pennsylvania at such place or places as the Board of
Directors may from time to time determine.
ARTICLE II. STOCKHOLDERS' MEETING
2.1 Meeting Place. All meetings of the stockholders shall be held at
the principal place of business of the Corporation, or at such other place
within or without the Commonwealth of Pennsylvania as shall be determined by the
Board of Directors and stated in the notice of such meeting.
2.2 Annual Meeting Time. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on such date and time
as may be determined by the Board of Directors and stated in the notice of such
meeting.
2.3 Organization and Conduct. Each meeting of the stockholders shall be
presided over by the Chairman of the Board, or in his absence by the President,
or if neither the Chairman nor the President is present, by any Vice President.
The Secretary, or in his absence a temporary Secretary, shall act as secretary
of each meeting of the stockholders. In the absence of the Secretary and any
temporary Secretary, the chairman of the meeting may appoint any person present
to act as secretary of the meeting. The chairman of any meeting of the
stockholders, unless prescribed by law or regulation or unless the Board of
Directors has otherwise determined, shall determine the order of the business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussions as shall be deemed appropriate by him in
his sole discretion.
2.4 Notice.
(a) Notice of the time and place of the annual meeting of
stockholders shall be given by delivering personally or by mailing a written or
printed notice of the same, at least 10 days and not more than 60 days prior to
the meeting, to each stockholder of record entitled to vote at such meeting.
When any stockholders' meeting, either annual or special, is adjourned for 30
days or more, or if a new record date is fixed for an adjourned meeting of
stockholders, notice of the adjourned meeting shall be given as in the case of
an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than 30 days or of the business to
be transacted thereat (unless a new
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record date is fixed therefor), other than an announcement at the meeting at
which such adjournment is taken.
(b) At least 10 days and not more than 60 days prior to the
meeting, a written or printed notice of each special meeting of stockholders,
stating the place, day and hour of such meeting, and the purpose or purposes for
which the meeting is called, shall be either delivered personally or mailed to
each stockholder of record entitled to vote at such meeting.
2.5 Voting Record. At least five days before each meeting of
stockholders, a complete record of the stockholders entitled to vote at such
meeting, or any adjournment thereof, shall be made, arranged in alphabetical
order, with the address of and number of shares held by each, which record shall
be kept on file at the registered office of the Corporation and shall be subject
to inspection by any stockholder at any time during usual business hours. The
record shall be kept open at the time and place of such meeting for the
inspection by any stockholder.
2.6 Quorum. Except as otherwise required by law:
(a) A quorum at any annual or special meeting of stockholders
shall consist of stockholders representing, either in person or by proxy, a
majority of the outstanding capital stock of the Corporation entitled to vote at
such meeting.
(b) The votes of a majority in interest of those present at
any properly called meeting or adjourned meeting of stockholders, at which a
quorum as defined above is present, shall be sufficient to transact business.
2.7 Voting of Shares.
(a) Except as otherwise provided in these Bylaws or to the
extent that voting rights of the shares of any class or classes are limited or
denied by the Articles of Incorporation, each stockholder, on each matter
submitted to a vote at a meeting of stockholders, shall have one vote for each
share of capital stock registered in his name on the books of the Corporation.
(b) Directors are to be elected by a plurality of votes cast
by the shares entitled to vote in the election at a meeting at which a quorum is
present. Stockholders shall not be permitted to cumulate their votes for the
election of directors. If, at any meeting of the stockholders, due to a vacancy
or vacancies or otherwise, directors of more than one class of the Board of
Directors are to be elected, each class of directors to be elected at the
meeting shall be elected in a separate election by a plurality vote.
2.8 Closing of Transfer Books and Fixing Record Date. For the purpose
of determining stockholders entitled to notice of or to vote at any meeting of
stockholders, or any adjournment thereof, or entitled to receive payment of any
dividend, the Board of Directors may provide that the stock transfer books shall
be closed for a stated period not to exceed 60 days, except with respect to the
payment of dividends for which the stated period shall not exceed 30 days, nor
be less than 10 days preceding such meeting or payment date, and in such case,
written or printed notice thereof shall be mailed at least 10 days before the
closing thereof to each stockholder of record at the address appearing on the
records of the Corporation or supplied by such stockholder to the Corporation
for the purpose of notice. In lieu of closing the stock transfer books, the
Board of Directors may fix in advance a record date for any such
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determination of stockholders, such date to be not more than 60 days, except
with respect to the payment of dividends for which the date shall not be more
than 50 days, and, in case of meeting of stockholders, not less than 10 days
prior to the date on which the particular action requiring such determination of
stockholders is to be taken.
2.9 Proxies. A stockholder may vote either in person or by proxy
executed in writing by the stockholder, or his duly authorized attorney-in-fact.
No proxy shall be valid after 11 months from the date of its execution, unless
otherwise provided in the proxy.
2.10 Voting of Shares in the Name of Two or More Persons. Where shares
are held jointly or as tenants in common by two or more persons as fiduciaries
or otherwise, if only one or more of such persons is present in person or by
proxy, all of the shares standing in the names of such persons shall be deemed
to be represented for the purpose of determining a quorum and the Corporation
shall accept as the vote of all such shares the votes cast by him or a majority
of them and if in any case such persons are equally divided upon the manner of
voting the shares held by them, the vote of such shares shall be divided equally
among such persons, without prejudice to the rights of such joint owners or the
beneficial owners thereof among themselves, except that, if there shall have
been filed with the Secretary of the Corporation a copy, certified by an
attorney-at-law to be correct, of the relevant portions of the agreements under
which such shares are held or the instrument by which the trust or estate was
created or the decree of court appointing them, or of a decree of court
directing the voting of such shares, the persons specified as having such voting
power in the latest such document so filed, and only such persons, shall be
entitled to vote such shares but only in accordance therewith.
2.11 Voting of Shares by Certain Holders. Shares standing in the name
of another corporation may be voted by an officer, agent or proxy as the bylaws
of such corporation may prescribe, or, in the absence of such provision, as the
Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy. Shares standing in the name of a receiver may be voted by such receiver
without the transfer thereof into his name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed. A stockholder whose shares are pledged shall be entitled
to vote such shares until the shares have been transferred into the name of the
pledgee or nominee, and thereafter the pledgee or nominee shall be entitled to
vote the shares so transferred.
2.12 Inspectors. For each meeting of stockholders, the Board of
Directors may appoint one or more inspectors of election. If for any meeting the
inspector(s) appointed by the Board of Directors shall be unable to act or the
Board of Directors shall fail to appoint any inspector, one or more inspectors
may be appointed at the meeting by the chairman thereof. Such inspectors shall
conduct the voting in each election of directors and, as directed by the Board
of Directors or the chairman of the meeting, the voting on each matter voted on
at such meeting, and after the voting shall make a certificate of the vote
taken.
Inspectors need not be stockholders.
2.13 Action By Shareholders Without a Meeting. No action required to be
taken or which may be taken at any annual or special meeting of stockholders of
the Corporation may be taken without a meeting as set forth in the Corporation's
Articles of Incorporation, which provisions are incorporated herein with the
same effect as if they were set forth herein.
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ARTICLE III. CAPITAL STOCK
3.1 Certificates. Certificates of stock shall be issued in numerical
order, and each stockholder shall be entitled to a certificate signed by the
President or a Vice President, and the Secretary or the Treasurer, and may be
sealed with the seal of the Corporation or a facsimile thereof. The signatures
of such officers may be facsimiles if the certificate is manually signed on
behalf of a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. If an officer who has
signed or whose facsimile signature has been placed upon such certificate ceases
to be an officer before the certificate is issued, it may be issued by the
Corporation with the same effect as if the person were an officer on the date of
issue. Each certificate of stock shall state:
(a) that the Corporation is incorporated under the laws of the
Commonwealth of Pennsylvania;
(b) the name of the person to whom issued;
(c) the number and class of shares and the designation of the
series, if any, which such certificate represents; and
(d) the par value of each share represented by such
certificate, or a statement that such shares are without par value.
3.2 Transfers.
(a) Transfers of stock shall be made only upon the stock
transfer books of the Corporation, kept at the registered office of the
Corporation or at its principal place of business, or at the office of its
transfer agent or registrar, and before a new certificate is issued the old
certificate shall be surrendered for cancellation. The Board of Directors may,
by resolution, open a share register in any state of the United States, and may
employ an agent or agents to keep such register, and to record transfers of
shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificate or an assignment separate from the certificate, or by a
written power of attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of stock shall be transferred on the books
of the Corporation until the outstanding certificates therefor have been
surrendered to the Corporation.
3.3 Registered Owner. Registered stockholders shall be treated by the
Corporation as the holders in fact of the stock standing in their respective
names and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
below or by the laws of the Commonwealth of Pennsylvania. The Board of Directors
may adopt by resolution a procedure whereby a stockholder of the Corporation may
certify in writing to the Corporation that all or a portion of the shares
registered in the name of such stockholder are held for the account of a
specified person or persons. The resolution shall set forth:
(a) The classification of stockholder who may certify;
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(b) The purpose or purposes for which the certification may be
made;
(c) The form of certification and information to be contained
therein;
(d) If the certification is with respect to a record date or
closing of the stock transfer books, the date within which the certification
must be received by the Corporation; and
(e) Such other provisions with respect to the procedure as are
deemed necessary or desirable.
Upon receipt by the Corporation of a certification complying with the
above requirements, the persons specified in the certification shall be deemed,
for the purpose or purposes set forth in the certification, to be the holders of
record of the number of shares specified in place of the stockholder making the
certification.
3.4 Mutilated, Lost or Destroyed Certificates. In case of any
mutilation, loss or destruction of any certificate of stock, another may be
issued in its place upon receipt of proof of such mutilation, loss or
destruction. The Board of Directors may impose conditions on such issuance and
may require the giving of a satisfactory bond or indemnity to the Corporation in
such sum as they might determine, or establish such other procedures as they
deem necessary.
3.5 Fractional Shares or Scrip. The Corporation may (a) issue fractions
of a share which shall entitle the holder to exercise voting rights, to receive
dividends thereon, and to participate in any of the assets of the Corporation in
the event of liquidation; (b) arrange for the disposition of fractional
interests by those entitled thereto; (c) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such shares are
determined; or (d) issue scrip in registered or bearer form which shall entitle
to holder to receive a certificate for a full share upon the surrender of such
scrip aggregating a full share.
3.6 Shares of Another Corporation. Shares owned by the Corporation in
another corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
ARTICLE IV. BOARD OF DIRECTORS
4.1 Number and Powers. The management of all the affairs, property and
interest of the Corporation shall be vested in a Board of Directors. The Board
of Directors shall be divided into three classes as nearly equal in number as
possible. The initial Board of Directors shall consist of 8 persons. The
classification and term of the directors shall be as set forth in the
Corporation's Articles of Incorporation, which provisions are incorporated
herein with the same effect as if they were set forth herein. Directors need not
be stockholders or residents of the Commonwealth of Pennsylvania. In addition to
the powers and authorities expressly conferred upon it by these Bylaws and the
Articles of Incorporation, the Board of Directors may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Articles of Incorporation or by these Bylaws directed or required to
be exercised or done by the stockholders.
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4.2 Change of Number. The number of directors may at any time be
increased or decreased by a vote of two-thirds of the Board of Directors,
provided that no decrease shall have the effect of shortening the term of any
incumbent director except as provided in Sections 4.4 and 4.5 hereunder.
Notwithstanding anything to the contrary contained within these Bylaws, the
number of directors may neither be less than five nor more than 15.
4.3 Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the Chairman or the President. Unless otherwise specified therein,
such resignation shall take effect upon receipt thereof by the Chairman or the
President. More than three consecutive absences from regular meetings of the
Board of Directors, unless excused by resolution of the Board of Directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the Board of Directors.
4.4 Vacancies. All vacancies in the Board of Directors shall be filled
in the manner provided in the Corporation's Articles of Incorporation, which
provisions are incorporated herein with the same effect as if they were set
forth herein.
4.5 Removal of Directors. Directors may be removed in the manner
provided in the Corporation's Articles of Incorporation, which provisions are
incorporated herein with the same effect as if they were set forth herein.
4.6 Regular Meetings. Regular meetings of the Board of Directors or any
committee thereof may be held without notice at the principal place of business
of the Corporation or at such other place or places, either within or without
the Commonwealth of Pennsylvania, as the Board of Directors or such committee,
as the case may be, may from time to time designate. The annual meeting of the
Board of Directors shall be held without notice immediately after the
adjournment of the annual meeting of stockholders.
4.7 Special Meetings.
(a) Special meetings of the Board of Directors may be called
at any time by the Chairman, President or by a majority of the authorized number
of directors, to be held at the principal place of business of the Corporation
or at such other place or places as the Board of Directors or the person or
persons calling such meeting may from time to time designate. Notice of all
special meetings of the Board of Directors shall be given to each director by
ten days' service of the same by telegram, by letter, or personally. Such notice
need neither specify the business to be transacted at, nor the purpose of, the
meeting.
(b) Special meetings of any committee may be called at any
time by such person or persons and with such notice as shall be specified for
such committee by the Board of Directors, or in the absence of such
specification, in the manner and with the notice required for special meetings
of the Board of Directors.
4.8 Quorum. A majority of the Board of Directors shall be necessary at
all meetings to constitute a quorum for the transaction of business.
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4.9 Waiver of Notice. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. A waiver of notice signed by the
director or directors, whether before or after the time stated for the meeting,
shall be equivalent to the giving of notice.
4.10 Registering Dissent. A director who is present at a meeting of the
Board of Directors at which action on a corporate matter is taken shall be
presumed to have assented to such action unless his dissent is entered in the
minutes of the meeting, or unless he files his written dissent to such action
with the person acting as the secretary of the meeting before the adjournment
thereof, or unless he delivers his dissent in writing to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
4.11 Executive, Audit and Other Committees. Standing or special
committees may be appointed by the Board of Directors from its own number from
time to time, and the Board of Directors may from time to time invest such
committees with such powers as it may see fit, subject to such conditions as may
be prescribed by the Board. An Executive Committee may be appointed by
resolution passed by a majority of the full Board of Directors. It shall have
and exercise all of the authority of the Board of Directors, except in reference
to amending the Articles of Incorporation, adopting a plan of merger or
consolidation, recommending the sale, lease or exchange or other dispositions of
all or substantially all the property and assets of the Corporation otherwise
than in the usual and regular course of business, recommending a voluntary
dissolution or a revocation thereof, or amending these Bylaws. An Audit
Committee shall be appointed by resolution passed by a majority of the full
Board of Directors, and at least a majority of the members of the Audit
Committee shall be directors who are not also officers of the Corporation. The
Audit Committee shall review the records and affairs of the Corporation to
determine its financial condition, shall review the Corporation's systems of
internal control with management and the Corporation's independent auditors and
shall monitor the Corporation's adherence in accounting and financial reporting
to generally accepted accounting principles, as well as such other duties as may
be assigned to it by the Board of Directors. All committees appointed by the
Board of Directors shall keep regular minutes of the transactions of their
meetings and shall cause them to be recorded in books kept for that purpose in
the office of the Corporation. The designation of any such committee, and the
delegation of authority thereto, shall not relieve the Board of Directors, or
any member thereof, of any responsibility imposed by law.
4.12 Remuneration. The Board of Directors, by the affirmative vote of a
majority of the directors then in office, and irrespective of any personal
interest of any of its members, shall have the authority to establish reasonable
compensation of all directors for services to the Corporation as directors,
officers, or otherwise, or to delegate such authority to any appropriate
committee; provided, that nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of standing or special committees may
be allowed like compensation for attending committee meetings.
4.13 Action by Directors Without a Meeting. Any action which may be
taken at a meeting of the directors, or of a committee thereof, may be taken
without a meeting if a consent in writing, setting forth the action so taken or
to be taken, shall be signed by all of the directors, or all of the members of
the committee, as the case may be. Such consent shall have the same effect as a
unanimous vote.
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4.14 Action of Directors by Communications Equipment. Any action which
may be taken at a meeting of directors, or of a committee thereof, may be taken
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time.
ARTICLE V. OFFICERS
5.1 Designations. The officers of the Corporation shall be the Chairman
of the Board, a President, a Secretary and a Treasurer, as well as such Vice
Presidents (including Executive and Senior Vice Presidents), Assistant
Secretaries and Assistant Treasurers as the Board may designate, who shall be
elected for one year by the directors at their first meeting after the annual
meeting of stockholders, and who shall hold office until their successors are
elected and qualify. Any two or more offices may be held by the same person,
except that the offices of President and Secretary may not be held by the same
person.
5.2 Powers and Duties. The officers of the Corporation shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action by the Board of Directors,
the officers shall have such powers and duties as generally pertain to their
respective offices.
5.3 Delegation. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person whom
it may select.
5.4 Vacancies. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting of the Board.
5.5 Other Officers. Directors may appoint such other officers and
agents as it shall deem necessary or expedient, who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.
5.7 Term - Removal. The officers of the Corporation shall hold office
until their successors are chosen and qualify. Any officer or agent elected or
appointed by the Board of Directors may be removed at any time, with or without
cause, by the affirmative vote of a majority of the whole Board of Directors,
but such removal shall be without prejudice to the contractual rights, if any,
of the person so removed.
ARTICLE VI. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of June of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the Board of Directors. The appointment of such accountants shall be subject
to annual ratification by the stockholders.
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ARTICLE VII. DIVIDEND AND FINANCE
7.1 Dividends. Dividends may be declared by the Board of Directors and
paid by the Corporation out of the unreserved and unrestricted earned surplus of
the Corporation, or out of the unrestricted capital surplus of the Corporation,
subject to the conditions and limitations imposed by the laws of the
Commonwealth of Pennsylvania. The stock transfer books may be closed for the
payment of dividends during such periods of not in excess of 50 days, as from
time to time may be fixed by the Board of Directors. The Board of Directors,
however, without closing the books of the Corporation, may declare dividends
payable only to the holders of record at the close of business on any business
day not more than 50 days prior to the date on which the dividend is paid.
7.2. Reserves. Before making any distribution of earned surplus, there
may be set aside out of the earned surplus of the Corporation such sum or sums
as the directors from time to time in their absolute discretion deem expedient
as a reserve fund to meet contingencies, or for equalizing dividends, or for
maintaining any property of the Corporation, or for any other purpose. Any
earned surplus of any year not distributed as dividends shall be deemed to have
thus been set apart until otherwise disposed of by the Board of Directors.
7.3 Depositories. The monies of the Corporation shall be deposited in
the name of the Corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out only
by check or other order for payment of money signed by such persons and in such
manner as may be determined by resolution of the Board of Directors.
ARTICLE VIII. PERSONAL LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable for
monetary damages for any action taken, or any failure to take any action, as a
director to the extent set forth in the Corporation's Articles of Incorporation,
which provisions are incorporated herein with the same effect as if they were
set forth herein.
ARTICLE IX. BUSINESS COMBINATIONS
The affirmative vote of the holders of not less than 80% of the
outstanding shares of "Voting Shares" shall be required for the approval of
certain "Business Combination," as those terms are defined and as such approval
is set forth in the Articles of Incorporation of the Corporation which are
incorporated herein with the full force and effect as if they were set forth
herein.
ARTICLE X. NOTICES
Except as may otherwise be required by law, any notice to any
stockholder or director may be delivered personally or by mail. If mailed, the
notice shall be deemed to have been delivered when deposited in the United
States mail, addressed to the addressee at his last known address in the records
of the Corporation, with postage thereon prepaid.
ARTICLE XI. SEAL
The corporate seal of the Corporation shall be in such form and bear
such inscription as may be adopted by resolution of the Board of Directors, or
by usage of the officers on behalf of the Corporation.
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ARTICLE XII. BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes and proceedings of meetings of its stockholders
and Board of Directors; and it shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of its stockholders, giving the names and addresses of all stockholders and the
number and class of the shares held by each. Any books, records and minutes may
be in written form or any other form capable of being converted into written
form within a reasonable time.
ARTICLE XIII. AMENDMENTS
These Bylaws may be altered, amended or repealed only as set forth in
the Corporation's Articles of Incorporation, which provisions are incorporated
herein with the same effect as if they were set forth herein.
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EXHIBIT 5
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MALIZIA, SPIDI, SLOANE & FISCH, P.C.
ATTORNEYS AT LAW
1301 K STREET, N.W.
SUITE 700 EAST
WASHINGTON, D.C. 20005
(202) 434-4660
FACSIMILE: (202) 434-4661
WRITER'S DIRECT DIAL NUMBER
(202) 434-4660
September 28, 1998
Board of Directors
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
Ladies and Gentlemen:
Reference is made to the registration statement on Form SB-2 (the
"Registration Statement") being filed by First Star Bancorp, Inc., a
Pennsylvania corporation (the "Company") with the Securities and Exchange
Commission for the purpose of registering under the Securities Act of 1933, as
amended (the "Securities Act"), 68,594 shares of the Company's common stock,
$1.00 par value per share, to be issued or reserved for issuance in connection
with the mutual to stock conversion of Nesquehoning Savings Bank and
simultaneous merger with and into First Star Savings Bank, a wholly owned
subsidiary of the Company (the "Merger Conversion"), as described in the
Registration Statement.
In this regard, we have examined the Articles of Incorporation and
Bylaws of the Company, resolutions of the Board of Directors, the Agreement and
Plan of Reorganization and such other documents and matters of law as we deemed
relevant for the purpose of rendering this opinion. Based solely upon the
foregoing and relying upon the Company as to the accuracy of the facts and
documents (without independent verification), we are of the opinion that the
Common Stock, when issued in accordance with the terms of the Registration
Statement, will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion only as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. This
opinion may not be used for any other purposes without our written permission.
In giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/Malizia, Spidi, Sloane & Fisch, P.C.
Malizia, Spidi, Sloane & Fisch, P.C.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
REGISTRATION STATEMENT ON FORM SB-2 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
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