As filed with the Securities and Exchange Commission on February ^ 10, 1999
Registration No. 333-64475
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. ^ 4
TO
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(2)
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Common Stock,
$1.00 Par Value 58,840 $56.19 $3,306,250 $975.35
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid. 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
<PAGE>
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 58,840 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.
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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 (Subscription) Price Per Share: $56.19
o Number of Shares
Minimum/Midpoint/Maximum: 37,818 to 44,491 to 51,165 to 58,840
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 to $2,956,250
o Net Proceeds per Share $46.93 to $48.32 to $49.35 to $50.24
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 (717)
________
Hopper Soliday & Co., Inc.
______________, 1999
<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering and the Merger Conversion........
Summary.........................................................................
Selected Financial and Other Data...............................................
^ 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...........................................................
Recent Developments ............................................................
Management's Discussion and Analysis of Recent Developments.....................
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 ^____ of this document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
AND THE MERGER CONVERSION
Q: What do I need to do now?
A: Although you are not required to do anything, first, if you are a depositor
of Nesquehoning we would encourage you to plan to attend the special
meeting of depositors of Nesquehoning or complete and mail your proxy
approving the merger conversion. Then, after you have reviewed the
information relating to the offerings, if you wish to take advantage of the
opportunity to purchase shares of First Star Bancorp, complete your stock
order form and submit it together with the applicable purchase price.
Q: What are the Nesquehoning Depositors being asked to vote on?
A: Nesquehoning depositors are being asked to vote upon the proposed merger
conversion with First Star Bancorp.
Q: What is the Merger Conversion?
A: As explained below, the First Star Bancorp 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 Savings.
However, in order for First Star Savings 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 Savings. After the merger conversion, Nesquehoning will operate
as the downtown Nesquehoning office of First Star Savings.
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 Nesquehoning trustees
believe 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. Furthermore, it will be difficult to 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. Some of the factors considered
by the board of trustees of Nesquehoning were: (i) the age of its officers
and (ii) the geographic location and applicable demographics of its
community. Nesquehoning's two principal officers: Francis X. Koomar and
Stephen Koomar are 82 and 69 years old. The size and location of
Nesquehoning makes it unlikely that a successor to either of the two
managers could be attracted at a reasonable cost. Furthermore, to remain
independent, Nesquehoning would have to spend a considerable amount of
money on its physical plant and equipment. For example, Nesquehoning
processes all of its loans and much of its deposits manually. In order to
grow Nesquehoning would have to automate at significant costs to such a
small institution. Finally, Nesquehoning's building is in need of repair
and possibly should be replaced. Again, such expense for an institution the
size of Nesquehoning would be prohibitive. Merging with First Star
eliminates these issues.
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
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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 of
Nesquehoning believe that First Star Savings is such a bank. First Star
Savings offers a wider variety of financial products and services as well
as the convenience of a bank with six offices in the Pennsylvania counties
of Lehigh and Northampton.
In short, the Nesquehoning Trustees 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
Bancorp's shareholders, Nesquehoning's depositors and the communities they
serve.
Q. Are there potential downside factors in a Merger Conversion?
A. As with any investment decision, there are potential negative factors that
investors should consider. For example, Nesquehoning depositors will not
likely be able to take advantage of the increase in the initial stock price
that has occurred in some recent mutual-to-stock conversions. You are
strongly urged to read the entire document, including the "Risk Factors"
section beginning on page ___ of this Prospectus.
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 borrower 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.
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, Nesquehoning
depositors first, as of July 31, 1997, second, as of December 31, 1998 and
third, as of _____________, 1999 will be entitled to subscribe for shares
of First Star Bancorp common stock at a 10% discount to the market price.
The price, which is $56.19 was determined pursuant to the Merger Agreement.
Additional benefits of the merger conversion are discussed at length in a
proxy statement included with this prospectus and provided to all
depositors of Nesquehoning entitled to vote on the proposed transaction.
Such price equals the average of the last 25 average trading days of First
Star Bancorp's common stock as reported on the OTC Bulletin Board prior to
the date of this prospectus. The first trade date of the 25-day trade
period was May 7, 1998. See "Proforma Combined Condensed Financial
Statements."
Q: What happens if the Merger Conversion is not approved?
A: Nesquehoning would not convert to the stock form of ownership and the
merger would not take place. Furthermore, no shares of common stock of
First Star Bancorp will be sold pursuant to this offering. 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.
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2
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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 Bancorp's Common Stock listed on a stock exchange?
A: No. First Star Bancorp's Common Stock is not frequently traded, but when it
is traded, it is usually in privately negotiated transactions and not
through a brokerage firm. Hopper Soliday has committed, subject to market
conditions and other factors, to be a market maker in First Star's Common
Stock.
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 range 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.
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 (717) ________.
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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 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 September 30, 1998, we
had total assets of $331.6 million, deposits of $155.2 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 1993 as a result of the merger of two
Pennsylvania-chartered mutual savings associations, one of which traces its
origins to 1893. First Star Bancorp's principal business consists of attracting
deposits from the general public and originating loans secured by residential
properties. First Star Bancorp's business is conducted through its main office
located in Bethlehem, Pennsylvania and five branch offices. See pages ___ to
___.
Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
(712) 669-6521
Nesquehoning is a Pennsylvania-chartered mutual holding company
established in 19____. Nesquehoning primarily makes loans to residential
properties from funds received through deposits. At September 30, 1998,
Nesquehoning had total assets of $16.5 million, deposits of $14.1 million and
equity of $2.2 million.
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in First Star Bancorp'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.
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4
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These provisions include: restrictions on the acquisition of First Star
Bancorp'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 66
2/3% shareholder vote requirement 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 First Star
Bancorp more difficult. In addition, the effect of these provisions could be to
limit the trading price potential of First Star Bancorp common stock.
The overall effect of these provisions: (1) may result in First Star
Bancorp being less attractive to a potential acquiror; (2) may be to deter a
future non-negotiated takeover offer that a majority of the shareholders might
possibly view to be in their best interest as the offer might include a
substantial premium over the market price of the First Star Bancorp's common
stock at that time; and (3) may result in shareholders receiving less for their
shares than otherwise might be available in the event of a takeover attempt.
Furthermore, these provisions may have the effect of entrenching management
against the wishes of the shareholders. See "Restrictions on Acquisition of
First Star Bancorp, Inc." and "--Voting Control by Directors and Officers."
The Stock Offering
We are offering between 37,818 and 51,165 shares of common stock at
$56.19 per share. Any increase over $2,875,000 of First Star Bancorp Common
Stock shares would require the approval of the Pennsylvania Department of
Banking (the "Department") and Non-Objection from the Federal Deposit Insurance
Corporation ("FDIC").
Stock Purchases
The shares of common stock will be offered on the basis of the
priorities described in this prospectus. If you are a ^ depositor of
Nesquehoning Savings Bank, 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
Only ^ depositors of Nesquehoning will receive 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 Nesquehoning Savings Bank 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 21, 1998, and updated on January 5, 1999, the estimated
valuation range of Nesquehoning was between $2,125,000 and $2,875,000 (with a
midpoint of $2,500,000). The estimated valuation range of the shares is
Nesquehoning's estimated market value after giving effect to the sale of shares
in this offering.
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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 $56.19 price per share was determined pursuant to the terms
of the Merger Agreement between First Star and Nesquehoning. Such price is a 10%
discount on the average of the average of the last twenty-five (25) ^ trading
days of the common stock of First Star Bancorp prior to the date of this
Prospectus. The first trade of the 25-day trade period was May 7, 1998. See "Pro
Forma Combined Condensed Financial Statements" "-Market for First Star Bancorp's
Common Stock" and "Risk Factors - Lack of Active Market for Common Stock." The
independent appraisal will be updated before we complete the Merger Conversion.
If the estimated valuation range of Nesquehoning is either below $2,125,000 or
above $3,306,250, 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 ___________, 1999. Any community offering or syndicated
community offering may terminate at any time without notice, but no later than
______________, 2001, 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. An employee stock ownership plan is expected to purchase
up to 10% of the stock sold in the offering. We also intend to implement a stock
option plan and reserve for issuance a number of shares equal to 10% of the
shares sold in the offering, which may benefit the President and other officers
and ^ trustees 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.
Use of the Proceeds Raised from the Sale of Common Stock
The net proceeds First Star Bancorp receives from the sale of its
common stock will be used for general corporate purposes, including loan
originations and investment in mortgage-backed and investment securities. First
Star Bancorp will also lend a portion of the net proceeds to First Star Savings
Bank's Employee Stock Ownership Plan to purchase up to 10% of the common stock
sold in the offering. See page ______.
Dividends
First Star Bancorp currently does not pay cash dividends on its common
stock. We may however, at a later time reexamine our dividend policy, however,
at this time, we have no plans to pay dividends in the foreseeable future. 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. Hopper Soliday, subject to market and other conditions, intends to
make a market in First Star Bancorp's ^ common stock. See page ____.
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Conditions to Completion of the Offering and Issuance of the Stock
The stock offering and merger conversion are contingent upon the
receipt of all required regulatory approvals, approval by the depositors of
Nesquehoning, the Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking, and the sale of at least the minimum ^ amount of common
stock offered. In the event these approvals are not obtain, the offering could
be delayed or terminated.
Important Risks in Owning First Star Bancorp, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read
the entire prospectus, including the "Risk Factors" section on pages ___ to ___
of this document.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We are providing the following summary consolidated financial
information about First Star Bancorp, Inc. for your benefit. The June 30
information is derived from First Star Bancorp, Inc.'s audited consolidated
financial statements. The September 30 information was prepared internally and
is unaudited. The following information is only a summary and you should read it
in conjunction with First Star Bancorp, Inc.'s consolidated financial statements
and notes beginning on page F-1.
Selected Financial Data
<TABLE>
<CAPTION>
At
September 30, At June 30,
------------- ------------------------------------
1998 1998 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount of:
Assets.......................................... $331,643 $316,102 $270,899 $181,582
Loans receivable, net(1)........................ 179,322 175,298 149,476 144,299
Mortgage-backed securities available
for sale...................................... 77,617 76,035 74,736 19,417
Investment securities available for sale........ 59,189 47,724 28,535 5,279
Cash and cash equivalents....................... 1,266 2,242 3,310 3,680
Deposits........................................ 155,236 145,096 118,662 114,266
FHLB advances................................... 150,647 144,485 129,400 50,571
Subordinated debentures......................... 5,480 5,480 5,480 1,480
Stockholders' equity............................ 15,987 15,113 12,015 10,570
Other Data
Number of:
Real estate loans outstanding................... 3,155 2,928 2,812 2,738
Deposit accounts................................ 16,564 15,922 14,394 14,102
Offices......................................... 6 6 6 5
Tangible book value per share, fully
diluted(2).................................... $27.48 $26.79 $22.93 $21.08
</TABLE>
- ------------------------
(1) Does not include loans available for sale of $0, $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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Summary of Operations
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30, Year Ended June 30,
-------------------- -----------------------------------
1998 1997 1998 1997 1996
-------- --------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest income...................................... $ 5,952 $ 5,174 $21,240 $16,193 $13,379
Interest expense..................................... 4,165 3,446 14,610 10,406 8,907
------ ------ ------ ------ -----
Net interest income................................ 1,787 1,728 6,630 5,787 4,472
Provision for loan losses............................ 97 90 385 220 244
------- ------- ------ ------ -----
Net interest income after provision
for loan losses.................................. 1,690 1,638 6,245 5,567 4,228
Non-interest income.................................. 159 458 1,759 720 548
Non-interest expenses............................... 1,001 881 3,581 4,036(1) 2,848
------ ------ ------ ------ -----
Income before income taxes.......................... 848 1,217 4,423 2,251 1,928
------ ------ ------
Provision for income taxes.......................... 316 447 1,607 741 658
------ ------ ------ ------ ------
Net income......................................... 533 770 2,816 1,510 1,270
------ ------ ------
Less preferred dividends............................. (11) (11) (45) (44) (45)
------- ------- ------- ------- -------
Net income applicable to common
stockholders....................................... $ 521 $ 758 $ 2,771 $ 1,465 $ 1,225
======== ======== ======== ======= ========
Earnings per common share -- basic................... $ 0.70 $ 1.02 $ 5.05 $ 3.55 $ 3.02
Earnings per common share -- assuming
full dilution...................................... $ 0.68 $ 1.00 $ 4.90 $ 3.44 $ 2.94
Dividend payout ratio (2).......................... 2.06% 2.85% 2.70% 5.69% 6.80%
</TABLE>
- ---------------------
(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.
(2) Includes dividends paid on Series A Preferred Stock.
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Key Operating Ratios
<TABLE>
<CAPTION>
At or for the
Three Months Ended At or For the Year Ended
September 30, June 30,
----------------------------- ------------------------------------------
1998(1) 1997(1) 1998 1997(2) 1996
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets).................. .66% 1.13% .96% .67% .69%
Return on average equity (net income
divided by average equity)........................ 13.75 23.68 20.76 13.37 12.91
Average stockholders' equity to average
assets ratio...................................... 4.77 4.77 4.62 4.99 5.35
Equity to assets at period end...................... 4.82 4.78 4.78 4.44 5.82
Net interest rate spread............................ 2.08 2.27 2.09 2.33 2.57
Net yield on average interest-earnings
assets(3)......................................... 7.56 7.66 7.59 7.71 7.72
Non-performing loans to total assets................ .75 1.57 .98 1.41 2.24
Average interest-earning assets to average
interest-bearing liabilities...................... 104.70 104.92 105.28 104.95 104.81
Net interest income after provision for loan
losses, to total other expenses................... 168.83 185.93 174.39 137.93 148.46
Non-performing loans to total loans................. 1.38 2.70 1.76 2.56 2.81
</TABLE>
- --------------
(1) Annualized, where appropriate.
(2) For 1997, return on average assets and return on average equity, excluding
the effect of the special assessment to recapitalize the SAIF (see footnote
1 on page 8), were .88% and 17.21%, respectively.
(3) Net interest income as a percentage of average interest-earning assets.
- --------------------------------------------------------------------------------
10
<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,
thereby making our portfolio vulnerable to increased market rates of interest.
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
First Star Bancorp's 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. 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.
11
<PAGE>
Possible Decline in the Market for, or Price of Common Stock After the Offering
First Star Bancorp's common stock is being offered to ^ Nesquehoning
depositors at a 10% discount to the market price is determined pursuant to the
merger agreement between First Star and Nesquehoning, and the purchase price may
be less than the market price of our common stock on the date the merger
conversion is completed. Therefore 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,
Nesquehoning depositors will not likely be able to take advantage of the
increase in the initial stock price that has occurred in some recent
mutual-to-stock conversions. Furthermore, it is possible that the receipt,
exercise, or lapse of subscription rights may result in tax liability for
certain depositors. In such case, depositors may also be inclined to sell our
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 our 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^" and "--Effects of
the Merger Conversion on Depositors and Borrowers of Nesquehoning Savings
Bank--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 First Star Bancorp for purposes of the federal
securities laws, the First Star Bancorp 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 currently intend to mail the
certificates representing common stock in the merger conversion within five days
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 First Star Bancorp'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 First
Star Bancorp'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 ^
66 2/3% shareholder vote requirement 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 First Star
Bancorp more difficult. In addition, the effect of these provisions could be to
limit the trading price potential of ^ First Star Bancorp common stock.
The overall effect of these provisions: (1) may result in First Star
Bancorp being less attractive to a potential acquiror; (2) may be to deter a
future non-negotiated takeover offer that a majority of the
12
<PAGE>
shareholders might possibly view to be in their best interest as the offer might
include a substantial premium over the market price of the First Star Bancorp's
common stock at that time; and (3) may result in shareholders receiving less for
their shares than otherwise might be available in the event of a takeover
attempt. Furthermore, these provisions may have the effect of entrenching
management against the wishes of the shareholders. 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 13.9% of the common
stock offered in the merger conversion. These purchases together with common
stock and common stock equivalents currently owned by ^ First Star Bancorp's
officers 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 very 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 First Star Bancorp's
articles of incorporation. See "Proposed Purchases by Directors and Officers of
Nesquehoning Savings Bank," "Management of First Star Bancorp, Inc.^,"
"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
our stock to Nesquehoning officers and directors through ^ equal to 10% of the
stock sold in the offering. If the shares for the stock options are issued from
our authorized but unissued stock, your voting interests in the offering may be
diluted by up to approximately 9.4% and the trading price of our stock may
potentially be affected. 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 First Star
Bancorp. 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 Savings is currently running test programs and has advised us that it
expects to resolve this potential problem by June 30, 1999. 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 Bancorp. We expect to spend approximately
13
<PAGE>
$100,000 through June 30, 1999 for year 2000 compliance. See "Management's
Discussion and Analysis -- Year 2000 Readiness Disclosure."
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 Nesquehoning's depositors 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 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.
Your Subscription Rights May Be Taxable
We have received an opinion from Feldman Financial Advisors that, under
Feldman Financial's valuation, the subscription rights granted to depositors to
purchase First Star Bancorp common stock have no value. However, Feldman
Financial's valuation is not binding on the Internal Revenue Service. If the
Internal Revenue Service determines that those subscription rights have value,
then receipt of those rights could result in a taxable gain to you. Whether
subscription rights have value is an inherently factual determination. For
further discussion regarding tax aspects, see "The Merger Conversion Effects of
Merger Conversion on Depositors and Borrowers of Nesquehoning Savings Bank^--Tax
Effects."
14
<PAGE>
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 offering may not be
sold for at least one year. The table assumes that 44,491 shares (the midpoint
of the estimated valuation range) of the common stock will be sold at $56.19 per
share and that sufficient shares will be available to satisfy subscriptions in
all categories. The maximum purchase limitation is $100,000 of First Star
Bancorp common stock.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name(1) Position Purchased Purchased Sold(2)
- ---------------------- ---------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph F. Arieta Trustee 890 $ 50,000 2.0
William P. Gardiner Trustee 890 50,000 2.0
Martin S. Kovich, Jr. Trustee 890 50,000 2.0
Francis X. Koomar Trustee, President and
Chairman of the Board 1,779 100,000 4.0
Stephen P. Koomar Vice President,
Secretary and
Managing Officer 890 50,000 2.0
------ ------- ----
5,339 $300,000 12.0%
====== ======= ====
</TABLE>
- -------------------
(1) There are two officers and/or directors of First Star Savings Bank who are
also eligible depositors of Nesquehoning. Such individuals, based on the
sale of 44,491 shares of common stock, intend to purchase approximately
3,558 shares or 8.0% of common stock in the offering.
(2) Based on the sale of 44,491 shares of common stock.
USE OF PROCEEDS
Based on the Appraised Value of $2,500,000 (the midpoint of the
Estimated Valuation Range) and a price of $56.19 per share, First Star Bancorp
estimates it will receive $2,150,000 in net proceeds from the sale of our common
stock offered hereby. First Star Bancorp intends to use a portion of the net
proceeds it retains to make a loan directly to the Bank's Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase stock in the offering.
The net proceeds will most likely be utilized by First Star Bancorp for general
corporate purposes to expand investment and lending, internal growth, and
possible external growth through the expansion and refurbishment of its branch
office system within its existing market areas, including the installation of
automated teller machines ("ATMs"), technological advancements and expansion of
its commercial and consumer lending programs. Except as disclosed elsewhere in
this document, there are no current agreements or arrangements regarding
expansion. See "Management's Discussion and Analysis - Results of Operations for
the Three Months Ended September 30, 1998 - Operating Expenses. Net proceeds may
also be used by First Star Savings to make contributions to the ESOP which in
turn would be used to repay the loan from First Star Bancorp.
In the event the ESOP does not purchase common stock in the offering,
the ESOP may purchase shares of common stock in the market after the merger
conversion. In the event the purchase price of
15
<PAGE>
the common stock is higher then $56.19 per share, the amount of proceeds
required for the purchase by the ESOP will increase and the resulting
stockholders' equity will decrease.
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 common
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. Payments for shares made through withdrawals from existing
Nesquehoning deposit accounts will not result in the receipt of new funds for
investment by First Star Bancorp but will result in a reduction of the combined
entity's deposits and interest expense as funds are transferred from interest
bearing certificates or other deposit accounts. The following table shows
estimated gross and net proceeds based upon $2,125,000, $2,500,000, $2,875,000,
and $3,306,250 of common stock of First Star Bancorp (respectively, the minimum,
midpoint, maximum, and maximum, as adjusted of the Estimated Valuation Range)
issued in the merger conversion at the $56.19 per share. In each case, it is
assumed that (i) 100% of the common stock is sold in the Subscription Offering;
(ii) no shares of common 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.
Maximum,
Minimum Midpoint Maximum As Adjusted
Appraised Appraised Appraised Appraised
Value(1) Value(1) Value(1) Value
-------- -------- -------- -----
(In thousands)
Number of shares to be issued.... 37,818 44,491 51,165 58,840
Subscription purchase price
per share...................... $56.19 $56.19 $56.19 $56.19
Gross proceeds................... $2,125 $2,500 $2,875 $3,306
Expenses......................... 350 350 350 350
------ ------ ------ ------
Net proceeds..................... $1,775 $2,150 $2,525 $2,969
===== ===== ===== =====
- -------------------
(1) Gross proceeds include $212,500, $250,000, $287,500, and $330,000 of
First Star Bancorp Common Stock purchased by the ESOP at the minimum,
midpoint and maximum.
DIVIDENDS
First Star Bancorp's board of directors have the authority to declare
dividends on the shares, subject to statutory and regulatory requirements. First
Star Bancorp does not currently pay cash dividends on its common stock and does
not intend to pay cash dividends in the foreseeable future. First Star Bancorp
stopped paying dividends on its common stock in 1998 to facilitate growth. 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 First Star
Bancorp 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 Regulatory Capital Compliance"^ and "The Merger Conversion --
Effects of Merger Conversion to Stock Form on Depositors and Borrowers of
Nesquehoning Savings Bank --Liquidation Account^."
16
<PAGE>
First Star Bancorp is subject to the requirements of Pennsylvania law,
which generally requires that if dividends are declared they are to be 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, dividends paid out of First Star Savings
current or accumulated earnings and profits to First Star Bancorp for federal
income tax purposes will not be considered to result in a distribution from
First Star Savings bad debt reserve. Any dividends to First Star Bancorp that
would reduce amounts appropriated to First Star Savings bad debt reserve and
deducted for federal income tax purposes would create a tax liability for First
Star Savings. The amount of additional taxable income created by the excess
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. See ^ Note 12 to our
Consolidated Financial Statements. First Star Savings does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
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 average market price and
common stock cash dividend information for our common stock. Information is
presented for each quarter of the previous calendar year. 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 26.00 24.50 .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 50.00 32.25 --
September 30 74.25 46.625
December 31 72.50 67.50 --
1999
- ----
March 31 (up to
February __)
17
<PAGE>
- -------------------
(1) Represents annualized dividend.
The last trade of our Common Stock on January 28, 1999 was at an
average price of $86.44 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. Hopper Soliday, subject to market and other conditions, has indicated it
will make a market in First Star Bancorp's common stock.
CAPITALIZATION
The following table presents, as of September 30, 1998, our historical
capitalization and the combined 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 Valuation Range
("EVR") at a price of $56.19 per share.
<TABLE>
<CAPTION>
Pro Forma Combined Capitalization
At September 30, 1998 Based on the Sale of
------------------------ --------------------------------------------------
Historical 37,818 44,491 51,165 58,840
First Star Nesquehoning Shares(1) Shares(1) Shares(1) (Shares(1)
---------- ------------ --------- --------- --------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Deposits(2) ................................ $ 155,235 $ 14,276 $ 169,512 $ 169,512 $ 169,512 $ 169,512
Borrowed funds ............................. 156,768 -- 156,768 156,768 156,768 156,768
--------- -------- --------- --------- --------- ---------
Total deposits and borrowed funds ........ $ 312,003 $ 14,276 $ 326,280 $ 326,280 $ 326,280 $ 326,280
========= ======== ========= ========= ========= =========
Stockholders' equity:
Preferred stock, $1.00 per share, 1,000,000
shares authorized; 27,520 issued ........ 28 N/A 28 28 28 28
Common stock, $1.00 par value, 2,500,000
shares authorized; total shares to be
issued as reflected ..................... 372 N/A 410 416 423 431
Additional paid-in capital ................. 8,423 N/A 10,160 10,529 10,897 11,320
Retained earnings ......................... 6,298 2,194 8,482 8,482 8,482 8,482
ESOP(3) .................................. (300) -- (513) (550) (588) (660)
Net unrealized gains on
available-for-sale securities .......... 1,166 -- 1,166 1,166 1,166 1,166
--------- -------- --------- --------- --------- ---------
Total stockholders' equity ................. $ 15,987 $ 2,194 $ 19,733 $ 20,071 $ 20,408 $ 20,765
========= ======== ========= ========= ========= =========
Total stockholders' equity
as a % of total assets ................... 4.82% 13.06% 5.66% 5.76% 5.86% 6.20%
Fully diluted book value per share of
Common Stock ............................. $ 27.48 N/A $ 31.34 $ 31.49 $ 31.63 $ 31.80
Shares outstanding ......................... 771,920 N/A 807,208 814,663 822,118 831,815
</TABLE>
- -------------
(1) Assumes all shares are sold to eligible depositors of Nesquehoning at a
price of $56.19 per share at the minimum, midpoint and maximum of the
valuation range.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common 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, $288,000, and $330,000 at the minimum, midpoint, maximum, and
maximum, as adjusted of the Estimated Valuation Range.
18
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
Set forth below is a summary of the historical regulatory capital at
September 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 Estimated 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 ..................... $ 19,010 $ 15,987 $ 2,194 $ 21,204 $ 18,181
Less: unrealized gain on securities
available for sale ............... 1,046 1,166 -- 1,046 1,166
Less: intangible assets ........... -- -- -- -- --
-------- -------- -------- -------- --------
FDIC leverage capital .............. 17,964 14,821 2,194 20,158 17,015
Plus: FDIC tier 2 capital (1) ..... 1,543 7,023 120 1,663 7,143
-------- -------- -------- -------- --------
Total FDIC risk-based capital ...... $ 19,507 $ 21,844 $ 2,314 $ 21,821 $ 24,158
======== ======== ======== ======== ========
FDIC quarterly average total assets
for leverage ratio ............... $322,181 $324,742 $ 17,318 $339,499 $342,060
FDIC net risk-weighted assets
including off - balance sheet
items ............................ $172,550 $175,640 $ 7,890 $180,440 $183,530
FDIC leverage capital ratio ........ 5.58% 4.56% 12.67% 5.94% 4.97%
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 11.31% 12.44% 29.33% 12.09% 13.16%
Minimum requirement ................ 8.00% 8.00% 8.00% 8.00% 8.00%
</TABLE>
- -----------------------------
(1) Tier 2 capital consists of the allowance for loan losses, which is limited
to 1.25% of total risk-weighted assets as detailed under regulations of the
FDIC and subordinated debentures.
(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 September 30, 1998, First Star Savings had
not been advised of any additional requirements in this regard.
First Star Savings 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 COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements give effect to the Merger Conversion on a purchase accounting basis.
These statements assume the sale of 44,491 shares of First Star Bancorp common
stock at $56.19 per share or $2,500,000 in aggregate (the midpoint of the
19
<PAGE>
Estimated Valuation Range), less offering expenses of $350,000. Furthermore,
these statements also assume that distribution of $400,000 to depositors of
Nesquehoning as of June 30, 1998 takes place as of the dates indicated. The pro
forma combined condensed balance sheet assumes the Merger Conversion took place
on September 30, 1998 and June 30, 1998 and combines First ^ Star Bancorp's
unaudited 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 transaction will be accounted for as a "purchase."
The pro forma combined condensed statements of income for the three
months ended September 30, 1998 and the year ended June 30, 1998 includes First
^ Star Bancorp's historical financial information for the three months ended
September 30, 1998 and the year ended June 30, 1998 and Nesquehoning Savings
Bank's historical financial information for the three months ended September 30,
1998 and the twelve months ended June 30, 1998 and assumes 44,491 shares of
First Star Bancorp^ common stock were sold at the midpoint of the valuation
range.
The stock price of $56.19 per share was determined by taking a 10%
discount on the average of the ^ average of the last twenty-five (25) trading
days of the common stock of First Star Bancorp, Inc. as reported by the OTC
Bulletin Board prior to the ^ date of ^ this Prospectus. These trades and the
dates are set forth below. Quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission, and may not represent actual transactions.
Average
Date of Trade Price Per Share
------------- ---------------
01/28/99 86.44
01/27/99 83.00
01/21/99 79.00
01/14/99 77.50
01/08/99 77.50
01/05/99 79.00
12/29/98 72.50
12/28/98 72.50
11/23/98 68.75
11/20/98 67.50
09/23/98 73.62
08/27/98 67.50
08/04/98 68.16
07/27/98 57.18
07/23/98 52.91
07/21/98 53.54
07/17/98 53.33
07/16/98 50.83
07/15/98 51.41
07/13/98 46.66
07/10/98 50.10
07/09/98 51.33
07/08/98 47.91
06/12/98 41.66
05/07/98 42.08
Total Average Price Per Share: ====== x 10% discount = $56.19.
20
<PAGE>
The pro forma combined condensed 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." 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."
21
<PAGE>
The pro forma condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
First Star Bancorp set forth elsewhere in this Prospectus.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
-------------------------- Conversion
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
ASSETS
<S> <C> <C> <C> <C>
Cash................................................... $ 1,013 $ 25 1,800 (1) $ 2,838
Interest bearing deposits.............................. 253 3,538 3,791
Securities/Available for sale......................... 136,806 130 136,936
Securities/Held to maturity............................ 89 89
Loans receivable, net.................................. 179,322 12,936 384 (2) 192,642
Bank premises.......................................... 656 52 11 (2) 719
Other assets........................................... 13,593 25 13,618
------- ------- ------- --------
Total assets................................. $331,643 $16,795 $ 2,195 $350,633
======= ====== ======= =======
LIABILITIES
Non-interest deposits.................................. $ 1,664 $ -- -- $ 1,664
Interest deposits...................................... 153,572 14,276 105 (2) 167,953
FHLB advances.......................................... 150,647 150,647
Subordinated debentures............................... 5,480 5,480
Other borrowed funds................................... 641 250 (3) 891
Other liabilities...................................... 3,652 325 3,977
------- ------- ------ -------
Total liabilities............................. 315,656 14,601 355 330,612
STOCKHOLDERS' EQUITY
Preferred stock........................................ 28 28
Common Stock........................................... 372 44 (1) 416
Paid-in capital........................................ 8,423 ^ 3,840 (4) 12,263
Retained earnings...................................... 6,298 2,194 (2,194)(2) 6,298
ESOP debt.............................................. (300) (250)(3) (550)
Unrealized gain........................................ 1,166 1,166
------- ------ -------- -------
Total (stockholders') equity.................. 15,987 2,194 ^ 1,440 17,821
------- ------ ---------- -------
Liabilities & equity.......................... $331,643 $16,795 $^ 1,795 $360,233
======= ====== ======= =======
</TABLE>
- ---------------
(1) Represents ^ investable cash proceeds of the offering of ^ $1,750,000,
which is net of estimated fees of $350,000 and a $400,000 distribution to
Nesquehoning depositors.
(2) To remove Nesquehoning retained earnings and mark assets and liabilities to
market value. Allocation of purchase price is based on management's best
estimate but is preliminary. ^ First Star Bancorp will perform a final
allocation of the purchase price.
(3) Represents purchase by ESOP in the offering.
(4) Represents additional paid-in-capital from the offering and additional paid
in capital from recording the assets and liabilities to market value and
removing ^ Nesquehoning Savings Bank's retained earnings.
22
<PAGE>
The pro forma condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
First Star Bancorp set forth elsewhere in this Prospectus.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
---------------------------- Conversion
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash................................................... $ 1,385 $ 65 $ 1,800 (1) $ 3,250
Interest bearing deposits.............................. 858 3,362 4,220
Securities/Available for sale.......................... 123,759 130 123,889
Securities/Held to maturity............................ -- 94 94
Loans receivable, net.................................. 176,686 12,816 377 (2) 189,879
Bank premises.......................................... 687 52 11 (2) 750
Other assets........................................... 12,727 30 12,757
------- ------ -------- --------
Total........................................ $316,102 $16,549 $ 2,188 $334,839
======= ====== ======== =======
LIABILITIES
Non-interest deposits.................................. 1,555 -- -- 1,555
Interest deposits...................................... 143,541 14,141 98 (2) 157,780
FHLB advances.......................................... 144,485 144,485
Subordinated debentures................................ 5,480 5,480
Other borrowed funds................................... 647 250 (3) 897
Other liabilities...................................... 5,281 233 5,514
------- ------ -------- -------
Total liabilities............................. 300,989 14,374 348 315,711
STOCKHOLDERS' EQUITY
Preferred stock........................................ 28 28
Common Stock........................................... 372 43 (1) 415
Paid-in capital........................................ 8,423 ^3,842 (4) 12,265
Retained earnings...................................... 5,777 2,175 (2,193) (2) 5,757
ESOP debt.............................................. (300) (250) (3) (550)
Unrealized gain........................................ 813 813
------- ------ -------- -------
Total (stockholders') equity.................. 15,113 2,175 ^ 1,440 18,728
------- ------ -------- -------
Liabilities and equity........................ $316,102 $16,549 $^ 1,788 $334,439
======= ====== ======== =======
</TABLE>
- -------------------
(1) Represents ^ investable cash proceeds of the offering of ^ $1,750,000,
which is net of estimated fees of $350,000 and a $400,000 distribution to
Nesquehoning depositors.
(2) To remove Nesquehoning Savings Bank retained earnings and mark assets and
liabilities to market value. Allocation of purchase price is based on
management's best estimate but is preliminary. ^ First Star Bancorp will
perform a final allocation of the purchase price.
(3) Represents purchase by ESOP in the offering.
(4) Represents additional paid-in-capital from the offering and additional paid
in capital from recording the assets and liabilities to market value and
removing ^ Nesquehoning Savings Bank's retained earnings.
23
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Historical
For the Three Months Ended
---------------------------------------
Pro Forma
September 30, 1998 September 30, 1998 Conversion Pro Forma
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data) Interest income:
Loans receivable.............................. $3,564 $ 256 $ 3,820
MBS........................................... 1,169 1,169
Investments................................... 1,219 50 $ 16(1) 1,285
----- ----- ------- ---------
Total interest income................ 5,952 306 16 6,274
Interest expense:
Deposits...................................... 1,881 185 2,066
Borrowings................................... 2,283 2,283
----- ----- ------- -------
Total interest expense............... 4,164 185 4,349
----- ----- ------- -------
Net interest income........................... 1,788 121 16 1,925
Provisions for loan loses..................... 98 98
----- ----- ------- --------
Net interest income after provision .......... 1,690 121 16 1,827
Operating income.............................. 159 1 160
Other expenses................................ 1,001 85 4(2) 1,090
----- ----- ------- --------
Income before taxes........................... 848 37 12 897
Income taxes.................................. 316 22 5(1) 343
----- ----- ------- --------
Net income.................................... 532 15 7 554
Dividends on preferred stock.................. (11) (11)
--- ----- ------- --------
Net income applicable to common
stockholders................................ $ 521 $ 15 $ 7 $ 543
===== ===== ======= ========
Earnings per share............................ $0.70 N/A $0.67
Earnings per assuming full dilution........... $0.68 N/A $0.65
Average shares outstanding:
Common........................................ 372,084 N/A 40,041(3) 412,125
Common assuming dilution...................... 771,920 N/A 40,041(3) 816,410
</TABLE>
- -------------------------
(1) Represents gross annualized return of 5.37% on ^ the investable cash
proceeds, a tax rate of 38.0% on the net proceeds, and a net return of
3.33% on such proceeds.
(2) Assumes the ESOP purchases 10% of ^ First Star Bancorp common stock for
$250,000 with a loan from First Star Bancorp, such loan will be paid over a
15-year period.
(3) Assumes an additional 40,041 shares are outstanding for the entire period
(44,491 shares sold in the offering, less 4,450 shares purchased by the
ESOP but not released).
24
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Historical
For the Year Ended
---------------------------------
Pro Forma
June 30, 1998 June 30, 1998 Conversion Pro Forma
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
(Dollars in thousands, except per share data) Interest income:
<S> <C> <C> <C> <C>
Loans receivable.............................. $ 13,234 $ 1,051 $ $ 14,285
MBS........................................... 4,780 14 4,794
Investments................................... 3,226 143 $ 63(1) 3,432
-------- ----- -------- --------
Total interest income................ 21,240 1,208 63 22,511
Interest expense:
Deposits...................................... 6,638 719 7,357
Borrowings.................................... 7,972 7,972
-------- ------- -------- -------
Total interest expense............... 14,610 719 15,329
-------- ------ -------- -------
Net interest income........................... 6,630 489 63 7,182
Provisions for loan loses..................... 385 385
-------- ------- -------- -------
Net interest income after provision .......... 6,245 489 63 6,797
Operating income.............................. 1,760 5 1,765
Other expenses................................ 3,582 280 16(2) 3,878
-------- ------ -------- -------
Income before taxes.......................... 4,423 214 47 4,684
Income taxes.................................. 1,607 84 18(1) 1,709
-------- ------ -------- -------
Net income.................................... 2,816 130 29 2,975
Dividends on preferred stock.................. (45) (45)
-------- ------- -------- -------
Net income applicable to common
stockholders................................ $ 2,771 $ 130 $ 29(1) $ 2,930
======== ====== ======= =======
Earnings per share............................ $5.05 N/A $ 4.98
Earnings per assuming full dilution........... $4.90 N/A $ 4.77
Average shares outstanding:
Common........................................ 295,025 N/A 40,041(3) 335,066
Common assuming dilution...................... 548,780 N/A 40,041(3) 588,821
</TABLE>
- -------------------------
(1) Represents gross annualized return of 5.37% on ^ the investable cash
proceeds, a tax rate of 38.0% on the net proceeds, and a net return of
3.33% on such proceeds.
(2) Assumes the ESOP purchases 10% of ^ First Star Bancorp common stock for
$250,000 with a loan from First Star Bancorp, such loan will be paid over a
15-year period.
(3) Assumes all 40,041 shares sold in the offering are outstanding for the
entire fiscal year (44,491 shares sold in the offering, less 4,450 shares
purchased by the ESOP but not released).
25
<PAGE>
THE MERGER CONVERSION
General
The ^ merger conversion is being conducted pursuant to the ^ Amended
Merger Conversion Agreement dated February ___, 1999 between First Star Bancorp,
First Star Savings and Nesquehoning (the "Agreement") and the Amended Plan of
Conversion of Nesquehoning (the "Plan"). The merger conversion is subject to,
among other things, approval of the Agreement and the Plan by Nesquehoning's
depositors, the FDIC and the Department. A special meeting of depositors has
been called for this purpose to be held on __________ ___, 1999 (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 First Star ^ Bancorp
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, Lehigh, Luzerne, Monroe, Northampton
and Schuykill Counties of 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 of First Star Bancorp.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the ^ merger 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 that: (i) the
^ merger conversion will qualify as a reorganization under Section 368(a)(1)(A)
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 First Star Bancorp for our stock, and (iii) no gain or
loss will be recognized by Nesquehoning by reason of the proposed ^ merger
conversion.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based on the
assumption that the subscription rights issued in connection with the ^ merger
conversion have no value. We have received
26
<PAGE>
an opinion of Feldman Financial Advisors which 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 approximately 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
community 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.
Liquidation Account. In the unlikely event of Nesquehoning's complete
liquidation in its 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.
Upon a complete liquidation after the ^ merger 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 (June 30) is less than
the amount in such account on the respective
27
<PAGE>
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 Nesquehoning 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
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
trustees 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 Nesquehoning on December 31, 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
28
<PAGE>
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: Voting Depositors (Third Priority). Voting Depositors are persons
who have a deposit account of at least $50 on _____________, 1999, the voting
record date of the special meeting of depositors of Nesquehoning. Each ^ Voting
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, ^ ESOP, and Supplemental Eligible
Account Holders. In the event there are not enough shares to fill the orders of
the Voting Depositors, the subscriptions of the Voting 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 Voting 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 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.
29
<PAGE>
Expiration Date. The Subscription Offering will expire at 12:00 noon,
Bethlehem, Pennsylvania Time, on March __, 1999 (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 first to our Employee Stock
Ownership Plan, second, to our shareholders and third, to natural persons who
reside in Pennsylvania, on a best-effort basis through Hopper Soliday & Co.,
Inc.. 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 ^ 100% of the market price as determined by
the Merger Conversion Agreement. See "Pro Forma Combined Condensed Financial
Statements." We have the right to accept or reject any order in the community
offering for any reason or for no reason.
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 ^ merger
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.
In addition to the foregoing, if a syndicate of broker-dealers
("Selected Dealers") is formed to assist in the Syndicated Community Offering,
you may pay for your shares with funds held by or deposited with a Selected
Dealer. If your order form is executed and forwarded to the Selected Dealer or
if the Selected Dealer is authorized to execute the order form on behalf of a
purchaser, the Selected Dealer will forward the order form and funds to First
Star Bancorp for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the Selected Dealer. Alternatively, Selected Dealers may solicit indications
of interest from their customers to place orders for shares. Such Selected
Dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their Selected
Dealer or authorize the Selected Dealer to execute such forms. The Selected
Dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his or her intent to purchase (the
"Debit Date") and on or before noon of the next business day following the Debit
Date will send order forms and funds to First Star Savings for deposit in a
segregated account. If such alternative procedure is employed, purchasers' funds
are not required to be in their accounts with Selected Dealers until the Debit
Date.
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 _______, 1999, 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.
If an order in the community offering is accepted, promptly after the
completion of the ^ merger conversion, a certificate for the appropriate amount
of shares will be forwarded to
30
<PAGE>
____________________________ 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 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 Hopper Soliday & Co., Inc. 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 Hopper Soliday & Co., Inc. (on terms negotiated prior to
commencement of the syndicated community offering) and Hopper Soliday & Co.,
Inc. 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. Appropriate means 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
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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 as soon as possible after receipt of this
prospectus.
The ESOP may subscribe for shares by submitting its order form along
with evidence of a loan commitment from a financial institution or First Star
Bancorp for the purchase of the shares during the community offering and by
making payment for shares on the date of completion of the ^ merger conversion.
Federal regulations prohibit ^ First Star Bancorp, First Star Savings
and Nesquehoning from lending funds or extending credit to any person to
purchase shares in the ^ merger conversion.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the ^ merger conversion will be mailed to the person(s)
at the address noted on the order form, within five days following consummation
of the ^ merger 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 and personnel from Hopper Soliday 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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<PAGE>
Marketing Arrangements
We have engaged Hopper Soliday & Co., Inc. as our financial advisor in
connection with the offering. Hopper Soliday & Co., Inc. has agreed to exercise
its best efforts to assist us in the sale of the shares in the offering. Hopper
Soliday & Co., Inc. will receive a fee of (a) 2.0% of the aggregate dollar
amount of common stock sold in the subscription offering (excluding shares sold
to Nesquehoning and First Star trustees, directors, executive officers and their
associates, and to the ESOP); (b) 1.0% of the aggregate dollar amount of common
stock sold in the community offering to those people on a list provided by us
and our shareholders; and (c) 2.0% of the aggregate dollar amount of common
stock sold in the community offering to persons other than those in (b) above.
This fee, however, will not exceed $50,000. We will also reimburse Hopper
Soliday & Co., Inc. for its out-of-pocket expenses (up to $5,000) and legal
expenses (up to $10,000). We have also agreed to indemnify Hopper Soliday & Co.,
Inc. for reasonable costs and expenses in connection with certain claims or
liabilities which might be asserted against Hopper Soliday & Co., Inc. In the
event we begin any syndicated community offering, we will pay Hopper Soliday 4%
(including those fees paid to brokers) of the aggregate dollar amount sold in
such 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 Hopper Soliday
& Co., Inc. will be working at, and supervising the operation of, the Stock
Information Center. Hopper Soliday & Co., Inc. 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 Hopper
Soliday & Co., Inc. with clerical matters and to answer questions related solely
to our business.
Stock Pricing and Number of Shares to be Issued
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.
On the basis of the above, Feldman Financial Advisors has determined,
in its opinion, that as of September 21, 1998, and updated on January 5, 1999,
the estimated market value of Nesquehoning was
33
<PAGE>
$2,500,000. ^ Applicable 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 ^ Estimated Valuation
Range. The Estimated Valuation Range will be updated prior to consummation of
the ^ merger conversion and the ^ Estimated Valuation Range 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 ^ Estimated Valuation Range 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.
Based on the independent appraisal and the terms of the Merger
Conversion Agreement, between 37,818 and 51,165 shares of common stock of First
Star Bancorp are being offered at the minimum and maximum of the valuation
range, subject to adjustment of up to 58,840 shares. The stock price of $56.19
per share was determined by taking a 10% discount on the average of the average
of the last twenty-five (25) trading days of the common stock of First Star
Bancorp, Inc. as reported by the OTC Bulletin Board prior to the date of this
Prospectus.
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.
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<PAGE>
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.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional purchase limitations. The
minimum purchase is $500.00 of Common Stock and the maximum purchase for any
individual person or persons ordering through a single account, is $100,000 of ^
First Star Bancorp common stock (or 1,779 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 ^ First
Star Bancorp common stock (or 1,779 shares). However, the ESOP may purchase up
to 10% of the shares sold. Furthermore, the Plan ^ provides that officers and ^
trustees of Nesquehoning and their associates may not purchase, in the
aggregate, more than 35% of the shares issued pursuant to the merger conversion.
Depending on market conditions and the results of the offering, the
board of ^ trustees may, if the Department agrees, increase or decrease any of
the purchase limitations without the approval of Nesquehoning's depositors 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 ^ Estimated Valuation Range 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 Voting Depositors, to fill unfulfilled subscriptions of
Voting 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
35
<PAGE>
(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 $56.19 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.
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 Sales and Purchases of Shares by Trustees and Officers
Shares purchased by trustees and officers of 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, ^ trustees and officers of
Nesquehoning and their associates 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
Nesquehoning depositor approval will not need further Nesquehoning depositor
approval unless required by the Department and /or FDIC.
Conditions and Termination
Completion of the merger conversion, including the offering, 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, (ii) the approval or
non-objection from the FDIC and the Department, and (iii) completion of the sale
of shares within 24 months following approval of the Plan by Nesquehoning's
depositors. If these conditions are not satisfied, the Plan will be terminated
and Nesquehoning will continue its business in the mutual form of organization.
We may terminate the Plan at any time prior to the meeting of Nesquehoning's
depositors 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 ^ Agreement and the Plan, the material terms of which are set
forth herein. The ^ Agreement and the Plan are attached to the proxy statement
mailed to certain depositors of Nesquehoning. Copies of the Agreement and the
Plan are available from us and should be consulted for further
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<PAGE>
information. Adoption of the Agreement and the Plan by Nesquehoning's depositors
authorizes ^ Nesquehoning to interpret, amend or terminate the ^ Agreement and
the Plan.
RECENT DEVELOPMENTS
Set forth below are summaries of historical financial and other data
regarding First Star Bancorp, Inc. This information is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes thereto of First Star Bancorp, Inc. presented elsewhere in this
Prospectus. The information at December 31, 1998, and for the three and six
months ended December 31, 1998 and 1997 is unaudited and, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
condition for the unaudited periods have been made.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of First Star Bancorp, Inc. at the dates indicated:
At December 31, At June 30,
1998 1998
--------------- -----------
(Dollars in thousands)
Total amount of:
Total assets.............................. $348,453 $316,102
Loans receivable, net(1).................. 184,280 175,298
Mortgage-backed securities, net
(available for sale)..................... 75,761 76,035
Investment securities available
for sale................................. 70,462 47,724
Cash and cash equivalents................. 5,205 2,242
Deposits.................................. 174,387 145,096
FHLB advances............................. 146,927 144,485
Subordinated debentures................... 5,480 5,480
Stockholders' equity...................... 16,125 15,113
Number of:
Real estate loans outstanding............ 3,297 2,928
Deposit accounts......................... 17,508 15,922
Offices.................................. 6 6
Tangible book value per share,
fully diluted........................... $28.21 $26.79
(1) Does not include loans available for sale of $0 and $1,388,000,
respectively.
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Summary of Operations
The following table summarizes First Star Bancorp's results of
operations for each of the periods indicated:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
------- ------- -------- -------
(In thousands)
Interest income ............ $ 6,277 $ 5,225 $12,229 $10,399
Interest expense ........... 4,431 3,615 8,596 7,061
Net interest income ...... 1,846 1,610 3,633 3,338
Provision for loan losses .. 97 100 195 190
Net interest income after
provision for loan losses 1,749 1,510 3,438 3,148
Non-interest income ........ 268 625 428 1,084
Non-interest expense ....... 994 872 1,995 1,753
Income before income taxes 1,023 1,263 1,870 2,479
Income taxes ............... 418 430 733 877
Less preferred dividends ... 11 11 22 23
Net income applicable
to common stockholders 594 822 1,115 1,579
Key Operating Ratios
The table below sets forth certain ratios of First Star Bancorp at the
dates or for the periods indicated. Ratios are annualized, where appropriate.
At or For the
Six Months Ended
December 31,
-----------------
1998 1997
------ -------
Return on average assets (net
income divided by average assets) .. .68% 1.14%
Return on average equity (net
income divided by average equity) .. 14.55 25.61
Average stockholders' equity to
assets ratio ....................... 4.63 4.78
Net interest rate spread ............. 2.04 2.05
Net yield on average interest-earning
assets ............................. 7.41 7.50
Non-performing loans to total assets . .76 1.62
Average interest-earning assets to
average interest-bearing liabilities 104.58 105.38
Net interest income after provision
for loan losses, to total other
expenses ........................... 172.33 179.58
Non-performing loans to total loans .. 1.44 2.11
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Set forth below is a brief discussion of the material changes to First
Star Bancorp's Financial Condition at December 31, 1998 and the results of
operations for the three months ended and six months ended December 31, 1998.
For further details of the changes to First Star Bancorp's Financial Condition
and results of operations in prior periods please refer to "Management's
Discussion Analysis" elsewhere in this Prospectus.
Financial Condition at December 31, 1998 and June 30, 1998
- ----------------------------------------------------------
Total assets increased at December 31, 1998, to $348.5 million from
$316.1 million at June 30, 1998, an increase of $32.1 million, or 10.2%. The
increase in total assets was attributable primarily to an increase in investment
securities which increased by $22.8 million to $70.5 million from $47.7 million
at June 30, 1998 due to the volume of purchases, primarily in "Trust Preferred
Securities," exceeding maturities and sales, and to an increase in loans
receivable which increased by $9 million to $184.3 million from $175.3 million
at June 30, 1998 due to increased volume in mortgage and commercial real estate
lending which exceeded loan repayments.
Total cash and cash equivalents increased to $5.5 million at December
31, 1998 from $2.2 million at June 30, 1998, an increase of $3.3 million, or
150%. Mortgage-backed securities decreased slightly to $75.8 million at December
31, 1998 from $76.0 million at June 30, 1998, a decrease of $.2 million, or .3%.
Deposits increased to $174.4 million at December 31, 1998, from $145.1
million at June 30, 1998, an increase of $29.3 million or 20.2%. This increase
in deposits is concentrated primarily in certificates of deposit which increased
by $25.7 million to $129.8 million from $104.1 million due primarily due to
First Star Savings' decision to offer competitive interest rates on certificate
accounts.
Advances from the Federal Home Loan Bank increased to $146.9 million at
December 31, 1998, from $144.5 million at June 30, 1998, an increase of $2.4
million or 1.7%.
Stockholders' equity increased to $16.1 million at December 31, 1998,
from $15.1 million at June 30, 1998, an increase of $1 million or 6.6 %. The
increase is mainly attributable to net income from operations which was
partially offset by a decrease 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 December 31, 1998, the Bancorp's non-performing assets were $4.0 million
compared to $4.2 million at June 30, 1998, a decrease of $200,000 or 4.8%. The
ratio of non-performing assets to total assets was 1.1% at December 31, 1998
compared to 1.3 % at June 30, 1998.
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<PAGE>
Net Income
- ----------
Net income for the three and six months ended December 31, 1998 totaled
$594,000 and $1.1 million, a decrease of $228,000 or 27.7%, and $464,000 or
18.5% due primarily to a decrease in non-interest income and an increase in
non-interest expense, offset somewhat by an increase in net interest income.
Net Interest Income
- -------------------
During the three and six months ended December 31, 1998, net interest
income increased $236,000 or 14.6%, and $295,000 or 8.8% as compared to the same
periods in 1997, due to increased interest income during both periods, offset
somewhat by an increase in interest expense.
Total Interest Income
- ---------------------
For the three and six months ended December 31, 1998, total interest
income increased by $1.1 million and $1.8 million respectively, to $6.3 million
for the three months ended December 31, 1998 from $5.2 million for the three
months ended December 31, 1997 and to $12.2 million for the six months ended
December 31, 1998 from $10.4 million for the six months ended December 31, 1997.
These increases are primarily attributable to an increase in income on
investment securities which increased by approximately $600,000 for the three
months ended December 31, 1998 and by $1.1 million for the six months ended
December 31, 1998. Interest income on loans receivable increased by
approximately $450,000 for the three months ended December 31, 1998 and by
$800,000 for the six months ended December 31, 1998.
Total Interest Expense
- ----------------------
Total interest expense increased by $816,000 for the three months ended
December 31, 1998 and by $1.5 million for the six months ended December 31,
1998. The two components of total interest expense are interest on deposits and
interest on borrowings. Interest expense on deposits increased by $438,000 and
$800,000 for the three and six months ended December 31, 1998 respectively.
Interest expense on borrowings increased by $426,000 and $730,000 for the three
and six months ended December 31, 1998, respectively.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $97,000 for the three months ended
December 31, 1998 as compared to $100,000 for the three months ended December
31, 1997, and for the six months ended December 31, 1998 was $190,000 as
compared to $195,000 for the six months ended December 31, 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.
Non-Interest Income
- -------------------
Included in other income are loan servicing income, gains and losses on
sales of mortgage-backed securities and other investments and other
miscellaneous sources of operating income.
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<PAGE>
During the three months ended December 31, 1998, other income decreased
by $357,000 to $268,000 from $625,000 for the three months ended December 31,
1997. During the six months ended December 31, 1998 other income decreased by
$656,000 to $428,000 from $1.1 million for the six months ended December 31,
1997. The primary reason for the decreases were decreases in the amount of gains
realized on the sale of mortgage-backed securities and investment securities.
During the six months ended December 31, 1998 these gains decreased by $319,000
and by $726,000 for the six months ended December 31, 1998.
Non-Interest Expenses
- ---------------------
Operating expenses increased by $122,000 and $242,000 for the three and
six months ended December 31, 1998, respectively The primary component of
operating expenses is salaries and employee benefits which increased by $80,000
and $215,000 for the three and six months ended December 31, 1998, due primarily
to normal salary adjustments.
In connection with the Merger Conversion, First Star Savings has
committed to upgrade Nesquehoning's branch with a drive-up, ATM machine and safe
deposit boxes, as well as off-street parking, none of which currently exist at
Nesquehoning. The estimated cost of the renovations is $500,000. Such costs will
be amortized over various time frames in accordance with generally accepted
accounting principles. First Star Bancorp has no formal contracts at this time
regarding the property.
First Star Bancorp believes that these expenditures will have an
overall positive effect on First Star Bancorp's franchise and shareholder value,
but also realize that the expenditures will most likely depress profitability
ratios in the short term. The Board of Directors and management also expect that
both interest income and fee income will increase as a result o the upgraded
branch office, new employees and new technology. However, it is not possible to
precisely estimate such revenue increases, if any, at this time.
Statements concerning future performance, developments, or events,
concerning expectations for growth and market forecasts, and any other guidance
on future periods, constitute forward-looking statements which are subject to a
number of risks and uncertainties, including interest rate fluctuations and
government and regulatory actions which might cause actual results to differ
materially from stated expectations or estimates.
Upon completion of the Merger Conversion, First Star Bancorp expects
increased expenses due to additional reporting requirements due to the filing of
the registration statement as well as increased costs associated with Merger
Conversion (added employees and stock purchased by the ESOP).
Regulatory Capital Requirements
- -------------------------------
Set forth below are the Bank's regulatory capital ratios at December
31, 1998 as compared to the minimum regulatory capital requirements imposed by
the FDIC (dollars in thousands).
<TABLE>
<CAPTION>
Requirement Actual Excess
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital................... $13,840 4.00% $18,537 5.36% $ 4,697 1.36%
Tier I risk-based capital.......... 7,539 4.00% 18,537 9.84 10,998 5.84
Risk-based capital................. 15,078 8.00% 20,178 10.71 5,100 2.71
</TABLE>
41
<PAGE>
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.
Forward - Looking Statements
This document contains statements that project the future operations of
First Star Bancorp which involve risks and uncertainties. First Star Bancorp's
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" beginning on page ____
of 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.
We originate fixed- and adjustable-rate real estate mortgage loans
which approximated 79% of our loan portfolio at September 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 loan originations. At September 30, 1998, adjustable-rate mortgage
loans totalled $59.5 million or 27.9% of
42
<PAGE>
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
We utilize various asset/liability models to help us monitor our
sensitivity to changes in interest rates, notably net portfolio value ("NPV")
analysis. NPV is the difference between incoming and outgoing discounted cash
flows from assets, liabilities, and off-balance sheet contracts. Our interest
rate risk is measured as the change to its NPV as a result of hypothetical
100-400 basis point ("bp") changes in market interest rates. We calculate the
NPV quarterly. The following table presents our NPV at September 30, 1998.
Changes
in Market $ %
Interest Rates NPV Amount Change Change in NPV NPV Ratio(1)
-------------- ---------- -------- -------------- -----------------
(basis points)
+400 ^ 4,601 (16,005) (77.7) 1.51%
+300 ^ 9,566 (11,040) (53.6) 3.05%
+200 ^ 14,082 (6,523) (31.7) 4.38%
+100 ^ 18,009 (2,597) (12.6) 5.47%
0 ^ 20,606 -- 0.0% 6.15%
-^ 100 ^ 17,412 (3,193) (15.5) 5.12%
-200 ^ 15,514 (5,092) (24.7) 4.50%
-300 ^ 14,046 (6,506) (31.8) 4.00%
-400 ^ 13,097 (7,509) (36.4) 3.67%
- -----------------
(1) Calculated as the estimated NPV divided by present value of total assets.
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
43
<PAGE>
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 $25.8 million, or 17.3%, to $175.3 million from $149.5 million at
June 30, 1997.
Total cash and cash equivalents decreased to $2.2 million at June 30,
1998 from $3.3 million at June 30, 1997, a decrease of $1.1 million, or 33.3%.
Investment securities increased by $19.2 million to $47.7 million at June 30,
1998 from $28.5 million at June 30, 1997 and mortgage-backed securities
increased to $76 million at June 30, 1998 from $74.7 million at June 30, 1997,
an increase of $1.3 million, or 1.7%.
Real estate owned (REO) 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. 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 22.2%. This increase
in deposits is concentrated primarily in certificates
44
<PAGE>
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 as
compared to $4.9 million at June 30, 1997, a 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 totalling $333,000 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 many
lessees continue to make their payments to The Bennett Funding Group, the
Trustee disputes the ownership of the payments 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.
The 25% reserve is an estimate of the amount needed to absorb the loss
of principal on the Bennett leases. This estimate is based upon an analysis of
the latest complex settlement proposal made by the Trustee in Bankruptcy and the
estimated impact such a settlement could have upon First Star Savings if it were
accepted. The estimate also includes an evaluation of the cash collected, the
on-going cash flow collected by the trustee, and an evaluation of possible
insurance proceeds and a cash payment account that possibly could be
recoverable.
45
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to First
Star Bancorp'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 September 30, Three Months Ended September 30,
----------------- -------------------------------------------------------------------
1998 1998 1997
----------------- ---------------------------------- -------------------------------
Average Interest Average(s) Average Interest Average(s)
Yield/Cost(5) Balance Income Yield/Cost Balance Income Yield/Cost
------------- ------- ------ ---------- ------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)........................ 7.98% 178,171 3,564 8.00% 155,264 3,142 8.09%
Investment and mortgage-backed
securities(2)............................. 6.87 140,574 2,388 6.80 111,830 2,033 7.27
------- ------ ------- -------
Total interest-earning assets............. 7.56% 318,745 5,952 7.47% 267,094 5,175 7.75%
Non-interest-earning assets................. 6,006 5,507
Total assets.............................. 324,751 272,601
Interest-bearing liabilities:
NOW accounts . ............................. 2.31% 13,514 80 2.37% 12,715 76 2.39%
Passbook and club accounts.................. 2.36 13,008 77 2.37 11,257 71 2.52
Money market demand accounts................ 4.76 15,655 186 4.75 10,768 118 4.38
Certificates of Deposit..................... 5.75 107,386 1,538 5.73 87,877 1,252 5.70
Other liabilities.......................... 5.90 154,860 2,283 5.90 131,953 1,929 5.85
------- ------- ------- -------
Total interest-bearing liabilities.......... 5.50% 304,423 $ 4,164 5.47% 254,570 $ 3,446 5.41%
------- ======= ------- =======
Non-interest-bearing liabilities............ 4,828 5,020
-------- --------
Total liabilities......................... 309,251 259,590
Retained earnings........................... 15,500 13,011
------- -------
Total liabilities and retained earnings... $324,751 $272,601
======= =======
Net interest income......................... $ 1,788 $ 1,729
======= =======
Interest rate spread(3)..................... 2.06% 2.00% 2.34%
====== ====== ======
Net yield on interest-earning assets(4)..... 2.29% 2.24% 2.59%
====== ====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 104.53% 104.71% 104.92%
====== ====== ======
</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.
(5) Annualized.
46
<PAGE>
Average Balance Sheet (continued)
The following table sets forth certain information relating to First
Star Bancorp'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>
Year Ended June 30,
---------------------------------------------------------------------
1998 1997
------------------------------- ----------------------------------
Average Interest Average Average Interest Average
Balance Income Yield/Cost Balance Income Yield/Cost
------- ------ ---------- ------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............................... $170,991 $ 13,470 7.84% $150,727 $ 11,852 7.86%
Investment and mortgage-backed securities(2)...... 114,451 7,769 6.78 65,616 4,430 6.75
------- ------ ------- -------
Total interest-earning assets.................... 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 . .................................... 14,250 311 2.18% 13,036 267 2.05%
Passbook and club accounts......................... 10,427 283 2.71 10,029 278 2.78
Money market demand accounts....................... 12,902 572 4.43 9,991 420 4.20
Certificates of Deposit............................ 96,108 5,472 5.69 81,745 4,504 5.51
Other liabilities................................. 137,734 7,972 5.79 91,328 4,937 5.41
------- ------- ------- -------
Total interest-bearing liabilities................. 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)............................ 2.05% 2.43%
====== ======
Net yield on interest-earning assets(4)............ 2.32% 2.67%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities............. 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.
47
<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>
Three Months Ended September 30, Year Ended June 30,
--------------------------------------- ----------------------------------------
1998 vs. 1997 1998 vs. 1997
--------------------------------------- ----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
--------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- -------- -------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ..................... $ 1,854 $ (145) $ (21) $ 1,688 $ 1,593 $ (30) $ (4) $ 1,559
Investment securities ................ 1,576 (69) (44) 1,463 995 76 55 1,126
Mortgage-backed securities ........... 442 (685) (61) (304) 2,104 38 29 2,171
FHLB stock ........................... 55 26 3 84 144 26 14 184
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ..... 3,928 (874) (123) 2,931 4,836 110 94 5,040
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW and money market deposits ........ 188 81 20 288 147 40 8 195
Savings and certificate accounts ..... 1,135 27 6 1,168 802 140 26 968
FHLB borrowings ...................... 1,339 65 11 1,416 2,511 347 176 3,034
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 2,662 1673 37 2,872 3,460 527 210 4,197
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income ............................... $ 1,265 $(1,047) $ (160) $ 59 $ 1,376 $ (417) $ (116) $ 843
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Results of Operations for the Three Months Ended September 30, 1998 and 1997
General. The largest components of First Star Bancorp's total income
and total expenses are interest items. As a result, First Star Savings 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 Savings 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 First Star Bancorp's assets consist of fixed rate loans,
increases in interest costs will result in a decline in First Star Bancorp's net
interest income or possibly a net interest loss.
Results of Operations. First Star Bancorp recorded net income of
$532,751 for the three months ended September 30, 1998, representing a 30.8%
decrease from the $769,732 net income recorded for the three months ended
September 30, 1997. The decrease is mainly attributable to a decrease of
$299,570 in noninterest income and an increase of $135,416 in salaries and
employee benefits, which were partially offset by an increase in net interest
income of $59,037.
48
<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 three months ended September 30, 1998,
total interest income increased to $5.9 million from $5.2 million, or 13.5%, for
three months ended September 30, 1997. This increase was due primarily to an
16.1% increase in income on loans receivable to $3.6 million at September 30,
1998 as compared to $3.1 million at September 30, 1997 and to an increase in
interest and dividends on investments of $430,878, offset somewhat by a $76,050
decrease or 6.1% in interest on mortgage-backed securities. During the same time
periods the average balance on loans receivable increased by $22.9 million, or
14.7%, and the average balance on investment securities increased by $28.7
million or 25.7%. The average balance of loans increased due to loan
originations in excess of principal repayments. The average balance of
mortgage-backed securities decreased due to principal repayment as First Star
Savings invested such funds in loans and investment securities.
Total Interest Expense. Total interest expense increased 23.5% to $4.2
million for the three months ended September 30, 1998 from $3.4 million for the
three months ended September 30, 1997. The two components of total interest
expense are interest on deposits, which increased by $364,498 or 24%, and
interest on borrowings, which increased by $354,204 or 18.4% for the three
months ended September 30, 1998 as compared to the same period in 1997. These
increases are attributable to increases in the volume of both deposits and
borrowings as described previously.
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 $97,500 for the three months ended
September 30, 1998, as compared to $90,000 for the three months ended September
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. The allowance for loan loss represents .86% of loans outstanding at
September 30, 1998.
Other Income. Included in other income are loan servicing income, gains
or losses on sales of mortgage-backed securities and other investments by First
Star Savings, and other miscellaneous sources of operating income.
During the three months ended September 30, 1998, other income
decreased to $159,721 from $459,291 or 65.2% for the three months ended
September 30, 1997. The reason for the decrease is mainly attributable to
decreases in the amount of gains realized on the sale of mortgage-backed and
investment securities which were $319,486 for the three months ended September
30, 1997 and $0 for the three months ended September 30, 1998.
49
<PAGE>
Operating Expenses. Total operating expenses increased $120,848 or
13.7% to $1,001,478 for the three months ended September 30, 1998, as compared
to $880,630 for the three months ended September 30, 1997.
The primary component of operating expenses was salaries and employee
benefits which increased $135,416 or 31% to $572,056 from $436,640 for the three
months ended September 30, 1997 due primarily to normal salary adjustments and
bonus payments based on volume and profit incentives. Other items remained
relatively stable, however, other expense decreased $30,526 or 15.4% due to a
decrease of $19,722 in the costs associated with maintaining real estate
acquired through foreclosure.
In connection with the ^ merger conversion, First Star Savings has
committed to upgrade Nesquehoning's branch with a drive-up, ATM machine and safe
deposit boxes, as well as off-street parking, none of which currently exist at
Nesquehoning. The estimated cost of the renovations is $500,000. Such costs will
be amortized over various time frames in accordance with generally accepted
accounting principles. First Star Bancorp has no formal contracts at this time
regarding the property.
First Star Bancorp believes that these expenditures will have an
overall positive effect on First Star Bancorp's franchise and shareholder value,
but also realize that the expenditures will most likely depress profitability
ratios in the short term. The Board of Directors and management also expect that
both interest income and fee income will increase as a result o the upgraded
branch office, new employees and new technology. However, it is not possible to
precisely estimate such revenue increases, if any, at this time.
Statements concerning future performance, developments, or events,
concerning expectations for growth and market forecasts, and any other guidance
on future periods, constitute forward-looking statements which are subject to a
number of risks and uncertainties, including interest rate fluctuations and
government and regulatory actions which might cause actual results to differ
materially from stated expectations or estimates.
Upon completion of the ^ merger conversion, First Star Bancorp expects
increased expenses due to additional reporting requirements due to the filing of
the registration statement as well as increased costs associated with ^ merger
conversion (added employees and stock purchased by the ESOP).
Management continues to monitor operating expenses and reduces such
expenses, where possible. The ratio of operating expense to average assets for
the three months ended September 30, 1998 was 1.24%.
Income Taxes. Income tax expense decreased $132,000 due to decreased
earnings during the period.
Results of Operations for the Years Ended June 30, 1998 and 1997
Results of Operations. First Star Bancorp recorded 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. 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.
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
50
<PAGE>
30.86% is due primarily to an increase in income on loans receivable to $13.2
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. These increases are attributable to increases
in the volume of both deposits and borrowings as described previously.
Provision 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 .84% of loans outstanding at June 30, 1998 as compared to .76% of
loans outstanding at June 30, 1997. This increase of $165,000 is a result of
increased lending activity during the fiscal year ended June 30, 1998.
Other Income. Included in other income are loan servicing income, gains
or losses on sales of mortgage-backed securities and other investments by First
Star Savings, 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 increase is mainly attributable to increases in the amount of gains realized
on the sale of mortgage-backed and investment securities which were $1,150,657
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. Loan servicing income increased by $58,863 to $284,572 for fiscal
year ended June 30, 1998 from $225,709 for fiscal year ended June 30, 1997
primarily attributable to an increase in the loan volume serviced.
Operating Expenses. Total operating expenses decreased $455,007 or
12.7% 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.
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 operating expenses and to reduce or
eliminate such expenses where possible. The ratio of operating expense to
average assets for fiscal 1998 and fiscal 1997 were 1.24% and 1.32%,
respectively
See also " - Results of Operations for the Three Months Ended September
30, 1998 and 1997 Operating Expenses".
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Liquidity and Capital Resources. First Star Savings 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, First Star Savings
may borrow from the Federal Home Loan Bank of Pittsburgh (FHLB Pittsburgh"). At
June 30, 1998, First Star Bancorp had outstanding from the FHLB of Pittsburgh
advances equal to $144.5 million as compared to the $129.4 million in
outstanding advances at June 30, 1997. Such borrowings, as a percentage of First
Star Savings total assets, equaled 45.7% at June 30, 1998 and 47.7% 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,
First Star Savings maximum borrowing capacity was $202.2 million.
At June 30, 1998, First Star Savings 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
First Star Bancorp 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. First Star Savings 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.
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The following table sets forth First Star Savings regulatory capital
position at September 30, 1998, as compared to the minimum regulatory capital
requirements imposed on First Star Savings by the FDIC.
Percentage of
Amount Average Asset
------ -------------
(Dollars
in thousands)
Leverage Capital:
Regulatory requirement........... $12,887 4.0%
Actual capital................... 17,964 5.6
------ ---
Excess........................... $ 5,077 1.6%
====== ===
Tier I Risk-Based Capital:
Regulatory requirement........... $ 6,902 4.0%
Actual Capital................... 17,964 10.4
------ ----
Excess........................... $11,062 6.4%
====== ===
Risk-based Capital:
Regulatory requirement........... $13,804 8.0%
Actual Capital................... 19,507 11.3
------ ----
Excess........................... $ 5,703 3 .3%
====== ====
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 Readiness Disclosure
Rapid and accurate data processing is essential to First Star Bancorp's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data.
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The following discussion of the implications of the year 2000 problem
for First Star Bancorp, contains numerous forward looking statements based on
inherently uncertain information. The cost of the project and the date on which
First Star Bancorp plans to complete the internal year 2000 modifications are
based on management's best estimates, which are derived utilizing a number of
assumptions of future events including the continued availability of internal
and external resources, third party modifications and other factors. However,
there can be no guarantee that these statements will be achieved and actual
results could differ. Moreover, although management believes it will be able to
make the necessary modifications in advance, there can be no guarantee that
failure to modify the systems would not have a material adverse effect on First
Star Bancorp.
First Star Bancorp places a high degree of reliance on computer systems
of third parties, such as customers, suppliers, and other financial and
governmental institutions. Although First Star Bancorp is assessing the
readiness of these third parties and preparing contingency plans, there can be
no guarantee that the failure of these third parties to modify their systems in
advance of December 31, 1999 would not have a material adverse affect on First
Star Bancorp.
First Star Bancorp's Year 2000 Plan (the "Plan") was presented to the
Board of Directors in March 1998. The Plan was developed using the guidelines
outlined in the Federal Financial Institutions Examination Council's "The Effect
of Year 2000 on Computer Systems" and is scheduled for substantial completion of
mission critical system testing and implementation by June 30, 1999. The Year
2000 Committee is responsible for the Plan with the Board of Directors receiving
Year 2000 progress reports on a quarterly basis.
The primary operating software for First Star Bancorp is through a
third party service bureau ("External Provider"). First Star Bancorp has
maintained ongoing contact with this vendor so that modification of the software
for Year 2000 readiness is a top priority and is expected to be accomplished,
though there is no assurance, by June 30, 1999. First Star Bancorp has performed
significant testing of the software utilized by the External Provider with
successful results. The External Provider has represented that the software
currently being utilized for First Star Bancorp's current operations is Year
2000 compliant.
After an onsite examination in November 1998, the FDIC raised concerns
that First Star's management did not take sufficient action in accordance with
FFIEC guidance to adequately ensure continued processing of First Star Bancorp's
data by its External Provider. Since this examination, First Star Bancorp has
participated in proxy testing of its External Provider with another financial
institution in its area. Proxy testing is a cooperative effort of a number of
financial institutions that use the same service for a third party service
bureau. First Star is testing its External Provider with another area financial
institution at one location. After completing the testing cycle in January 1999,
we believe the External Provider has made significant effort to achieve Year
2000 readiness.
First Star Bancorp has contacted all other material vendors and
suppliers regarding their Year 2000 readiness. Each of these third parties has
delivered written assurance to First Star Bancorp that ^ Year 2000 will not be
an issue or that the issue will be satisfactorily resolved prior to the end of
1999. Appropriate testing, if possible, and any related contingency plans would
be performed in the second and third quarter of 1999. First Star Bancorp has
contacted all significant customers and non-information technology suppliers
(i.e. utility systems, telephone systems, etc.), regarding their year 2000 state
of readiness with significant customers and non-information technology
suppliers. Such parties have indicated that they have established Year 2000
plans and are in various stages of remediation and testing. We are unable to
test the Year 2000 readiness of our significant suppliers of utilities. We are
relying on the utility companies' internal testing and representations to
provide the required services that drive our
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<PAGE>
data systems. First Star Savings is currently determining what recourse it would
have from such parties if they do not resolve the Year 2000 issues. All software
that is considered mission critical has been tested.
First Star Savings mailed questionnaires to approximately 45 commercial
loan customers. Such customers represent 100% of the total commercial loans
outstanding at First Star Savings at September 30, 1998. These questionnaires
were based on Appendix A of Guidance Concerning the Year 2000 Impact on
Customers, Federal Financial Institutions Examination Council (FFIEC)
Interagency Statement, March 17, 1998. This questionnaire is also used in the
underwriting for new commercial loans. First Star Savings' Year 2000 Committee
members reviewed the responses with the appropriate commercial loan officer to
rate the customers' risk levels based on the type of business and the type of
loan and collateral. First Star Savings has received favorable questionnaire
responses from its borrowers. Borrowers have established Year 2000 plans and are
testing software and contacting vendors and suppliers and plan to be ready for
Year 2000. Several borrowers are real estate holding companies that have minimal
risk. Any customers with greater than low risk level will receive follow-up
attention in the first quarter of calendar 1999.
Individual mortgage loan and consumer loan customers were not contacted
as a practical matter; it was deemed to be beyond the scope of our testing
parameters, because most of these are individuals with adequate collateral on
the loans.
Costs will be incurred to replace certain non-compliant software and
hardware. First Star Bancorp does not anticipate that direct costs for
renovating or replacing non-compliant hardware and software will exceed
$100,000, of which approximately $8,000 had been expended as of September 30,
1998. No assurance can be given that the Year 2000 Plan will be completed
successfully by the Year 2000, in which event First Star Bancorp could incur
significant costs. If the External Provider fails to maintain its system in a
compliant state or incurs other obstacles prior to Year 2000, First Star Bancorp
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the financial statements of First Star Bancorp.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
First Star Bancorp is monitoring its External Provider to evaluate
whether its data processing system will fail and is being provided with periodic
updates on the status of testing and upgrades being made by the service bureau.
If the External Provider fails, First Star Bancorp will attempt to locate an
alternative service bureau that is year 2000 compliant. If First Star Bancorp is
unsuccessful, First Star Bancorp will enter deposit and loan transactions by
hand in its general ledger and compute loan payments and deposit balances and
interest in its existing computer system. First Star Bancorp is able to do this
because of their relatively small number of loan and deposit accounts and their
internal bookkeeping system. First Star Bancorp's computer systems are
independently able to generate labels and mailings for all of First Star
Bancorp's customers. If this labor intensive approach is necessary, management
and our employees will become much less efficient. However, First Star Bancorp
believes that they would be able to operate in this manner for a limited time,
until their existing service bureau, or their replacement, is able to again
provide data processing services. If very few financial institution service
bureaus were operating in the year 2000, their replacement costs, assuming First
Star Bancorp could negotiate an agreement, could be material. First Star Savings
is currently determining what recourse it would have from its External Provider
if it does not resolve the Year 2000 issues.
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<PAGE>
As part of its contingency planning, First Star Savings will increase
its liquidity to accommodate any possible increase customer demand for cash
during the start of 2000. To ensure maximum staffing, employees may not take
vacation from December 27, 1999 through January 14, 2000 (other than bank
holidays). Furthermore, the remainder of 1999 will be used for the completion of
testing and modifying the contingency plan, as needed.
The most reasonably likely worst case scenario is that some areas where
First Star Savings has branch offices located will experience blackouts if
utility service companies are unable to provide necessary service to drive our
data systems or provide sufficient sanitary conditions to our offices. In the
event that this would happen, First Star Savings would be unable to open the
affected branches, and customers would be directed to other branch locations and
business would be transacted manually.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with First Star Bancorp, such as customers, vendors, payment system providers
and other financial institution, makes it impossible to assure that a failure to
achieve compliance by one or more of these entities would not have material
adverse impact on the operations of First Star Bancorp.
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 First Star Savings 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 First Star Bancorp's consolidated
financial statements.
Accounting for Derivative Instruments and Hedging Activities. In June
1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting for
derivative instruments, including certain instruments embedded in other
contracts, and for hedging activities. It requires that any entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has not yet determined the impact, if any, of this statement on First
Star Bancorp's consolidated financial statements.
BUSINESS OF FIRST STAR BANCORP, INC.
First Star Bancorp was formed in March 10, 1993 as a
Pennsylvania-chartered corporation to be the holding company and sole
stockholder 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
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<PAGE>
repurchases without adverse tax consequences. There are, however, no present
plans regarding diversification, acquisitions, expansion or repurchases.
The office of First Star Bancorp 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 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 Convertible 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 $146.6
million, or 80.3% of our total loans receivable portfolio at September 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 are all located within Lehigh and Northampton
Counties. Our market area includes the counties of Lehigh, Northampton, Carbon,
Bucks and, Monroe in their entireties. Carbon, Lehigh and Northampton Counties
make 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 relatively sparsely populated, while Bucks County,
considered part of metropolitan Philadelphia, is densely populated, reporting
over 544,000 residents in 1990.
Allentown, Bethlehem and Easton are the principal cities of the Lehigh
Valley (Pennsylvania), which has an aggregate population of approximately
650,000. During the past twenty years, the economy of the Lehigh Valley has
shifted from one principally dominated by manufacturing, especially the steel
industry, to an economy characterized by a diverse group of industries including
service and distribution firms, health care, high technology, manufacturing and
retailing firms. Major employers include Air Products and Chemicals, Lehigh
Valley Hospital Center, Dun & Bradstreet, Prudential Insurance Company, Lucent
Technologies and Lehigh University. As of November 1997, unemployment in Lehigh
and Northampton Counties was 4.2% and 4.1%, respectively. A recently-completed
interstate highway network through the Lehigh Valley has benefitted the local
economy by providing convenient access to
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New York, New England and Philadelphia. Carbon County (the location of
Nesquehoning's office) had unemployment at 7.4%.
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.
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The following table sets forth information concerning the types of
loans held by us.
<TABLE>
<CAPTION>
At September 30, At June 30,
---------------- ------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
----------------- --------------- -------------- -------------- -------------- --------------
$ % $ % $ % $ % $ % $ %
-------- ------ ------- ------ -------------- ------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loans:
Real Estate:
1-4 family....................... 146,585 80.27 145,722 81.81 127,054 83.11 128,335 87.38 128,614 80.05 101,459 76.83
Construction..................... 462 .25 110 .06 1,231 .80 895 .61 12,208 7.60 13,461 10.19
Multi-family and commercial...... 25,952 14.21 21,838 12.26 11,155 7.30 6,000 4.09 5,743 3.57 3,611 2.73
Commercial leases ............... 1,333 .73 1,496 .84 1,897 1.24 1.345 .92 2,009 1.25 1,925 1.46
Consumer Loans:
Home equity...................... 7,291 3.99 7,904 4.44 9,349 6.12 9,071 6.18 10,735 6.68 10,258 7.77
Auto loans....................... 320 .18 328 .18 218 .14 220 .15 323 .20 347 .26
Other............................ 669 .37 728 .41 1,976 1.29 983 .67 1,042 .65 992 .76
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans........................ 182,612 100.00 178,126 100.00 152,880 100.00 146,849 100.00 160,674 100.00 132,053 100.00
------- ====== ====== --------====== ------- ====== ------- ====== ------- ======
Less:
Loans in process................. 329 66 927 447 4,180 7,280
Deferred loan origination fees
and costs....................... 1,418 1,273 1,321 1,090 1,215 1,143
Allowance for loan losses........ 1,543 1,489 1,156 1,014 859 838
------- ------- ------- ------- ------- -------
Total loans, net................... 179,322 175,298 149,476 144,299 154,420 122,792
======= ======= ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(Dollars in thousands)
One-to-four family............. $89,808 $54,398 $144,004
Construction................... -- 462 462
Commercial leases ............. 1,131 -- 1,131
Commercial & multi-family...... 18,161 7,791 25,952
Home Equity.................... 5,673 1,617 7,291
Other consumer................. 724 240 964
------- ------- -------
Total........................ $115,497 $64,508 $179,804
======= ====== =======
The following information contains information concerning changes in
the amount of loans held by us.
<TABLE>
<CAPTION>
For the Three
Months Ended For the Years Ended
September 30, June 30,
------------ ----------------------------------------------------------
1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of period ......... $ 178,126 $ 152,880 $ 146,859 $ 162,681 $ 139,296 $ 108,534
========= ========= ========= ========= ========= =========
Loans originated:
1 to 4 family residential ... 8,611 32,399 16,241 22,754 36,464 35,917
Construction ................ 351 385 1056 767 11,302 13,052
Multi-family and commercial
real estate ............... 4,868 21,909 9,564 2,079 2,911 --
Home equity and second
mortgages ................. 1,096 2,733 4,522 3,662 4,766 5,432
Other consumer .............. 169 878 1,015 785 1,088 981
--------- --------- --------- --------- --------- ---------
Total loans originated ........ 15,095 58,304 32,398 30,047 56,531 55,382
--------- --------- --------- --------- --------- ---------
Loans sold:
Total loans sold ............ $ -- $ 7,034 $ -- $ 10,784 $ -- $ 8,092
--------- --------- --------- --------- --------- ---------
Loan principal repayments ... 10,609 26,204 26,367 35,085 33,146 16,528
Other (NET) ................. $ -- $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- ---------
Net loan activity ........... $ 4,486 $ 25,246 $ 6,031 $ (15,822) $ 23,385 $ 30,762
========= ========= ========= ========= ========= =========
Total gross loans receivable
at end of period .......... $ 182,612 $ 178,126 $ 152,880 $ 146,859 $ 162,681 $ 139,296
========= ========= ========= ========= ========= =========
</TABLE>
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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 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 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 primarily properties with five to ten 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
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<PAGE>
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/or 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. First Star Savings 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."
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
62
<PAGE>
agreement on an interest rate float, allowing us to adjust the interest rate on
the loan. At September 30, 1998, commitments to cover originations of mortgage
and commercial loans totalled $5.3 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 $2.45 million at September 30, 1998. At
September 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.
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 three months ended September 30, 1998 and 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.
63
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
At September 30, At June 30,
---------------- -----------------------------------------------
1998 1998 1997 1996 1995 1994
----------------- ------- ------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
1-4 family residential real estate ...... $1,731 $2,312 $3,166 $3,689 $2,206 $1,678
Construction ............................ -- -- -- 106 106 --
Multi-family and commercial ............. 337 336 336 -- 33 60
Commercial leases ......................... 333 333 333 333 -- --
Consumer loans:
Home equity ............................. 77 100 287 192 180 101
Other consumer .......................... 5 -- 41 73 76 54
------ ------ ------ ------ ------ ------
Total ..................................... 2,483 3,082 4,163 4,393 2,601 1,893
====== ====== ====== ====== ====== ======
Real estate owned ......................... 1,261 1,129 767 259 506 472
Other non-performing assets ............... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total non-performing assets ............... $3,744 $4,211 $4,930 $4,652 $3,107 $2,365
====== ====== ====== ====== ====== ======
Total non-accrual to net loans ............ 1.38% 1.76% 2.79% 3.04% 1.66% 1.46%
Total non-accrual to total assets ......... .75% .98% 1.54% 2.42% 1.40% 1.20%
Total non-performing assets to
total assets ............................ 1.13% 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 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
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<PAGE>
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 September 30, 1998, we had loans classified as special mention,
substandard, doubtful and loss as follows:
At
September 30,
1998
-------------
(In thousands)
Special mention............................. $ 168
Substandard................................. 3,393
Doubtful assets............................. --
Loss assets................................. --
------
Total.................................. $ 3,561
=======
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.
65
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30, At June 30,
----------------- -------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
----------------- ----------------- ---------------- ----------------- --------------- ------------------
Percent Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -------- ------ ----- ------ ----- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period
allocated to:
One-to four-family... $ 997 64.61% $ 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........ 444 28.78 395 26.53 231 19.98 117 11.54 130 15.12 110 13.11
Commercial leases.... 93 6.03 93 6.25 89 7.70 34 3.35 27 3.14 32 3.81
Consumer............. 9 .58 9 .60 19 1.65 11 1.08 23 2.67 29 3.46
------ ------ ------ ------ ------ ------ ----- ------ ----- ------ ----- ------
Total allowance...... $1,543 100.00% $1,489 100.00% $1,156 100.00% $1,014 100.00% $ 860 100.00% $ 839 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
66
<PAGE>
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 September 30, At June 30,
---------------- ------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---------------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding ................... $ 179,322 $ 176,686 $ 150,944 $ 148,503 $ 162,681 $ 139,296
========= ========= ========= ========= ========= =========
Average loans outstanding ................. 178,171 170,991 150,727 155,594 150,989 123,914
========= ========= ========= ========= ========= =========
Allowance balances (at beginning of period) 1,489 1,156 1,014 860 839 486
Provision (credit):
1-4 family residential .................. 38 226 101 209 76 223
Construction ............................ -- -- (16) (13) 19 3
Multi-family and commercial real estate . 62 165 114 (13) 27 59
Commercial leases ....................... (2) 4 29 33 (11) 28
Consumer ................................ -- (10) (8) 2 (7) 18
Net charge-offs (recoveries)
1-4 family residential .................. 44 43 73 53 83 (22)
Construction ............................ -- -- -- -- -- --
Multi-family and commercial real estate . -- -- -- -- -- --
Commercial leases ....................... -- -- -- -- -- --
Consumer ................................ -- 9 -- 11 -- --
--------- --------- --------- --------- --------- ---------
Allowance balance (at end of period) ...... 1,543 1,489 1,156 1,014 860 839
========= ========= ========= ========= ========= =========
Allowance for loan losses as a percent of
total loans outstanding ................. .86% .84% .77% .68% .53% .60%
Allowance for loan losses as a percent of
non-performing loans .................... 62.3% 48.3% 30.2% 25.0% 33.1% 44.2%
Net loans charged off as a percent of
average loans outstanding ............... .02% .03% .05% .04% .06% --
</TABLE>
REO. At September 30, 1998, we had 16 properties with an aggregate book
value of $1.3 million in real estate owned. The largest REO property had a book
value of $131,000 at September 30, 1998 and consisted of a single family
dwelling located in the Pocono Mountain section of Northeastern Pennsylvania. Of
the total amount of REO, $881,621, or 70% of the total consisted of eleven
single family dwellings located in the Pocono Mountain section of Northeastern
Pennsylvania.
Investment Activities
Investment Securities. 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 September
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
67
<PAGE>
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 September 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.
We have not experienced any significant changes in the payment patterns
of our mortgage-backed securities portfolio in the last few years.
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 September 30, At June 30,
---------------------- ------------------------------------------------
1998 1998 1997 1996
---------------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal Agencies............... $ 12,306 $ 16,529 $ 16,996 $ --
Mortgage-backed securities ....................... 77,617 76,035 74,736 19,417
Corporate debt securities......................... 44,915 29,438 9,806 5,273
Marketable equity securities....................... 1,968 1,757 1,733 6
-------- -------- -------- --------
Total securities available for sale................ $136,806 $123,759 $103,271 $24,696
======= ======= ======= ======
</TABLE>
68
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investments at September 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..................... $ -- --% $2,015 7.03% $1,726 6.28% $ 8,565 7.65% $ 12,306 7.36% $ 12,306
Mortgage-backed securities..... -- -- 526 7.22 -- -- 77,091 6.20 77,617 6.21 77,617
Corporate debt securities...... 1,009 7.01 7,213 7.36 2,726 7.88 33,967 7.14 44,915 7.22 44,915
Marketable equity securities... -- -- -- -- -- -- 1,968 6.49 1,968 6.49 1,968
------ ----- ------- ------- ------ ------
Total investments............ $1,009 7.01% $9,754 7.28% $4,452 7.26% $121,591 6.62% $136,806 6.65% $136,806
====== ===== ====== ======= ======= =======
</TABLE>
69
<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 $43
million, or 27.7%, of our deposit portfolio at September 30, 1998. Certificates
of deposit constituted $112.8 million or 72.3% of the deposit portfolio of which
$14.9 million or 9.6% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. Such deposits are offered at negotiated rates. As
of September 30, 1998, we had $691,000 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 September 30, 1998 Total Deposits
- -------- ---- ------- ------ ------------------ --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-interest demand accounts......... None --% $ 250 $ 1,664 1.07%
NOW accounts......................... None 2.10 100 13,538 8.72
Passbook and club accounts........... None 2.79 100 11,505 7.41
Money market demand.................. None 2.91 1,000 16,408 10.56
Certificates of Deposit:
Fixed Term, Fixed-rate............... 91 Days 4.50 1,000 1,046 .67
Fixed Term, Fixed-rate............... 6-12 months 4.88 1,000 48,968 31.52
Fixed Term, Fixed-rate............... 13-30 months 5.31 1,000 31,392 20.21
Fixed Term, Fixed-rate............... 31-48 months 5.40 1,000 5,395 3.47
Fixed Term, Fixed-rate............... 49-60 months 5.45 1,000 14,123 9.10
IRA deposits......................... None -- -- 11,197 7.21
------ ------
155,236 99.94%
------- ------
Accrued interest on deposits 97 .06%
------- ------
Total $155,333 100.00%
======= ======
</TABLE>
- --------------------
(1) Interest rate offerings as of September 30, 1998.
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<PAGE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At June 30,
------------------- ------------------------------------
1998 1998 1997 1996
-------------------------------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C>
Interest Rate
4.00% or less....................................... $ 33 $ -- $ -- $ --
4.01-6.00%......................................... 83,097 67,287 68,215 69,053
6.01-8.00%.......................................... 28,800 36,532 16,167 13,453
8.01% or more....................................... 141 242 1,057 718
Accrued interest on certificate accounts............ 85 63 45 23
------ -------- -------- -------
Total $112,206 $ 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.
Amount Due
-------------------------------------------------------
After
Interest Rate June 30, June 30, June 30, June 30,
1999 2000 2001 2001 Total
---- ---- ---- ---- -----
(In thousands)
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
======= ======= ======== ======== ========
The following table indicates the amount of our certificates of
deposits of $100,000 or more by time remaining until maturity as of September
30, 1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months............... $ 3,186
Three through six months.......... 6,364
Six through twelve months......... 3,279
Over twelve months................ 2,116
-------
$ 14,945
========
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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 September 30, 1998, borrowings from the
FHLB of Pittsburgh totalled $150.6 million ($24.3 million of which were
short-term borrowings maturing before September 30, 1999).
The following table sets forth the terms of our short-term FHLB
advances.
<TABLE>
<CAPTION>
Three Months
Ended During the
September 30, Year Ended June 30
--------------------- ------------------------------------------------------
1998 1998 1997 1996
--------------------- ----------------- ------------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance outstanding..................... 28,007 $ 31,481 $ 38,214 $17,042
Maximum balance at end of any month............. 32,135 45,020 55,567 29,000
Balance outstanding end of period............... 24,324 27,935 55,567 29,000
Weighted average rate during period............. 5.84% 5.90% 5.80% 6.09%
Weighted average rate at end of period.......... 5.82 5.91 5.56 6.01
</TABLE>
Subordinated Debentures. During the year ended June 30, 1992, First
Star Savings 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 First Star 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 First Star 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 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 First Star Bancorp.
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 First Star
Bancorp at various redemption prices. The Debentures are subordinated in right
of payment to all present and future Senior Indebtedness of First Star Bancorp -
The Debentures are not transferable or assignable for a period of one year from
the date of purchase.
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<PAGE>
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 September 30, 1998,
$1,480,000 of the Debentures remain outstanding.
On December 31, 1996 First Star 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% below 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 First Star 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 First Star 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 First Star Bancorp.
Approximately 98% of the 1996 Debentures are held by officers, directors or
First Star Bancorp's ESOP.
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 to the
consolidated financial statements). 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.
73
<PAGE>
Properties
We own three of our six offices and lease three of them. The net book
value of this real property at September 30, 1998, was $496,874. Our total
investment in office equipment had a net book value of $158,803 at September 30,
1998.
Year Total Book Owned
Address Opened Investment Value Lease
------- ------ ---------- ----- -----
MAIN OFFICE:
418 West Broad Street 1952 1,877,296 320,391 Owned
Bethlehem, PA 18018
BRANCH OFFICES:
358 South Walnut Street 1986 95,075 14,192 Leased(1)
Bath, PA 18014
3590 Northwood Avenue 1987 165,702 -- Leased(2)
Palmer, PA 18043
14 South Main Street 1989 7,823 2,839 Leased(3)
Nazareth, PA 18064
471-497 Wabash Street 1994 191,933 138,681 Owned
Allentown, PA 18103
11 North Main Street 1997 202,846 179,574 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 September 30, 1998 we had 45 full-time employees and 5 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: First Star Savings and
Integrated Financial Corp. Integrated Financial Corp. primarily manages a
property acquired at a sheriff sale and holds an investment in a limited
partnership. Furthermore, Integrated Financial Corp. has one wholly owned
subsidiary, Integrated Abstract, Inc., which is inactive.
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<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 material 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 First Star Savings
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 First Star Savings 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 First Star Bancorp,
First Star Savings 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
First Star Savings 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 is limited by the FDIA.
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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 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. First Star Savings, 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
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depository institutions, including First Star Savings, 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 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, First Star Savings paid a pre-tax special assessment of
$745,000. Such payment was recorded as an expense and accounted for by First
Star Savings 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 are approximately
$.064 per $100 of 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 First Star Savings, are not
members of the Federal Reserve. At September 30, 1998, First Star Savings
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
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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.
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.
First Star Savings was in compliance in both the FDIC and Pennsylvania
capital requirements at September 30, 1998. See "Historical and Pro Forma
Regulatory 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. First
Star Savings received a "satisfactory" rating in its last CRA examination in
October, 1996.
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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 First Star Savings
as transactions with non-affiliates. In addition, certain of these transactions
are restricted to a percentage of First Star Savings capital. Affiliates of
First Star Savings include the Holding Company and any company which would be
under common control with First Star Savings.
First Star Savings 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, place limits on the amount of loans
First Star Savings may make to such persons based, in part, on First Star
Savings capital position, and require certain approval procedures to be
followed. See, however, "Management of First Star ^ Bancorp, Inc. - Certain
Related Transactions."
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 September 30, 1998, First Star Savings had $150.6
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 First Star Savings 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
September 30, 1998, First Star Savings 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.
First Star Savings had no discount window borrowings at September 30, 1998.
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Regulation of First Star Bancorp
General. First Star Bancorp, 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 First
Star Bancorp 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. First Star Bancorp 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 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
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guidelines are similar to those imposed on First Star Savings by the FDIC. See
"Regulation of First Star Savings - Regulatory Capital Requirements."
Commitments to Affiliated Depository Institutions. Under Federal
Reserve policy, First Star Bancorp will be expected to act as a source of
financial strength to First Star Savings and to commit resources to support
First Star Savings 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 First Star Savings require
the support of additional capital resources, it should be anticipated that First
Star Bancorp will be required to respond with any such resources available to
it.
Restrictions Applicable to Pennsylvania-Chartered Holding Companies.
First Star Bancorp 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
First Star Bancorp knows of no person or entity other than those set
forth below who is a beneficial owner of more than 5% of ^ First Star Bancorp
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
First Star Bancorp's outstanding shares of ^ common stock and as to ^ such stock
beneficially owned by all officers and directors of First Star Bancorp as a
group, as calculated from the lists of security holders of First Star Bancorp.
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%
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(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.
(2) Amelio Scott and Neil Scott are father and son, respectively. Tighe Scott,
a director of First Star Bancorp, 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 merger conversion.
Shares of
Common Stock
Beneficially
Year First Current Owned at Percent
Elected Term June 30, of
Name Age Director Expires 1998(1) Class
- ---- --- -------- ------- ------- -----
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 2001 101,438(5) 22.13%
Paul J. Sebastian.... 55 1986 2001 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%
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- --------------------------------
(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.
(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.
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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 First
Star Bancorp 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
First Star Bancorp'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, 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 First Star Bancorp'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 First Star
Bancorp 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 First Star Bancorp'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
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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 First Star Bancorp
and also administers First Star Bancorp's Employee Stock Compensation Program.
The current members of the Compensation Committee are Directors Parseghian,
Scott, 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 First Star Bancorp 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 First Star Savings. During fiscal 1998, each
non-employee director received a cash bonus of $1,500.
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
Compensation
Other Annual ------------ 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.
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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 Merger Agreement provides that we will enter into an
employment agreement for three years with Stephen Koomar of Nesquehoning with a
base salary of $60,000 per year.
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.
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 First Star Bancorp if permissible, or from a third
party lender. The loan is expected to be for a term of ^ 15 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., 4,449 shares, based on the midpoint of
the ^ Estimated Valuation Range). 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 12
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 participation in the plan. 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 First
Star Bancorp, 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 directors Svetik and Sebastian to
serve as ESOP administrators 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.
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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 First Star Bancorp's stockholders, at a stockholders' meeting to be
held no sooner than six months after the ^ merger conversion. Pursuant to the
plan, we will reserve for issuance 10% of the shares sold in the offering. 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 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.
First Star Bancorp 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 First Star
Bancorp. However, no purchases in the open market will be made that would
violate applicable regulations restricting purchases by First Star Bancorp. The
exercise of options and payment for the shares received would contribute to the
equity of First Star Bancorp.
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 First Star Bancorp after the merger conversion, the
board of directors believes that it is appropriate to include certain provisions
as part of First Star Bancorp's articles of incorporation to protect the
interests of First Star Bancorp 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 First Star Bancorp more difficult.
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The following discussion is a general summary of the material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions of First Star Bancorp, 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 First Star Bancorp 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 First Star Bancorp Articles of Incorporation and Bylaws
Election of Directors. Certain provisions of First Star Bancorp's
articles of incorporation and bylaws ^ impede changes in majority control of the
board of directors. First Star Bancorp's articles of incorporation provide that
the board of directors of First Star Bancorp ^ is 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 First Star Bancorp's
board. First Star Bancorp's articles of incorporation provide that the 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 First
Star Bancorp 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 First Star Bancorp 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. First Star Bancorp'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 First Star Bancorp'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 First Star Bancorp. 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,
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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 First Star Bancorp.
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 First Star Bancorp entitled to vote
generally in an election of directors.
Amendment to Articles of Incorporation and Bylaws. Amendments to First
Star Bancorp's articles of incorporation must be approved by First Star
Bancorp's board of directors and also by a majority of the outstanding shares of
First Star Bancorp's voting stock, provided, however, that approval by at least
two-thirds 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 First Star Bancorp entitled to vote in the election of directors, cast
at a meeting called for that purpose.
Benefit Plans. In addition to the provisions of First Star Bancorp'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
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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
First Star Bancorp 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 ^ 58,840 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 Bancorp. The
balance of the purchase price will be recorded for accounting purposes as
additional paid-in capital. See "Capitalization." The capital stock of First
Star Bancorp represents nonwithdrawable capital and will not be insured by us,
the FDIC, or any other governmental agency.
As of June 30, 1998, First Star Bancorp 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 NonCumulative Preferred Stock, Series A (the
"Series A Preferred Stock") issued and outstanding.
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 First Star Bancorp, 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 First Star Bancorp's
directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of First Star Bancorp, the holders of the common stock will be
entitled to receive all assets of First Star Bancorp available for distribution
in cash or in kind, after payment or provision for payment of (i) all debts and
liabilities of First Star Bancorp; (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 First Star Bancorp without first offering such shares to
existing stockholders of First Star Bancorp. The common stock is not subject to
call for redemption, and the outstanding shares of common stock when issued and
upon receipt by First Star Bancorp of the full purchase price therefor will be
fully paid and non-assessable.
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Issuance of Additional Shares. Except in the offering and possibly
pursuant to the Option Plan, First Star Bancorp 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 First Star Bancorp.
Serial Preferred Stock
No additional shares of serial preferred stock of First Star Bancorp
will be issued in the ^ merger conversion. After the ^ merger conversion is
completed, the board of directors of First Star Bancorp 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 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.
The Series A Preferred Stock currently outstanding is immediately
convertible on a one-for-one basis into the Common Stock of the Company. At
September 30, 1998, the Company had outstanding $1,480,000 principal amount of
Adjustable-Rate Mandatorily Convertible Debentures Due 2001 (the "Debentures")
which are convertible into Series A Preferred Stock at a rate of $15.625
principal amount of debenture or 1,013 shares of Series A Preferred Stock per
$10,000 face amount of Debentures. On December 31, 1996, the Company sold
$4,000,000 principal amount of Adjustable-Rate Mandatorily Convertible
Debentures due December 31, 2008 ("Series B Debentures") which are convertible
into Series B Preferred Stock at a rate of $35.00 principal amount of debenture
or 1,029 shares of Series B Preferred Stock per $25,000 face amount of Series B
Debentures. As of September 30, 1998, $4,000,000 principal amount of Series B
Debentures were outstanding.
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
First Star Bancorp pursuant to the foregoing provisions, or otherwise, First
Star Bancorp 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.
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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. First Star Bancorp's Articles of Incorporation (the
"Articles") require indemnification of directors, officers, employees or agents
of First Star Bancorp to the full extent permissible under Pennsylvania law.
First Star Bancorp may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of First Star
Bancorp or is or was serving at the request of First Star Bancorp 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 First Star Bancorp 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
Hopper Soliday & Co., Inc. will be passed upon by Rhoads & Sinon, Harrisburg,
Pennsylvania. 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 consolidated financial statements of First Star Bancorp, Inc. and
subsidiaries as of June 30, 1998 and 1997 and for each of the three years in the
period ended June 30, 1998, appearing in this document have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report which
appears elsewhere in this document, and have been so included in reliance upon
the report of such firm given upon their authority 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.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
First Star Bancorp 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 First Star Bancorp, 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.
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First Star Savings has filed an Application for Approval of a Merger
Company (the "Applications") with the Department with respect to the Conversion
Merger. In addition, First Star Savings 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 ^ Agreement and the Plan as well as copies of the ^
articles and ^ bylaws of each of First Star Bancorp and First Star Savings may
be obtained promptly and without charge from First Star Savings by contacting
__________, Secretary, First Star Bancorp, Inc., 418 West Broad Street,
Bethlehem, Pennsylvania 18018 at (610) 691-2333.
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First Star Bancorp, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................................................ F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997.................................................... F-2
Consolidated Statements of Earnings for the Years Ended June 30, 1998, 1997 and 1996...................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996........................................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996............................................................................................. F-5
Notes to Consolidated Financial Statements.................................................................. F-7
Unaudited Consolidated Balance Sheet as of September 30, 1998............................................... S-1
Unaudited Consolidated Statements of Earnings for the Three Months Ended
September 30, 1998 and 1997............................................................................. S-2
Unaudited Consolidated Statements of Changes in Stockholders' Equity for
the Three Months Ended September 30, 1998................................................................. S-3
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997............................................................................... S-4
Unaudited Notes to Consolidated Financial Statements........................................................ S-6
</TABLE>
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
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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.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
August 19, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------------
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
Convertible 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 817,751 614,235
Accrued expenses 209,897 345,836
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:
Convertible 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.
F-2
<PAGE>
<TABLE>
<CAPTION>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------
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 63,071 101,611
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 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 (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
============== ============== ==============
BASIC EARNINGS PER SHARE $ 5.05 $ 3.55 $ 3.02
============== ============== ==============
DILUTED EARNINGS PER SHARE $ 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.
F-3
<PAGE>
<TABLE>
<CAPTION>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 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 1,509,557
Issuance of stock to ESOP (400,000) (400,000)
Cash dividends paid on:
Preferred stock (44,464) (44,464)
Common stock (41,399) (41,399)
Unrealized gain on
available for sale
securities, net of tax 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
Net income 2,816,223 2,816,223
Stock dividends paid 113,691 5,390,069 (5,503,760)
Repayment of ESOP debt 100,000 100,000
Cash dividends paid on:
Preferred stock (45,150) (45,150)
Common stock (31,007) (31,007)
Unrealized gain on
available for sale
securities, net of tax 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.
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST STAR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 (1,087,586) (283,353)
Investment securities (63,071) (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
Principal collected on mortgage loans held for sale 80,376 186,171 352,688
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 2,491,053 728,270 1,662,328
--------------- --------------- --------------
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 45,893,070 32,538,313 36,067,048
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 (45,394,399) (84,519,361) 1,961,882
--------------- --------------- --------------
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 400,000
Repayment of ESOP loan (100,000) (135,000)
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 (8,543,586)
--------------- --------------- --------------
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.
F-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.
F-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
F-7
<PAGE>
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.
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, 1997 or 1996 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 is in the process
of evaluating this statement and does not know what impact, if any, this
F-8
<PAGE>
statement will have on the Bancorp's consolidated results of operations or
financial position when adopted.
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 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 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 22,374,337 22,452,490 11,803,615 11,803,140
-------------- ------------ ---------- -----------
Total $ 45,978,435 $ 45,967,450 $ 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.
F-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>
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 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:
June 30,
-------------------------------
1998 1997
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
============= =============
F-10
<PAGE>
Following is a summary of changes in the allowance for loan and lease
losses:
Year Ended June 30,
------------------------------------------
1998 1997 1996
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
=========== =========== ===========
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 of 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:
Year Ended June 30,
--------------------------------------------
1998 1997 1996
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
=========== =========== ===========
F-11
<PAGE>
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 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:
June 30,
-------------------------------
1998 1997
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
=========== ===========
F-12
<PAGE>
8. DEPOSITS
Deposits consist of the following major classifications:
June 30, 1998
---------------------------------------------
Effective
Rate of
Amount Percent Interest
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 %
====
June 30, 1997
---------------------------------------------
Effective
Rate of
Amount Percent Interest
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 %
====
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>
F-13
<PAGE>
A summary of interest expense on deposits is as follows:
Year Ended June 30,
------------------------------------------
Type of Account 1998 1997 1996
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
========== ========== ==========
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
June 30,
---------------------------------------------------------------
1998 1997
---------------------------- ------------------------------
Maturity Date Amount Percent Amount Percent
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 %
============ ==== ============ ====
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.
F-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 (35,466) (35,466) 159,042 159,042
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $1,275,500 $ 331,500 $1,607,000 $ 564,000 $ 177,000 $ 741,000 $ 507,000 $ 150,500 $ 657,500
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
F-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 5.0 116,820 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 36.3 % $741,000 32.9 % $657,500 34.1 %
========== ==== ======== ==== ======== ====
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts
are as follows:
June 30,
-----------------------
1998 1997
Deferred tax assets:
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
========= =========
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
F-16
<PAGE>
over a six-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 measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 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 % $ 14,675,032 5 %
Tier 1 Capital (to Risk Weighted Assets) 17,454,000 11.10 6,288,520 4 9,432,780 6
Total Capital (to Risk Weighted Assets) 18,943,000 12.05 12,577,040 8 15,721,300 10
As of June 30, 1997:
Tier 1 Capital (to Average Assets) $ 14,953,000 6.12 % $ 9,774,000 4 % $ 12,218,000 5 %
Tier 1 Capital (to Risk Weighted Assets) 14,953,000 11.61 5,153,000 4 7,729,000 6
Total Capital (to Risk Weighted Assets) 15,510,000 12.04 10,306,000 8 12,882,000 10
</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.
F-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 contribute
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 certain 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 are as follows:
Year Ending June 30,
1999 $ 72,000
2000 66,000
2001 66,000
2002 48,000
2003 48,000
Thereafter 240,000
---------
Total $ 540,000
=========
F-18
<PAGE>
The Company has employment agreements with two of its executive officers,
the terms of which are five years. Under the agreements, these officers
receive 200% of their salaries if they are involuntarily terminated or
voluntarily terminated for good reason. The Company can terminate the
agreements for "cause" as defined in the agreements. The maximum liability
under these agreements at June 30, 1998 was approximately $2.9 million.
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:
Exercise Price
--------------------------------------
$15.00 $8.50 Total
Options outstanding, June 30, 1995 2,600 19,357 21,957
Options exercised 1,564 1,564
Options terminated 330 330
----- ------ ------
Options outstanding, June 30, 1996 2,600 17,463 20,063
Options exercised
Options terminated
----- ------ ------
Options outstanding, June 30, 1997 2,600 17,463 20,063
20% stock dividends 1,144 7,683 8,827
Options exercised
Options terminated
----- ------ ------
Options outstanding, June 30, 1998 3,744 25,146 28,890
===== ====== ======
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
F-19
<PAGE>
issued upon the conversion of subordinated debentures (see Note 10). The
dividend pay rate is 2% over the prime rate, adjusted monthly.
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 applicable to common stockholders $ 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 exercise 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
Number of shares purchased with option proceeds 4,801 6,575 8,237
Average shares outstanding 548,780 412,918 405,422
Treasury shares 16,455 13,488 11,826
Adjusted shares outstanding 565,235 426,406 417,248
----------- ----------- ----------
Net income per share - basic $ 5.05 $ 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
F-20
<PAGE>
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
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.
F-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.
******
F-22
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS At
September 30,
1998
<S> <C>
Cash and amounts due from depository institutions $ 1,012,926
Interest-bearing deposits 253,144
-------------
Total cash and cash equivalents 1,266,070
Investment securities available for sale (amortized cost of $58,972,948) 59,188,632
Mortgage-backed securities available for sale (amortized cost of $76,090,453) 77,617,261
Loans receivable - net 179,321,641
Accrued interest receivable on:
Loans 1,421,184
Investment securities 977,636
Mortgage-backed securities 366,353
Real estate acquired through foreclosure 1,261,477
Federal Home Loan Bank stock - at cost 7,558,700
Office properties and equipment 655,677
Investment in limited partnerships 44,837
Cash surrender value of life insurance 1,611,381
Prepaid expenses and other assets 352,206
-------------
TOTAL ASSETS $ 331,643,055
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 155,235,556
Advances from Federal Home Loan Bank 150,646,628
Convertible subordinated debentures 5,480,000
Other borrowed money 641,077
Advances by borrowers for taxes and insurance 1,377,339
Accrued interest payable 878,959
ESOP loan 300,000
Accounts payable and accrued expenses 1,396,647
-------------
TOTAL LIABILITIES $ 315,656,206
=============
Commitments and contingencies (Notes 11 and 15)
Stockholders' Equity
Convertible preferred stock, $1 par value - authorized, 1,000,000 shares; issued and outstanding, 27,520
27,520 shares
Common stock, $1 par value - authorized, 2,500,000 shares; issued and outstanding, 372,084
372,084 shares
Paid-in capital in excess of par 8,422,959
Retained earnings 6,298,491
Employee Stock Ownership Plan debt (300,000)
Unrealized gain on available for sale securities, net of tax 1,165,795
-------------
Total stockholders' equity 15,986,849
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 331,643,055
=============
</TABLE>
See notes to consolidated financial statements.
S-1
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 3,564,444 $ 3,141,633
Mortgage-backed securities 1,168,812 1,244,862
Interest and dividends on investments 1,218,949 788,071
----------- -----------
Total interest income 5,952,205 5,174,566
INTEREST EXPENSE:
Interest on:
Deposits 1,881,261 1,516,763
Short-term borrowings
Long-term borrowings 2,283,436 1,929,232
----------- -----------
Total interest expense 4,164,697 3,445,995
----------- -----------
NET INTEREST INCOME 1,787,508 1,728,571
PROVISION FOR LOAN LOSSES 97,500 90,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,690,008 1,638,571
OTHER INCOME:
Loan servicing 72,941 70,585
Gain on sales of:
Loans and mortgage-backed securities - net -- --
Investment securities - net -- 319,486
Real estate acquired through foreclosure (4,192) (6,383)
Other income 90,972 75,603
----------- -----------
Total other income 159,721 459,291
OPERATING EXPENSES:
Salaries and employee benefits 572,056 436,640
Occupancy and equipment 129,253 113,358
Federal insurance premiums 19,743 18,379
Data processing 39,874 30,208
Professional fees 43,954 54,028
Advertising 29,201 30,094
Other expense 167,397 197,923
----------- -----------
Total operating expenses 1,001,478 880,630
INCOME BEFORE INCOME TAXES 848,251 1,217,232
INCOME TAXES: 315,500 447,500
NET INCOME $ 532,751 $ 769,732
----------- -----------
DIVIDENDS ON PREFERRED STOCK (11,287) (11,287)
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 521,464 $ 758,445
=========== ===========
BASIC EARNINGS PER SHARE $ 0.70 $ 1.02
DILUTED EARNINGS PER SHARE $ 0.68 $ 1.00
WEIGHTED AVERAGE SHARES OUTSTANDING:
Per common share 372,084 372,084
Per common share - assuming full dilution 771,920 771,920
</TABLE>
See notes to consolidated financial statements
S-2
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
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, JUNE 30, 1998 $27,520 $372,084 $8,422,959 $5,777,027 $(300,000) $813,316 $15,112,906
Net income 532,751 532,751
Stock dividends paid
Repayment of ESOP debt
Cash dividends paid on:
Preferred Stock (11,287) (11,287)
Common Stock
Unrealized gain on available
for sale securities,
net of tax 352,479 352,479
------- ------- --------- --------- -------- --------- ----------
BALANCE, SEPTEMBER 30, 1998 $ 27,520 $372,084 $8,422,959 $6,298,491 $(300,000) $1,165,795 $15,986,849
======= ======= ========= ========== ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
S-3
<PAGE>
FIRST STAR BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 532,751 $ 769,732
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 97,500 90,000
Depreciation and amortization 32,846 32,511
(Gain) loss on sale of:
Investment securities (319,486)
Real estate acquired through foreclosure 4,192 6,383
Amortization of deferred and prepaid loan fees (55,484) (19,523)
Deferred income taxes (22,754) (155,432)
Changes in assets and liabilities which provided (used) cash:
Interest receivable (361,537) 56,186
Prepaid expenses and other assets (186,719) (149,368)
Accounts payable, accrued expenses and income taxes payable 368,999 728,914
Interest payable 93,470 (37,567)
------------ ------------
Net cash provided by operating activities $ 503,264 $ 1,002,350
------------ ------------
INVESTING ACTIVITIES:
Purchase of:
Mortgage-backed securities (6,909,510) (6,860,242)
Investment securities (15,131,940) (7,918,312)
Federal Home Loan Bank stock (180,700)
Proceeds from sale of:
Real estate acquired through foreclosure 123,234 331,571
Mortgage-backed securities 15,561,222
Federal Home Loan Bank stock 550,800
Long-term loans originated (15,095,271) (14,982,889)
Purchases of premises and equipment (1,298) (20,706)
Decrease (increase) in cash surrender value of life insurance policies (28,000) 270,279
Proceeds from maturing investment securities 3,667,385 4,250,000
Principal collected on long-term loans and mortgage-backed securities 17,583,328 7,688,660
------------ ------------
Net cash (used in) provided by investing activities (15,972,772) (1,129,617)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in:
Demand deposits, NOW accounts and savings accounts 2,025,257 3,074,661
Proceeds from sale of certificates of deposit 14,225,578 7,392,416
Payments for maturing certificates of deposit (6,111,245) (3,153,563)
Increase (decrease) in advances from borrowers for taxes and insurance (1,790,743) (1,523,115)
Proceeds from Federal Home Loan Bank advances 20,500,000 57,821,645
Repayment of Federal Home Loan Bank advances (14,337,992) (65,022,438)
Dividends paid (11,287) (11,287)
Proceeds (repayment) of other borrowed money (6,327) (6,004)
------------ ------------
Net cash provided by financing activities $ 14,493,241 $ (1,427,685)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (976,267) (1,554,952)
</TABLE>
S-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Three Months Ended
September 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,242,337 3,680,078
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,266,070 $2,125,126
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits, advances and other borrowed money $4,071,227 $3,483,563
========== ==========
Income taxes $ 250,000 $ 275,000
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans to real estate acquired through foreclosure $ 259,613 $ 380,654
========== ==========
</TABLE>
See notes to consolidated financial statements.
S-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accounting and financial reporting policies of First Star Bancorp,
Inc. and its wholly-owned subsidiary, First Star Savings Bank ("Bank"), conform
to generally accepted accounting principles and to general practice within the
banking industry. In the opinion of management, the accompanying unaudited
consolidated financial statements of First Star Bancorp, Inc. ("Company")
contains all adjustments, consisting of only normal and recurring adjustments,
necessary for the fair presentation of the Company's financial position, results
of operations and cash flows for the periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the full year.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
are as follows:
<TABLE>
<CAPTION>
Available for Sale
September 30, 1998
-------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities $ 57,256,403 $ 464,520 $ (500,424) $ 57,220,499
Marketable equity securities 1,716,545 251,588 -- 1,968,133
---------- -------- ---------- ----------
Total investment securities $ 58,972,948 $ 716,108 $ (500,424) $ 59,188,632
=========== ======== ======= ===========
</TABLE>
The amortized cost and approximate fair value of debt securities by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------------
Approximate
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 1,016,874 $ 1,023,830
Due after one year through five years 9,329,041 9,228,288
Due after five years through ten years 4,473,023 4,451,565
Due after ten years 42,437,465 42,516,816
---------- ----------
Total $ 57,256,403 $ 57,220,499
=========== ===========
</TABLE>
During the three months ended September 30, 1998, there were no sales of debt
securities.
S-6
<PAGE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
Available for Sale
September 30, 1998
-------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 13,353,423 $ 415,536 $ -- $ 13,768,959
FNMA pass-through certificates 21,789,403 683,869 -- 22,473,272
GNMA 40,469,617 423,257 -- 40,892,874
Collateralized mortgage obligations 478,010 4,635 489 482,156
---------- -------- ----- ----------
Total $ 76,090,453 $ 1,527,297 $ 489 $ 77,617,261
=========== ========== ===== ===========
</TABLE>
S-7
<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
---------------------
Hopper Soliday & Co., Inc.
Dated ___________________, 1999
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of ____________________, 1999, 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 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 Form of Agency Agreement between First Star Bancorp, Inc., Nesquehoning Savings Bank and
Hopper Soliday & Co., Inc.^
2 Amended Merger Conversion Agreement dated February
___, 1999 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.*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1
and 8.1)
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 Marketing Materials*
99.3 Proxy Statement - Nesquehoning Savings Bank
* Previously filed.
** Electronic filing only.
</TABLE>
^
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");
<PAGE>
(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 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 February ^ 10, 1999.
FIRST STAR BANCORP, INC.
By: /s/ Joseph T. Svetik
-----------------------------------
Joseph T. Svetik
President and Director
(Duly Authorized Representative)
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 February ^ 10, 1999.
<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 Stephen M. Szy
Vice President and Chief Financial Officer Director
(Principal Financial and Accounting Officer)
</TABLE>
- ------------------
* Pursuant to power of attorney
EXHIBIT 1
<PAGE>
FIRST STAR BANCORP, INC.
NESQUEHONING SAVINGS BANK
----------
Up to $ 2,525,000
COMMON STOCK
($1.00 Par Value Per Share)
CONVERSION OFFERING MANAGEMENT AGREEMENT
----------------------------------------
February __, 1999
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
Gentlemen:
First Star Bancorp, Inc., a Pennsylvania-chartered bank holding company
(the "Company"), and Nesquehoning Savings Bank, a Pennsylvania-chartered mutual
savings bank (the "Bank"), hereby confirm their respective agreements with
Hopper Soliday & Co., Inc. (the "Manager") as follows:
1. Introductory. Prior to the date hereof, the Company, its
wholly-owned Pennsylvania-chartered stock savings bank subsidiary First Star
Savings Bank ("FSSB"), and the Bank entered into a Merger Conversion Agreement
dated as of August 14, 1998 (the "Merger Agreement") pursuant to which: (i) the
Bank will convert from a Pennsylvania-chartered mutual savings bank to a
Pennsylvania-chartered stock savings bank pursuant to the terms and conditions
of a Plan of Conversion dated August 14, 1998 approved by the Board of Trustees
of the Bank (the "Plan of Conversion", which is attached to and incorporated by
reference into the Merger Agreement as Exhibit A thereto); (ii) the Bank will
merge with and into FSSB; and (iii) the Company will issue and sell shares (the
"Shares") of its common stock, par value $1.00 per share ("Common Stock"), in
the Subscription, Community and Syndicated Community Offerings (as defined
herein). The conversion of the Bank to stock form, the merger of the Bank with
and into FSSB, and the offer and sale of Common Stock are hereinafter
collectively referred to as the "Conversion." The Merger Agreement and the Plan
of Conversion are hereinafter
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 2
collectively referred to as the "Plan."
In accordance with the Plan, the Company is offering to certain
depositors of the Bank (as more fully described in the Plan) nontransferable
rights to subscribe for up to $2,525,000 of its Common Stock in a subscription
offering (the "Subscription Offering"). The Company is concurrently offering
Shares of its Common Stock, subject to the availability of Shares after
satisfaction of all subscriptions in the Subscription Offering, in a community
offering with preference to the Company's Employee Stock Ownership Plan (the
"ESOP"), to shareholders of the Company and to natural persons who reside in
Pennsylvania (the "Community Offering") (the Subscription Offering and the
Community Offering are herein sometimes collectively referred to as the
"Subscription and Community Offerings"). Shares of the Common Stock not
subscribed for in the Subscription and Community Offerings will be offered to
certain members of the general public in a public offering through selected
broker/dealers to be managed by the Manager on a best efforts basis (the
"Syndicated Community Offering"). (The Subscription Offering, Community Offering
and Syndicated Community Offering are herein sometimes collectively referred to
as the "Offerings").
The Manager will serve as the manager of the Offerings on behalf of the
Company and the Bank pursuant to the terms of this Conversion Offering
Management Agreement (the "Agreement").
The Company has filed with the Securities and Exchange Commission (the
"SEC") a registration statement on Form SB-2 (File No. 333-64475) (the
"Registration Statement") containing an offering prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act of 1933,
as amended (the "1933 Act"), and has filed amendments thereto, if any, as may
have been required to the date hereof. The Registration Statement has been
declared effective by the SEC. The Registration Statement also includes, as an
exhibit thereto, a proxy statement in connection with a special meeting of
depositors of the Bank to consider and vote upon the Plan (the "Proxy
Statement"). The offering prospectus and Proxy Statement on file with the SEC at
the time the Registration Statement became effective are hereinafter
collectively called the "Prospectus," except that if the prospectus filed by the
Company pursuant to Rule 424(b) under the 1933 Act or any other post-effective
modification or amendment of the offering prospectus or Proxy Statement differs
from the offering prospectus or Proxy Statement on file at the time of the
Registration Statement became effective, the term "Prospectus" shall refer to
the offering prospectus filed pursuant to Rule 424(b) or to such modified or
amended offering prospectus and Proxy Statement from and after the time it is
filed with the SEC. The date the Registration Statement was declared effective
by the SEC is hereinafter referred to as the "Effective Date."
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 3
2. Representations and Warranties of Company. The Company represents
and warrants to, and agrees with the Manager that:
(a) As of the Effective Date, the Registration Statement
complied in all material respects with the requirements of the 1933 Act and
applicable SEC regulations, and the Registration Statement did not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and as of the
Effective Date and at the Closing Date (as defined herein), as the case may be,
the Prospectus and any Blue Sky Application or any Sales Information (as such
terms are defined herein) authorized by the Company or the Bank for use in
connection with the Offerings and consideration of the Plan of Conversion did
not and will not contain an untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this Section 2(a) shall not
apply to statements in or omissions from such Registration Statement, Prospectus
or Sales Information made in reliance upon and in conformity with information
furnished in writing to the Company by the Manager expressly regarding the
Manager for use under the captions "THE MERGER AGREEMENT - Community Offering"
and "THE MERGER AGREEMENT - Marketing Arrangements," in the Prospectus.
(b) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the 1933 Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the 1933 Act.
(c) The Company has filed the Prospectus with the Pennsylvania
Department of Banking (the "Department") and the Board of Governors of the
Federal Reserve (the "Federal Reserve"). The Company has filed a merger
application with the Department with respect to the conversion (the "Merger
Application"), and the Merger Application has been approved by the Department.
(d) Pursuant to the regulations of the Federal Deposit
Insurance Corporation (the "FDIC") regarding the conversion to stock form of
mutual state savings banks (12 C.F.R. ss.ss. 303.15, 333.4), as amended (the
"Conversion Regulations"), the Bank has filed a notice of intent to engage in
the conversion, including exhibits (as amended or supplemented, the "Conversion
Application") with the FDIC, which has been approved by the FDIC; and the
Prospectus has been approved for use by the FDIC. No order has been issued by
the FDIC preventing or suspending the use of the Prospectus; and no action by or
before the FDIC revoking such approvals or orders of effectiveness is pending
or, to the best of its knowledge, threatened.
(e) No order has been issued by the SEC or any state
regulatory or Blue Sky authority preventing or suspending the use of the
Prospectus, and no action by or before any such authority to revoke any
approval, authorization or order of effectiveness related to the
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 4
Conversion is pending or, to the best of its knowledge, threatened.
(f) The Conversion Application, including the Prospectus, was
approved by the FDIC on _____________, and the Merger Application was approved
by the Department on _______________. Neither the Conversion Application nor the
Merger Application includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that representations or warranties in this
Section 2(f) shall not apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Bank or the Company
by the Manager expressly regarding the Manager for use in the Prospectus
contained in the Conversion Application under the captions "THE MERGER AGREEMENT
- - Community Offering" and "THE MERGER AGREEMENT - Marketing Arrangements."
(g) The Company has been duly incorporated and is validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania, with full corporate power and authority to own its properties and
conduct its business as described in the Prospectus. The Company is duly
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended. The Company is not required to be qualified to do business as a
foreign corporation in any jurisdiction where the failure to be so qualified
would have a material adverse effect on the business or properties of the
Company. The Company has obtained all licenses, permits and other governmental
authorizations currently required for the conduct of its business, except for
those the failure of which to obtain would not result in a material adverse
effect on the financial condition or results of operations of the Company; all
such licenses, permits and other governmental authorizations are in full force
and effect, and the Company is in all material respects complying therewith. In
addition to FSSB, the Company has one other direct, wholly-owned subsidiary,
Integrated Financial Corp., which manages a property acquired at a sheriff sale
and holds an investment in a limited partnership, and an indirect subsidiary,
Integrated Abstract, Inc., which is a wholly-owned subsidiary of Integrated
Financial Corp. and is inactive.
(h) FSSB has been duly organized as a Pennsylvania-chartered
stock savings bank, and is validly existing and in good standing under the laws
of the Commonwealth of Pennsylvania with full power and authority to own its
property and conduct its business as described in the Prospectus. FSSB is a
member in good standing of the Federal Home Loan Bank of Pittsburgh, and the
deposit accounts of FSSB are insured by the Bank Insurance Fund ("BIF")
administered by the FDIC up to applicable limits. All of the issued shares of
capital stock of FSSB have been duly and validly authorized and issued, are
fully paid and non-assessable, and are owned directly by the Company, free and
clear of all liens, encumbrances, equities or other claims. There are no
outstanding rights, warrants or options to acquire or instruments convertible
into, or exchangeable for, any shares of capital stock or other equity interests
in FSSB.
(i) Each of the Company and FSSB has good, marketable and
insurable title to all assets material to its respective business and to those
assets described in the Prospectus as owned by the Company or FSSB, free and
clear of all material liens, charges, encumbrances or restrictions, except as
are described in the Prospectus or are not materially significant or
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 5
important in relation to the businesses of the Company or FSSB; and, to the best
knowledge of the Company, all of the leases and subleases material to the
business of the Company or FSSB, under which either of them holds properties,
are in full force and effect; and no claim of any sort has been asserted by
anyone adverse to the Company's or FSSB's rights as lessee or sublessee under
any of the leases or subleases mentioned above, or affecting or questioning the
Company's or FSSB's right to the continued possession of the leased or subleased
premises under any such lease or sublease. Each of the Company and FSSB, as the
case may be, has full corporate power and authority to conduct its operations at
its offices as described in the Prospectus and has received all necessary
approvals to maintain offices at the locations set forth in the Prospectus,
except for those approvals which the failure to obtain would not result in a
material adverse effect on the financial condition or results of operations of
the Company or FSSB.
(j) Neither the Company nor FSSB is in violation of its
certificate of incorporation, charter or bylaws or to the best of its knowledge
in default in the performance or observance of any obligation, agreement,
covenant, or condition contained in any material contract, lease, loan
agreement, indenture or other instrument to which is a party or by which either
of them or any of their respective properties may be bound, which default would
have a material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of either of them; the consummation
of the Conversion, the execution, delivery and performance of this Agreement and
the consummation of the transactions herein contemplated have been duly and
validly authorized by all necessary corporate action on the part of the Company
and FSSB, as applicable; and this Agreement has been validly executed and
delivered by the Company and is the valid, legal and binding obligation of the
Company enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization or other laws relating to or affecting the
enforcement of creditors' rights generally and equitable principles limiting the
right to obtain specific enforcement or similar equitable relief. The
consummation of the transactions herein contemplated will not conflict with or
constitute a breach of, or default under, the certificate of incorporation,
charter or bylaws of either the Company or FSSB, or constitute a material
default (or an event which, with notice or lapse of time or both would
constitute such a default) under, or result in the creation or imposition of any
material lien, charge or other encumbrance upon any material properties or
assets of the Company or FSSB pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond, debenture,
note or other instrument or obligation to which either of them is a party or by
which either of them or its respective assets or properties may be bound or is
subject, or violate any material governmental license or permit or any published
law, regulation, policy, approval, decree, injunction or order (subject to the
satisfaction of various conditions imposed by the Department or the FDIC in
connection with its approval of the Conversion Application), which violation,
default or encumbrance would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets or properties of the
Company or FSSB.
(k) There is no litigation, governmental proceedings, suits,
hearings or investigations or other proceedings pending or, to the best
knowledge of the Company, threatened against or involving the Company or FSSB or
any of their respective assets which individually or in the aggregate might
materially and adversely affect the condition (financial or
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 6
otherwise), operations, businesses, assets or properties of the Company or FSSB,
except as referred to in the Prospectus.
(l) The Company has received the opinion of Malizia, Spidi,
Sloane & Fisch, P.C. with respect to federal and state tax consequences and a
letter of Deloitte & Touche, LLP, with respect to the financial accounting
treatment of the Conversion, all as described in the Prospectus and the facts
relied upon in such opinion and letter are truthful, accurate and complete.
(m) The Company has all such power, authority, authorizations,
approvals and orders as may be required to enter into this Agreement, to carry
out the provisions and conditions hereof and, as of the Closing Date, to issue
and sell the Shares to be sold by the Company as provided herein.
(n) To the best of its knowledge, neither the Company or FSSB
is (i) in violation of (i) any directive, rule or regulation of the Department,
the FDIC or any other governmental agency, where compliance with such directive,
rule, or regulation in all material respects would result in a material change
in the conduct of its business or (ii) the subject of any enforcement action
that might materially and adversely affect the condition (financial or
otherwise), operations, businesses, assets or properties of the Company or FSSB,
and to the Company's knowledge, no such enforcement actions are threatened or
contemplated.
(o) There has been no material adverse change, on a
consolidated basis, in the condition (financial or otherwise) assets, capital,
properties, operations, earnings, affairs or business prospects of the Company
since the latest date as of which such condition is set forth in the Prospectus
except as referred to therein; and the capitalization, assets, properties and
businesses of the Company, on a consolidated basis, conform to the descriptions
thereof contained in the Prospectus as of the date specified. There have not
been any material transactions entered into by the Company or FSSB, except for
those transactions entered into in the ordinary course of business. To the best
knowledge of the Company, the Company, on a consolidated basis, does not have
any material liabilities of any kind, contingent or otherwise, except as set
forth in the Prospectus. The Company, on a consolidated basis, has not incurred
any material increase in long term debt nor incurred any material contingent or
other liabilities of any kind, except as set forth in the Prospectus.
(p) No default exists, and no event has occurred which with
notice of lapse of time, or both, would constitute a default, on the part of the
Company or FSSB or, to its best knowledge, on the part of any other party in the
due performance and observance of any term, covenant or condition of any
agreement (excluding agreements with borrowers) which is, on a consolidated
basis, material to the condition (financial or otherwise) of the Company; said
agreements are in full force and effect; and no other party to any such
agreement has instituted or, to the best knowledge of the Company, threatened
any action or proceeding wherein the Company or FSSB would or might be alleged
to be in default thereunder.
(q) Neither the Company nor FSSB is in violation of or in
default in any respect in the performance of any obligation, agreement or
condition contained in any material
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 7
bond, debenture, note or any other evidence of indebtedness, and the Company and
FSSB each is, in all material respects, complying with all laws, rules,
regulations and orders applicable to the operation of its respective business.
(r) Subsequent to the respective dates as of which information
is given in the Prospectus and prior to the Closing Date, except as otherwise
may be indicated or contemplated therein, neither the Company nor FSSB has or
will issue any securities or incur any liability or obligation, direct or
contingent, for borrowed money, except borrowings from the Federal Reserve Bank
of Philadelphia or the Federal Home Loan Bank of Pittsburgh and other borrowings
in the ordinary course of business, or enter into any transactions not in the
ordinary course of the business of the Company or FSSB and which is, on a
consolidated basis, material in light of the business and properties of the
Company.
(s) Upon consummation of the Conversion, the authorized,
issued and outstanding capital stock of the Company will be as set forth in the
Prospectus under the caption"CAPITALIZATION;" the issuance and sale of the
Shares by the Company has been duly authorized by all necessary corporate action
of the Company and, when issued and delivered in accordance with the terms of
the Plan against payment of the consideration calculated as set forth in the
Plan, will be validly issued, fully paid and nonassessable and the terms and
provisions of the Common Stock will conform to the description thereof contained
in the Prospectus; the issuance of the Shares is not subject to preemptive
rights which have not been validly waived in writing; upon consummation of the
transactions contemplated by the Plan, good title to the Shares will be
transferred from the Company upon issuance thereof against payment therefor,
free and clear of all claims, encumbrances, security interests and liens created
by the Company, whatsoever. The certificates representing the Shares will
conform in all material respects with the requirements of applicable laws and
regulations. Except as disclosed in Prospectus, or as may be imposed by
applicable law or regulation, there exists no restriction material to an
investor upon the ownership, possession, transfer or voting of any of the Shares
under the Certificate of Incorporation or Bylaws of the Company or under any
agreement or other instrument to which the Company is a party or by which it may
be bound.
(t) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery of
this Agreement or the issuance of the Shares, except for such approvals,
authorizations, consents or orders as have been obtained or have been applied
for and as of the Closing Date will be obtained, under the Conversion
Regulations and as may be required under the securities or blue sky laws of
various jurisdictions and the regulations of the National Association of
Securities Dealers, Inc. ("NASD").
(u) Except as disclosed in the Prospectus, the Company has not
sold or granted options, warrants, or other rights calling for the issuance of,
and there are no commitments or plans to issue, as of the date hereof, any
shares of capital stock of the Company or any security convertible into or
exchangeable for capital stock of the Company.
(v) All contracts and other documents required to be filed as
exhibits to the Prospectus, the Merger Application, or the Conversion
Application have been filed with the SEC, the Department and/or the FDIC, as the
case may be, except for such post-effective
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 8
post-approval or post-conversion contracts, documents or exhibits as may be
required.
(w) With respect to the Offerings, the Company has not taken
and will not take, directly or indirectly, any action resulting in a violation
of Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or in a manipulation of the price of the shares of the Company.
(x) To the best knowledge of the Company, Deloitte & Touche,
LLP, which has certified the financial statements of the Company included in the
Offering Circular, are independent public accountants within the meaning of the
Code of Professional Ethics of the American Institute of Certified Public
Accountants and Title 12 of the Code of Federal Regulations, and Title 17 of the
Code of Federal Regulations.
(y) For the past five years, the Company and FSSB (i) have
timely filed all required federal and state tax returns and no deficiency has
been asserted with respect to such returns by any taxing authorities, (ii) have
paid all taxes that have become due, and (iii) to the Company's knowledge, have
made adequate reserves for similar current tax liabilities, except where any
failure to make such filings, payments and reserves, or the assertion of such a
deficiency, should not have a material adverse effect, on a consolidated basis,
on the financial condition of the Company.
(z) Neither the Company nor FSSB nor the employees of the
Company or FSSB have made any payment of funds of the Company or FSSB as a loan
for the purchase of Shares, and no funds of the Company or FSSB have been set
aside to be used for any payment prohibited by law.
(aa) Appropriate arrangements have been made for placing the
funds received from subscriptions for Shares in special interest-bearing
accounts with FSSB until all Shares are sold and paid for, with provision for
refund to the purchasers in the event that the Conversion is not completed for
whatever reason or for delivery to the Company if all Shares are sold. Such
funds shall be invested only in insured deposits and such other investments as
are permitted under Rule 15c 2-4 promulgated under the Exchange Act.
(bb) Prior to the completion of the Conversion, the Company
will not have: (i) issued any securities within the last 18 months (except for
notes to evidence loans to the Company and reverse repurchase agreements), (ii)
had any material dealings within the 12 months prior to the date hereof with any
member of the NASD, or any person related to or associated with such member,
other than discussions and meetings relating to the proposed Offerings and
routine purchases and sales of investment and mortgage-backed securities; (iii)
entered into a financial or management consulting agreement except as
contemplated hereunder; and (iv) engaged any intermediary between the Manager
and the Company and the Bank in connection with the offering of Common Stock,
and no person is being compensated in any manner for such service.
Any certificate signed by an officer of the Company and delivered to
the Manager or its counsel that refers to this Agreement shall be deemed to be a
representation and warranty by the
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 9
Company to the Manager as to the matters covered thereby with the same effect as
if such representation and warranty were set forth herein.
3. Representations and Warranties of the Bank. The Bank represents and
warrants to, and agrees with the Manager that:
(a) The Bank has been duly organized as a Pennsylvania
chartered mutual savings bank, and is validly existing and in good standing
under the laws of Commonwealth of Pennsylvania with full power and authority to
own its property and conduct its business as described in the Prospectus. The
Bank is a member in good standing of the Federal Home Loan Bank of Pittsburgh,
and the deposit accounts of the Bank are insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC up to applicable limits. The
Bank is not required to be qualified to do business as a foreign corporation in
any jurisdiction where the failure to be so qualified would have a material
adverse effect on the business or properties of the Bank. The Bank has obtained
all licenses, permits and other governmental authorizations currently required
for the conduct of its business, except for those the failure of which to obtain
would not result in a material adverse effect on the financial condition or
results of operations of the Bank; all such licenses, permits and other
governmental authorizations are in full force and effect, and the Bank is in all
material respects complying therewith. The Bank has no subsidiaries.
Upon completion of the sale of the Shares by the Company as
contemplated by the Prospectus, (i) the Bank will be converted pursuant to the
Plan to a Pennsylvania-chartered stock savings bank with full power and
authority to own its property and conduct its business as described in the
Prospectus, and (ii) the Bank will be merged with and into FSSB.
(b) The Bank has good, marketable and insurable title to all
assets material to its business and to those assets described in the Prospectus
as owned by the Bank, free and clear of all material liens, charges,
encumbrances or restrictions, except as are described in the Offering Circular
or are not materially significant or important in relation to the business of
the Bank; and all of the leases and subleases material to the business of the
Bank, under which it holds properties, are in full force and effect; and no
claim of any sort has been asserted by anyone adverse to the Bank's rights as
lessee or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning FSSB's right to the continued possession of the leased
or subleased premises under any such lease or sublease following the
consummation of the Conversion. The Bank has full power and authority to conduct
its operations at its office as described in the Prospectus and has received all
necessary approvals to maintain an office at the location set forth in the
Prospectus, except for those approvals which the failure to obtain would not
result in a material adverse effect on the financial condition or results of
operations of the Bank.
(c) The Bank is not in violation of its certificate of
incorporation, charter or bylaws or, to the best of its knowledge, in default in
the performance or observance of any obligation, agreement, covenant, or
condition contained in any material contract, lease, loan agreement, indenture
or other instrument to which it is a party or by which it or any of its property
may be bound, which default would have a material adverse effect on the
condition
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 10
(financial or otherwise), operations, business, assets or properties of the
Bank; the consummation of the Conversion, the execution, delivery and
performance of this Agreement and the consummation of the transactions herein
contemplated have been duly and validly authorized by all necessary corporate
action on the part of the Bank; and this Agreement has been validly executed and
delivered by the Bank and is the valid, legal and binding obligation of the Bank
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
reorganization or other laws relating to or affecting the enforcement of
creditors' rights generally and equitable principles limiting the right to
obtain specific enforcement or similar equitable relief. The consummation of the
transactions herein contemplated will not conflict with or constitute a breach
of, or default under, the certificate of incorporation, charter or bylaws of the
Bank, or constitute a material default (or an event which, with notice or lapse
of time or both would constitute such a default) under, or result in the
creation or imposition of any material lien, charge or other encumbrance upon
any material properties or assets of the Bank pursuant to any of the terms,
provisions or conditions of, any material agreement, contract, indenture, bond,
debenture, note or other instrument or obligation to which the Bank is a party
or by which it or its assets or properties may be bound or is subject, or
violate any material governmental license or permit or any published law,
regulation, policy, approval, decree, injunction or order (subject to the
satisfaction of various conditions imposed by the Department in connection with
its approval of the Merger Application or the FDIC in connection with its
approval of the Conversion Application), which violation, default or encumbrance
would have a material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Bank.
(d) There is no litigation, governmental proceedings, suits,
hearings or investigations or other proceedings pending or, to the best
knowledge of the Bank, threatened against or involving the Bank or any of its
assets which individually or in the aggregate might materially and adversely
affect the condition (financial or otherwise), operations, businesses, assets or
properties of the Bank, except as referred to in the Prospectus.
(e) The Bank has received the opinion of Malizia, Spidi,
Sloane & Fisch, P.C. with respect to federal and state tax consequences and a
letter of Deloitte & Touche LLP with respect to the financial accounting
treatment of the Conversion, all as described in Prospectus and the facts relied
upon in such opinion and letter are truthful, accurate and complete.
(f) The Bank has all such power, authority, authorizations,
approvals and orders as may be required to enter into this Agreement, to carry
out the provisions and conditions hereof, and to merge with and into FSSB as
provided in the Plan.
(g) To the best of its knowledge, the Bank is not (i) in
violation of any directive, rule or regulation of the Department, the FDIC or
any other governmental agency where compliance with such directive, rule or
regulation in all material respects would result in a material change in the
conduct of its business or (ii) the subject of any enforcement action against
the Bank or its officers or directors that might materially and adversely affect
the condition (financial or otherwise), operations, businesses, assets or
properties of the Bank, and to the Bank's knowledge, no such enforcement actions
are threatened or contemplated.
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 11
(h) There has been no material adverse change in the condition
(financial or otherwise), assets, capital, properties, operations, earnings,
affairs or business prospects of the Bank since the latest date as of which such
condition is set forth in the Prospectus except as referred to therein; and the
capitalization, assets, properties and business of the Bank conform to the
descriptions thereof contained in the Prospectus as of the date specified. There
have not been any material transactions entered into by the Bank, except for
those transactions entered into in the ordinary course of business. To the best
knowledge of the Bank, the Bank does not have any material liabilities of any
kind, contingent or otherwise, except as set forth in the Prospectus. The Bank
has not incurred any material increase in long term debt nor incurred any
material contingent or other liabilities of any kind, except as set forth in the
Offering Circular.
(i) No default exists, and no event has occurred which with
notice of lapse of time, or both, would constitute a default, on the part of the
Bank or, to its best knowledge, on the part of any other party in the due
performance and observance of any term, covenant or condition of any agreement
(excluding agreements with borrowers) which is material to the condition
(financial or otherwise) of the Bank; said agreements are in full force and
effect; and no other party to any such agreement has instituted or, to the best
knowledge of the Bank, threatened any action or proceeding wherein the Bank
would or might be alleged to be in default thereunder.
(j) The Bank is not in violation of or in default in any
respect in the performance of any obligation, agreement or condition contained
in any material bond, debenture, note or any other evidence of indebtedness, and
the Bank is, in all material respects, complying with all laws, rules,
regulations and orders applicable to the operation of its business.
(k) Subsequent to the respective dates as of which information
is given in the Prospectus and prior to the Closing Date, except as otherwise
may be indicated or contemplated therein, the Bank has not issued any securities
or incurred any liability or obligation, direct or contingent, for borrowed
money, except borrowings from the Federal Home Loan Bank of Pittsburgh and other
borrowings in the ordinary course of business, or entered into any transactions
not in the ordinary course of the business of the Bank and which is material in
light of the business and properties of the Bank.
(l) No capital stock of the Bank has been or will be issued
and outstanding prior to the Closing Date.
(m) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery of
this Agreement, except for such approvals, authorizations, consents or orders as
have been obtained or have been applied for and as of the Closing Date will be
obtained, under the Conversion Regulations and as may be required under the
securities or blue sky laws of various jurisdictions and the regulations of the
National Association of Securities Dealers, Inc. ("NASD").
(n) Except as disclosed in the Prospectus, the Bank has not
sold or granted options, warrants, or other rights calling for the issuance of,
and there are no commitments or plans to issue, as of the date hereof, any
shares of capital stock of the Bank or any security
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 12
convertible into or exchangeable for capital stock of the Bank.
(o) All contracts and other documents required to be filed as
exhibits to the Prospectus, the Merger Application, or the Conversion
Application have been filed with the SEC, the Department and/or the FDIC, as the
case may be, except for such post-effective, post-approval or post-conversion
contracts, documents or exhibits as may be required.
(p) The records of the account holders, depositors, borrowers,
and other members of the Bank delivered to the Manager by the Bank or its agent
for use during the Conversion are accurate in all material respects.
[(q) To the best knowledge of the Bank, Joseph N. Spaniel, CPA
, who has certified the financial statements of the Bank included in the
Prospectus, is an independent public accountant within the meaning of the Code
of Professional Ethics of the American Institute of Certified Public Accountants
and Title 12 of the Code of Federal Regulations, and Title 17 of the Code of
Federal Regulations.]
(r) For the past five years, the Bank (i) has timely filed all
required federal and state tax returns and no deficiency has been asserted with
respect to such returns by any taxing authorities, (ii) has paid all taxes that
have become due, and (iii) to its knowledge, has made adequate reserves for
similar current tax liabilities, except where any failure to make such filings,
payments and reserves, or the assertion of such a deficiency, should not have a
material adverse effect on the condition of the Bank.
(s) Neither the Bank nor the employees of the Bank have made
any payment of funds of the Bank as a loan for the purchase of Shares, and no
funds of the Bank have been set aside to be used for any payment prohibited by
law.
(t) Appropriate arrangements have been made for placing the
funds received from subscriptions for Shares in special interest-bearing
accounts with the FSSB until all Shares are sold and paid for, with provision
for refund to the purchasers in the event that the Conversion is not completed
for whatever reason or for delivery to the Company if all Shares are sold. Such
funds shall be invested only in insured deposits and such other investments as
are permitted under Rule 15c 2-4 promulgated under the Exchange Act.
(u) Prior to the completion of the Conversion, the Bank will
not have: (i) issued any securities within the last 18 months (except for notes
to evidence loans to the Bank and reverse repurchase agreements), (ii) had any
material dealings within the 12 months prior to the date hereof with any member
of the NASD, or any person related to or associated with such member, other than
discussions and meetings relating to the proposed Offerings and routine
purchases and sales of investment and mortgage-backed securities; (iii) entered
into a financial or management consulting agreement except as contemplated
hereunder; and (iv) engaged any intermediary between the Manager and the Company
and the Bank in connection with the offering of Common Stock, and no person is
being compensated in any manner for such service.
[(v) The consolidated financial statements, together with the
related notes, of
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 13
the Bank, which are part of the Prospectus, fairly and accurately present the
consolidated financial condition, results of operations, retained earnings and
cash flows of the Bank at the respective dates thereof and for the respective
periods covered thereby and comply as to form in all material respects with the
applicable accounting requirements of the Conversion Regulations, and generally
accepted accounting principles, except as otherwise stated therein. Such
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved. The financial, statistical and pro forma information, tables
and related notes with respect to the Bank contained in the Offering Circular
present the information purported to be shown thereby accurately at the
respective dates thereof and for the respective periods covered thereby.]
Any certificate signed by an officer of the Bank and delivered to the
Manager or its counsel that refers to this Agreement shall be deemed to be a
representation and warranty by the Bank to the Manager as to the matters covered
thereby with the same effect as if such representation and warranty were set
forth herein.
4. Appointment as Manager and Compensation.
(a) The Company and the Bank hereby appoint the Manager and
the Manager hereby accepts appointment as financial advisor and as the manager
of the Offerings, on the basis of the representations, warranties, and
agreements herein contained, but subject to the terms and conditions herein set
forth. As Manager, the Manager will use its best efforts to assist the Company
in the sale of the Shares in the Subscription and Community Offerings in
accordance with the Plan, the Prospectus and this Agreement and will assist the
Company in obtaining purchase orders for any or all of the unsubscribed shares
of the Company's Shares in the Community Offering; provided, however, that the
Manager shall not be obligated to take any action which is inconsistent with any
applicable laws, regulations, decisions or orders. If requested by the Company,
the Manager will develop and manage a Syndicated Community Offering involving
local and regional brokerage firms in order to offer to the public any unsold
Shares following the Subscription and Community Offerings in a best efforts
public offering to be managed by the Manager. The Company and the Bank agree and
understand that the Manager has no obligation under this Agreement to purchase
any of the Shares for its own account. The Company and the Bank retain the right
to reject any purchase orders obtained in the Community Offering and the
Syndicated Community Offering pursuant to this Agreement.
(b) The Manager shall receive the following compensation for
its services hereunder:
(i) If the Conversion is completed, the Manager will
receive fees in the following amounts due no later than the Closing Date in next
day funds: (1) a fee of 2.0% of the aggregate purchase price of all Shares sold
in the Subscription Offering; except for purchases by the ESOP and trustees,
directors, officers and employees of the Company or the Bank; (2) a fee of 1.0%
of the aggregate purchase price of all other Shares sold in the Community
Offering to shareholders of the Company or to persons on the list of potential
investors attached hereto as Exhibit II; and (3) a fee of 2.0% of the aggregate
purchase price of all Shares sold in the Community Offering, excluding purchases
by persons described in clause (2) above. The fees
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 14
described above shall be subject to an overall cap of $50,000. The Closing Date
shall be the date upon which the Conversion is successfully completed in
accordance with the Conversion Regulations. The Company will pay brokers
participating in the Syndicated Community Offering, including the Manager, a fee
of 4.0% on the aggregate purchase price of all shares sold in the Syndicated
Community Offering. In the event the Conversion is terminated or otherwise
abandoned or has not been completed within 90 days after the commencement of the
Subscription and Community Offerings, the Manager will be entitled only to
reimbursement for expenses and legal fees as provided in paragraph 4(b)(ii)
below and in Section 6 hereof.
(ii) The Manager shall be reimbursed for all legal
fees and reasonable out-
of-pocket expenses incurred by it and its counsel whether or not the offering is
successfully completed; out-of-pocket expenses shall not exceed $5,000 and legal
fees shall not exceed $10,000. Such accountable expenses, including legal fees
and expenses, will be billed monthly. Full payment to defray the Manager's
accountable expenses, including legal fees and expenses subject to applicable
limits, remaining outstanding as of the Closing Date shall be made in next day
funds on the Closing Date or, if the Conversion is not completed and are
terminated for any reason, within ten (10) calendar days after receipt by the
Company of the detailed listing from the Manager of its remaining accountable
expenses for which payment has not been received. In the event of an
oversubscription or other event that causes the Subscription and Community
Offerings to be delayed, or the regulations governing the Conversion are
changed, the Manager reserves the right to renegotiate the limitation of fees
and expenses applicable to the Manager.
(iii) If the Company or the Bank request assistance
from the Manager's
counsel with regard to regulatory aspects of the transaction, such services
provided by the Manager's counsel shall be billed separately and shall not apply
toward the fee limit described in paragraph (ii) above.
(c) The employment of the Manager hereunder shall terminate
(a) upon termination or abandonment of the Merger Agreement and Plan by the
Company or the Bank, (b) forty-five (45) days after the Subscription and
Community Offerings close, unless the Company and the Bank, with the approval of
the Department and the FDIC, are permitted to extend such period of time, or (c)
upon consummation of the Conversion, whichever date shall first occur.
(d) The Manager agrees to act as a market marker for the
Company's Common Stock after consummation of the Conversion provided that all of
the conditions required by the NASD for the Manager to act as a market maker for
the Company's Common Stock are satisfied.
5. Further Agreements. The Company and the Bank jointly and severally
covenant and agree that:
(a) The Company shall deliver to the Manager from time to
time, such number of copies of the Conversion Application, Merger Application,
and Prospectus as the Manager reasonably may request. The Company authorizes the
Manager to use the Prospectus in connection with the offer and sale of the
Shares.
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 15
(b) The Company and the Bank will use their best efforts to
cause any post-effective amendment to the Registration Statement, Prospectus,
the Merger Application, or the Conversion Application to be declared effective
or approved by the SEC, the Department or the FDIC, as the case may be, and will
notify the Manager immediately, and confirm the notice in writing, (i) when the
Prospectus, as amended, has become effective; (ii) when any post-effective
amendment to the Registration Statement becomes effective or any supplement to
the Prospectus has been filed; (iii) of the issuance by the Department, the
FDIC, the SEC or any state securities regulator of any stop order relating to
the Prospectus or of the initiation or the threat of any proceedings for that
purpose; (iv) of the receipt of any notice with respect to the suspension of the
qualification of the Shares for offering or sale in any jurisdiction; and (v) of
the receipt of any comments from the staff of the Department, FDIC or the SEC
relating to the Conversion Application, the Merger Application, Registration
Statement or Prospectus. If the Department, FDIC, the SEC or any other
governmental authority enters a stop order relating to the Registration
Statement or Prospectus at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment.
(c) During the time when a Prospectus is required to be
delivered under the Conversion Regulations or applicable securities law and
regulations, the Company will comply so far as it is able with all requirements
imposed upon it by such law and regulations, as from time to time in force, so
far as necessary to permit the continuance of offers and sales of or dealings in
the Shares in accordance with the provisions hereof and the Prospectus. If
during the period when the Prospectus is used in connection with the offer and
sale of the Shares any event relating to or affecting the Company or the Bank
shall occur as a result of which it is necessary, in the reasonable opinion of
counsel for the Manager, to amend or supplement the Prospectus in order to make
the Prospectus not false or misleading in light of the circumstances existing at
the time it is delivered to a purchaser of the Shares, the Company and the Bank
forthwith shall prepare, file with the Department, the FDIC and the SEC and
furnish to the Manager a reasonable number of copies of an amendment or
amendments or of a supplement or supplements to the Prospectus (in form and
substance satisfactory to counsel for the Manager) which shall amend or
supplement the Prospectus so that, as amended or supplemented, the Prospectus
shall not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser of
the Shares, not misleading. The Company will not file or use any amendment or
supplement to the Prospectus which is to be used in the Offerings of which the
Manager has not first been furnished a copy or to which the Manager shall
reasonably object after having been furnished such copy. Such amendment or
supplement will comply in all material respects with the Conversion Regulations
and applicable securities law and regulations. For the purpose of this
subsection, the Company and the Bank shall furnish such information with respect
to themselves as the Manager from time to time reasonably may request.
(d) During the period when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with all
requirements imposed by the Department or the FDIC, by applicable state law or
the Conversion Regulations, and by the 1933 Act, Exchange Act and the rules and
regulations of the SEC promulgated under such statutes, including, without
limitation, Regulation M under the Exchange Act, in each case as
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 16
from time to time in force, in accordance with the provisions hereof and the
Prospectus.
(e) The Company shall take all reasonably necessary action and
furnish to whomever the Manager may direct, such information, instrument or
document of the Company (collectively, the "Blue Sky Applications") as may be
required to qualify or register the Shares for offer and sale by the Company
under the securities or Blue Sky laws of such jurisdictions as the Manager may
request; provided, however, that the Company shall not be obligated to qualify
as a broker dealer or as a foreign corporation to do business under the laws of
any such jurisdiction unless otherwise required to do so under the applicable
securities or Blue Sky Laws or at the direction of the Department or the FDIC.
In each jurisdiction where such qualification or registration shall be effected,
the Company, unless the Manager agrees that such action is not necessary or
advisable in connection with the distribution of the Shares, shall file and make
such statements or reports as are, or reasonably may be, required by the laws of
such jurisdiction.
(f) The liquidation account for the benefit of eligible
account holders as of the Closing Date, will be duly established and maintained
in accordance with the requirements of the Department and the FDIC.
(g) The Company and the Bank will not sell or issue, contract
to sell or otherwise dispose of, for a period of 90 days after the date hereof,
without the Manager's prior written consent, any Shares other than in connection
with any plan or arrangement described in the Prospectus.
(h) The Company shall maintain the effectiveness of its
registration under Section 12(g) of the Exchange Act for not less than three (3)
years, or such shorter period as may be required by the Commission or FDIC
Regulations.
(i) During the period during which the Company's common stock
is registered under the Exchange Act, the Company will furnish to its
stockholders as soon as practicable after the end of each fiscal year an annual
report (including a consolidated balance sheet and statements of consolidated
income, stockholders' equity and changes in financial position or cash flow
statement of the Company and its subsidiaries as at the end of and for such
year, certified by independent public accountants in accordance with Regulation
S-X under the Exchange Act).
(j) During the period of three years from the date hereof, the
Company will furnish to the Manager: a copy of each report of the Company
furnished to or filed with the appropriate regulatory agency under the Exchange
Act or any national securities exchange or system on which any class of
securities of the Company is listed or quoted, (including, but not limited to,
reports on Form 10-K, 10-Q and 8-K and all proxy statements and annual reports
to stockholders), a copy of each report of the Company mailed to its
stockholders or filed with the appropriate regulatory agency or any national
securities exchange or system on which any class of securities of the Company is
listed or quoted, each press release and material news items and additional
documents and information with respect to the Company as the Manager may
reasonably request, and (ii) from time to time, such other publicly available
information concerning the Company as the Manager may reasonably request.
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 17
(k) The Company and the Bank shall use the net proceeds from
the sale of the Shares in the manner set forth in the Prospectus under the
caption "USE OF PROCEEDS."
(l) The Company shall not deliver the Shares until it has
satisfied or caused to be satisfied each and every condition set forth in
Section 6 hereof, unless such condition is waived in writing by the Manager.
(m) The Company has taken or will take all necessary actions
to comply with the applicable provisions of the Conversion Regulations and the
securities or Blue Sky laws of the jurisdictions in which the Shares are to be
offered and sold.
(n) [Intentionally Omitted]
(o) The Company and the Bank (or its agents) shall advise the
Manager, if necessary, as to the allocation of the Shares in the event of an
oversubscription. The Company and the Bank shall indemnify and hold harmless the
Manager for any liability arising out of the allocation of the Shares in the
event of an oversubscription.
(p) The Company and the Bank will take such actions and
furnish such information as are reasonably requested by the Manager in order for
the Manager to ensure compliance with the NASD's "Interpretation Relating to
Free-Riding and Withholding."
(q) The Bank will not amend the Plan in any material respect
prior to the Closing Date without the consent of the Manager, which consent will
not be unreasonably withheld.
(r) The Company will use its best efforts to qualify the
Shares for quotation on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap Market effective on or prior to the Closing Date,
and will use its best efforts to maintain such qualification for a minimum of
three years following the Closing Date.
(s) The Company shall pay any stock issue and transfer taxes
that may be payable with respect to the sale of the Shares.
6. Payment of Expenses. The Company and the Bank will promptly pay
(directly or by reimbursement) all expenses incident to the conversion and the
performance of their obligations under this Agreement, including but not limited
to all expenses and any taxes incident to delivery of the Shares to purchasers
in the Offerings; the expenses of the Manager as set forth in Section 4; the
expenses and fees of the Bank's and the Company's counsel and independent
accountants; the expenses incurred in connection with the printing or
reproduction of copies of the Prospectus and the Conversion Application,
including any amendments thereto, the proxy soliciting materials, the Plan, any
other offering materials and any amendment or supplement thereto; the expenses
incurred in connection with the distribution and mailing of proxy soliciting and
offering materials; all reasonable filing fees (including, but not limited to,
the filing fees of the FDIC and the NASD and any fees required under applicable
state securities or Blue Sky laws); the cost of preparing a "Blue Sky"
memorandum; the cost of preparing stock certificates;
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 18
the costs and fees of any registrar or transfer agent; the cost and expense of
any temporary staff hired by the Manager at the written request of the Company
or the Bank; and all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
paragraph.
7. Conditions of the Manager's Obligations. The obligations of the
Manager as provided herein shall be subject to the accuracy of the
representations and warranties contained in Sections 2 and 3 hereof as of the
date hereof and as of the Closing Date, to the accuracy of the statements of
officers and directors of the Company and the Bank made pursuant to the
provisions hereof, to the performance by the Company and the Bank of their
obligations hereunder and to the following conditions:
(a) At the Closing Date, the Company and the Bank will have
completed the conditions precedent to, and shall have conducted the Conversion
in all material respects in accordance with the Plan, the Conversion Regulations
and all other applicable laws, regulations, decisions and orders, including all
terms, conditions, requirements and provisions precedent to the Conversion
imposed upon them by the Department and the FDIC.
(b) The Registration Statement and Prospectus, as the case may
be, shall have been declared effective by the Department, the FDIC and the SEC,
the Merger Application approved by the Department, and the Conversion
Application approved by the FDIC not later than 5:30 p.m. on the date of this
Agreement, or with the Manager's consent at a later time and date; and at the
Closing Date to the knowledge of the Company and the Bank, no stop order
suspending the effectiveness of the Registration Statement or the Prospectus
shall have been issued or proceedings therefore initiated or threatened by the
SEC, the FDIC, or any state authority and no order or other action suspending
the authorization of the Prospectus or the consummation of the Conversion shall
have been issued or proceedings therefore initiated or threatened by the SEC,
the FDIC, the Federal Reserve Board, or any other federal or state authority.
(c) At the Closing Date, the Manager shall receive the opinion
of Malizia, Spidi, Sloane & Fisch, P.C., special counsel for the Company dated
the Closing Date, addressed to the Manager, in form and substance satisfactory
to counsel for the Manager and to the effect that:
(i) the Company has been duly incorporated and is
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania, with full corporate power and authority to own its properties and
conduct its business as described in the Prospectus;
(ii) the Company has been duly qualified to do
business and, is in good standing as a foreign corporation in each jurisdiction
where the ownership or leasing of its properties, or the conduct of its
business, of which such counsel has knowledge, requires such qualification;
(iii) FSSB has been duly organized as a stock savings
bank and is validly
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 19
existing and in good standing under the laws of the Commonwealth of Pennsylvania
with full power and authority to own its property and conduct its business
described in the Prospectus;
(iv) all of the issued shares of capital stock of
FSSB have been duly and
validly authorized and issued, are fully paid and non-assessable, and are owned
directly by the Company, free and clear of all liens and encumbrances, equities
and other claims. There are no outstanding rights, warrants or options to
acquire or instruments convertible into, or exchangeable for, any shares of
capital stock or other equity interests for FSSB;
(v) FSSB is a member of the Federal Home Loan Bank of
Pittsburgh and
the deposit accounts of FSSB are insured by the BIF up to the applicable limits,
and no proceedings for the termination or revocation of such insurance are
pending or, to such counsel's knowledge, threatened;
(vi) FSSB has full power and authority to conduct its
operations at its
offices as described in the Prospectus and has received all necessary approvals
to maintain offices at the locations set forth in the Prospectus, except those
approvals which the failure to obtain would not result in a material adverse
effect on the financial condition or results of operation of FSSB;
(vii) the Plan complies with, and to the knowledge of
such counsel, the
merger of the Bank with and into FSSB complies with, the Conversion Regulations;
to the knowledge of such counsel, all of the terms, conditions, requirements and
provisions applicable to the Company or FSSB, with respect to the Plan and the
Conversion imposed by the Department or the FDIC, except with respect to filing
or submission of certain post-Conversion reports or other materials, have been
complied with by the Company and FSSB. The Plan has been duly adopted by all
required action of the respective Directors and shareholders of the Company and
FSSB;
(viii) upon consummation of the Conversion, the
Company will have
authorized and outstanding Common Stock as set forth in the Prospectus (adjusted
to give effect to the issuance of the shares); the description of such Common
Stock in the Prospectus is accurate in all material respects; to the knowledge
of such counsel, and except as disclosed in the Prospectus, there is no
outstanding option, warrant or other right calling for the issuance of any
capital stock of the Company or any security convertible or exchangeable into
such capital stock;
(ix) the issuance and sale of the Shares have been
duly and validly
authorized by all necessary corporate action on the part of the Company; the
Shares, when issued in accordance with the terms of the Plan and this Agreement,
will be validly issued, fully paid, nonassessable and free of preemptive rights;
(x) the certificates for the Shares are in due and
proper form and comply in all material respects with applicable requirements of
law;
(xi) no further approval, authorization, consent or
other order of any
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 20
public board or body is required in connection with the execution and delivery
of this Agreement by the Company, the issuance of the Shares and consummation of
the Conversion except for the following approvals, all of which have been
obtained (subject to the filing or submission of certain required
post-Conversion reports or other materials by the Company or the Bank): (i) the
approval of the Merger Application by the Department and the approval of the
Conversion Application by the FDIC, (ii) the declaration of effectiveness of the
Registration Statement and any required post-effective amendment to the
Registration Statement by the SEC; (iii) approval of the use of the Prospectus
by the Department and the FDIC, (iv) the issuance to the Bank of the Stock
Charter by the Department, and (v) as may be required under the securities laws
of various jurisdictions;
(xii) the Company may offer, issue and sell the
Shares in the Subscription
Offering and, if necessary, in the Community Offering without registration of
the Company or its directors, officers or employees as brokers, dealers,
salesmen or investment advisers under the Exchange Act or the Investment
Advisers Act of 1940 or the applicable states securities and investment advisers
laws or has registered in those states where registration is required and offers
of Shares made;
(xiii) the execution and delivery of this Agreement
and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action on the part of the Company; and this Agreement is
a legal, valid and binding obligation of the Company, enforceable in accordance
with its terms, except as may be limited (A) by bankruptcy, insolvency,
reorganization, moratorium, reorganization or similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights of
creditors of financial institutions the accounts of which are insured by the
FDIC, and (B) by general equity principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and except to
the extent that the provisions of Sections 8 and 9 hereof may be unenforceable
as against public policy, as to which no opinion need be rendered;
(xiv) the statements in the Prospectus under the
captions "REGULATION," "CAPITALIZATION," "THE MERGER CONVERSION," and
"DESCRIPTION OF CAPITAL STOCK," insofar as they are, or refer to, statements of
law or legal conclusions, have been prepared or reviewed by such counsel and are
accurate in all material respects;
(xv) the descriptions of certain provisions of
contracts, agreements or other documents (assuming for purposes of rendering
this opinion the validity and enforceability thereof) to which the Company is a
party which are described in the Prospectus, insofar as they purport to
summarize such provisions of such contracts, agreements or other documents, have
been reviewed by such counsel and constitute in all material respects accurate
and fair summaries of such provisions purported to be summarized for purposes of
the Prospectus;
(xvi) the Registration Statement and the Prospectus,
as the case may be, and any post-effective amendments thereto have been duly
authorized for final use by the SEC, the Department and the FDIC; and no order
has been issued by or proceedings pending by or before the SEC, the Department
or the FDIC seeking to revoke or rescind the orders declaring
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 21
the Registration Statement or Prospectus effective or authorizing or approving
the Conversion Application or, to the knowledge of such counsel, are any such
proceedings contemplated or threatened; and, to such counsel's knowledge and
information, no Person has sought to obtain regulatory or judicial review of the
final action of the Department approving the Merger Application or the FDIC
approving the Conversion Application;
(xvii) the execution and delivery of this Agreement
and the consummation
of the transactions contemplated hereby do not conflict with nor result in a
breach of the respective articles of incorporation, certificate of
incorporation, charter or bylaws of the Company and FSSB;
(xviii) the Prospectus (in each case as amended or
supplemented, if so
amended or supplemented) complies as to form in all material respects to the
requirements of the Conversion Regulations, the 1933 Act and applicable SEC
regulations, and applicable state securities laws, as the case may be (except as
to information with respect to, or supplied by the Manager, and as to financial
statements, notes to financial statements, financial tables and other financial
and statistical data, including the appraisal, included therein as to which no
opinion need be expressed); to such counsel's knowledge, the description in the
Prospectus (as amended or supplemented, if so amended or supplemented) of each
document and exhibit described therein is accurate in all material respects;
In giving such opinion, such counsel may rely as to all matters of fact
on certificates of officers and directors of the Company and the Bank delivered
pursuant hereto and certificates of public officials, provided that copies of
any such opinions or certificates are delivered to the Manager together with
such opinion. Such opinion may be governed by, and interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991), and, as a consequence, references in such opinion to such counsel's
"knowledge" may be limited to "actual knowledge" as defined in the Accord (or
knowledge based on certificates). Such opinion may be limited to present
statutes, regulations and judicial interpretations and to facts as they
presently exist; in rendering such opinion, such counsel need assume no
obligation to revise or supplement it should the present laws be changed by
legislative or regulatory action, judicial decision or otherwise; and such
counsel need express no view, opinion or belief with respect to whether any
proposed or pending legislation, if enacted, or any regulations or any policy
statements issued by any regulatory agency, whether or not promulgated pursuant
to any such legislation, would affect the validity of the execution and delivery
by the Company of this Agreement or the issuance of the Shares.
(d) At the Closing Date, the Manager shall receive the letter
of Malizia, Spidi, Sloane & Fisch, P.C., special counsel for the Company, dated
the Closing Date, addressed to the Manager, in form and substance reasonably
acceptable to the Manager, to the effect that, based on such counsel's
participation in conferences with representatives of the Company and the Bank,
their counsel, and discussions with the independent public accountants for the
Company and the Bank; review of documents and understanding of applicable law
(including the requirements of the Conversion Regulations) and the experience
such counsel has gained in its practice, and while such counsel undertakes no
responsibility for the accuracy or completeness of the information set forth
therein, nothing has come to such counsel's attention that would lead
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 22
it to believe that the Prospectus, as amended (except as to information in
respect of the Manager contained therein, and except as to the financial
statements, notes to financial statements, financial tables and other financial
and statistical data contained therein, as to which such counsel need express no
comment), at the time it or any amendment thereto became effective, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made not misleading. (In
making this statement, such counsel may state that it has not undertaken to
verify independently the information in the Prospectus and therefore does not
assume any responsibility for the accuracy or completeness thereof.)
Such counsel may further state, if true, that in the period of time
from the effective date of the Prospectus to the date of its letter, such
counsel did not meet with representatives of the Company or the Bank, or
representatives of their accountants, in any conferences at which the contents
of the Prospectus were discussed, nor did such counsel otherwise undertake any
procedures (other than the review of documents delivered to the Manager on the
Closing Date pursuant to this Agreement) which were intended or likely to elicit
information concerning the accuracy, completeness or fairness of the statements
made in the Prospectus. Nevertheless, in the course of such counsel's
representation of the Company in connection with this Agreement, no information
has come to its attention since such effective date which causes such counsel to
believe as of the date of its opinion that the Prospectus (except as to
information in respect of the Manager contained therein, and except as to the
financial statements, notes to financial statements, financial tables and other
financial and statistical data, including the appraisal, included therein, as to
which such counsel need express no comment) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering such letter, such counsel may rely as to matters of fact
on certificates of officers, directors and agents of the Company and the Bank
and certificates of public officials delivered pursuant hereto. Such counsel may
assume that any agreement is the valid and binding obligation of any parties to
such agreement other than the Company or FSSB. Such letter may be governed by,
and interpreted in accordance with, the Accord, and, as a consequence,
references in such letter to such counsel's "knowledge" may be limited to
"actual knowledge" as defined in the Accord (or knowledge based on
certificates). Such letter may be limited to present statutes, regulations and
judicial interpretations and to facts as they presently exist; in rendering such
letter, such counsel need assume no obligation to revise or supplement it should
the present laws be changed by legislative or regulatory action, judicial
decision or otherwise; and such counsel need express no view, opinion or belief
with respect to whether any proposed or pending legislation, if enacted, or any
regulations or any policy statements issued by any regulatory agency, whether or
not promulgated pursuant to any such legislation, would affect the validity of
the execution and delivery by the Company of this Agreement or the issuance of
the Shares.
(e) At the Closing Date, the Manager shall receive the
favorable opinion of ________________________, special counsel for the Bank,
dated the Closing Date, addressed to the Manager, in form and substance
reasonably satisfactory to counsel for the Manager and
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 23
to the effect that:
(i) the Bank is duly organized as a mutual savings bank and is validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania, with full power and authority to own its properties and
conduct its business as described in the Prospectus;
(ii) the Bank has been duly qualified to do business
and to such counsel's knowledge, is in good standing as a foreign
corporation in each jurisdiction where the ownership or leasing of its
properties, or the conduct of its business, requires such
qualification.
(iii) the Bank has obtained all licenses, permits and
other governmental authorizations currently required for the conduct of
its business and to maintain offices at the locations set forth in the
Prospectus, except where the failure to hold such licenses, permits or
other governmental authorizations would not have a material adverse
effect on the Bank;
(iv) there are no material legal or governmental
proceedings or investigations pending or, to the knowledge of such
counsel, threatened against or involving the assets of the Bank which
are required to be described in the Prospectus that are not so
described;
(v) to the knowledge of such counsel, the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby do not constitute a breach of or default (nor give
rise to any right of termination, cancellation or acceleration) under
or result in the creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Bank pursuant
to any of the terms, provisions or conditions of any material
agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Bank is a party or by which it or its assets or
properties may be bound or is subject, or any governmental license or
permit, or violate any law, administrative regulation or order, or
court order, writ, injunction or decree (subject to the satisfaction of
certain conditions imposed by the Department or the FDIC in connection
with its approval of the Conversion Application), which violation,
default or encumbrance would have a material adverse effect on the
financial condition of the Bank;
(vi) to the knowledge of such counsel, there has been
no breach by the Bank of the Bank's articles of incorporation,
certificate of incorporation, charter or bylaws or breach or default
(or the occurrence of any event which, with the lapse of time or
notice, or both, would result in a breach or default) under any
material agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Bank is a party or by which any
of its assets or properties may be bound, or any governmental license
or permit, or a violation of law, administrative regulation or order,
or court order, writ, injunction or decree, which breach, default or
violation, would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets or properties of
the Bank;
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 24
(vii) to the knowledge of such counsel, the Bank has
no subsidiaries;
(viii) the Plan complies with, and to the knowledge
of such counsel, the Conversion of the Bank from a Pennsylvania
chartered mutual savings bank to a Pennsylvania stock savings bank and
the merger of the Bank with and into FSSB complies with, the Conversion
Regulations; to the knowledge of such counsel, all of the terms,
conditions, requirements and provisions applicable to either the
Company or the Bank, with respect to the Plan and the Conversion
imposed by the Department or the FDIC, except with respect to filing or
submission of certain post-Conversion reports or other materials, have
been complied with by the Bank. The Plan has been duly adopted by the
required vote of the Trustees of the Bank and voting depositors of the
Bank;
(ix) the Bank is a member of the Federal Home Loan
Bank of Pittsburgh and the deposit accounts of the Bank are insured by
the SAIF up to the applicable limits, and no proceedings for the
termination or revocation of such insurance are pending or to such
counsel's knowledge threatened;
(x) no further approval, authorization, consent or
other order of any public board or body is required in connection with
the execution and delivery of this Agreement and consummation of the
Conversion except for the following approvals, all of which have been
obtained (subject to the filing or submission of certain required
post-Conversion reports or other materials by the Company or the Bank):
(i) the approval of the Merger Application by the Department and the
approval of the Conversion Application by the FDIC, (ii) the
declaration of effectiveness of the Registration Statement and the
Prospectus and any required post-effective amendment to the
Registration Statement and the Prospectus by the SEC, the Department
and the FDIC, and (iii) the issuance to the Bank of the Stock Charter
by the Department;
(xi) the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part of
the Bank; and this Agreement is a legal, valid and binding obligation
of the Bank, enforceable in accordance with its terms, except as may be
limited (A) by bankruptcy, insolvency, reorganization, moratorium,
reorganization or similar laws relating to or affecting the enforcement
of creditors' rights generally or the rights of creditors of financial
institutions the accounts of which are insured by the FDIC, and (B) by
general equity principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law;
(xii) the statements in the Prospectus under the
caption "THE MERGER CONVERSION," insofar as they are, or refer to,
statements of law or legal conclusions, have been prepared or reviewed
by such counsel and are correct and complete in all material respects;
(xiii) to the best of such counsel's knowledge, there
are no material contracts, indentures, mortgages, loan agreements,
notes, leases, or other material instruments to which the Bank is a
party and which are required to be described or
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Hopper Soliday & Co., Inc.
February __, 1999
Page 25
referred to in the Prospectus or to be filed as exhibits thereto other
than those described or referred to therein or filed as exhibits
thereto; the descriptions of certain provisions of contracts,
agreements or other documents (assuming for purposes of rendering this
opinion the validity and enforceability thereof) to which the Bank is a
party which are described in the Prospectus, insofar as they purport to
summarize such provisions of such contracts, agreements or other
documents, have been reviewed by such counsel and constitute in all
material respects accurate and fair summaries of such provisions
purported to be summarized for purposes of the Prospectus.
(xiv) the Merger Application has been approved by the
Department and the Conversion Application has been approved by the FDIC
and the Prospectus and any post-effective amendments thereto have been
duly authorized for final use by the SEC, the Department and the FDIC;
the Stock Charter has been declared effective by the Department; and no
order has been issued by or proceedings pending by or before the SEC,
the Department or the FDIC seeking to revoke or rescind the orders
declaring the Registration Statement or Prospectus effective or
authorizing or approving the Merger Application or the Conversion
Application or, to the knowledge of such counsel, are any such
proceedings contemplated or threatened; and, to such counsel's
knowledge and information, no Person has sought to obtain regulatory or
judicial review of the final action of the Department or the FDIC
approving the Merger Application and the Conversion Application;
(xv) the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby do not
conflict with nor result in a breach of the articles of incorporation,
certificate of incorporation, charter or bylaws of the Bank;
(xvi) the Conversion Application and the Prospectus
(in each case as amended or supplemented, if so amended or
supplemented) comply as to form in all material respects to the
requirements of the Conversion Regulations, the 1933 Act and related
SEC regulations, and applicable state securities laws, as the case may
be (except as to information with respect to, the Manager contained
therein, and except as to financial statements, notes to financial
statements, financial tables and other financial and statistical data,
including the appraisal, included therein, as to which no opinion need
be expressed); to such counsel's knowledge, all exhibits required to be
filed with the Conversion Application and the Prospectus (in each case
as amended or supplemented, if so amended or supplemented) have been so
filed and the description in the Conversion Application and the
Offering Circular of such documents and exhibits is accurate in all
material respects;
In rendering such opinion, such counsel may rely as to matters of fact
on certificates of officers and directors of the Company and the Bank and
certificates of public officials delivered pursuant hereto. Such counsel may
assume that any agreement is the valid and binding obligation of any parties to
such agreement other than the Bank. Such opinion may be governed by, and
interpreted in accordance with, the Accord, and, as a consequence, references in
such opinion to such counsel's "knowledge" may be limited to "actual knowledge"
as defined in the Accord (or knowledge based on certificates). Such opinion may
be limited to present statutes,
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 26
regulations and judicial interpretations and to facts as they presently exist;
in rendering such opinion, such counsel need assume no obligation to revise or
supplement it should the present laws be changed by legislative or regulatory
action, judicial decision or otherwise; and such counsel need express no view,
opinion or belief with respect to whether any proposed or pending legislation,
if enacted, or any regulations or any policy statements issued by any regulatory
agency, whether or not promulgated pursuant to any such legislation, would
affect the validity of the execution and delivery by the Bank of this Agreement.
(f) At the Closing Date, the Manager shall receive the letter
of ____________________, special counsel for the Bank, dated the Closing Date,
addressed to the Manager, in form and substance reasonably acceptable to the
Manager, to the effect that, based on such counsel's participation in
conferences with representatives of the Company and the Bank, their counsel, the
independent appraiser, and the independent public accountants for the Company
and the Bank, review of documents and understanding of applicable law (including
the requirements of the Conversion Regulations) and the experience such counsel
has gained in its practice, and while such counsel undertakes no responsibility
for the accuracy or completeness of the information set forth therein, nothing
has come to such counsel's attention that would lead it to believe that the
Prospectus, as amended (except as to information in respect of the Manager
contained therein, and except as to the financial statements, notes to financial
statements, financial tables and other financial and statistical data, including
the appraisal, contained therein, as to which such counsel need express no
comment), at the time it or any amendment thereto became effective contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made not misleading. (In making this
statement, such counsel may state that it has not undertaken to verify
independently the information in the Prospectus and therefore does not assume
any responsibility for the accuracy or completeness thereof.)
Such counsel may further state, if true, that in the period of time
from the effective date of the Prospectus to the date of its letter, such
counsel did not meet with representatives of the Company or the Bank, or
representatives of their accountants, in any conferences at which the contents
of the Prospectus were discussed, nor did such counsel otherwise undertake any
procedures (other than the review of documents delivered to the Manager on the
Closing Date pursuant to this Agreement) which were intended or likely to elicit
information concerning the accuracy, completeness or fairness of the statements
made in the Prospectus. Nevertheless, in the course of such counsel's
representation of the Bank in connection with this Agreement, no information has
come to its attention since such effective date which causes such counsel to
believe as of the date of its opinion that the Prospectus (excluding the
financial statements, financial tables and other financial and statistical data,
including the appraisal, contained therein, as to which such counsel need
express no comment) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
In rendering such letter, such counsel may rely as to all matters of
fact on certificates of officers and directors of the Company or the Bank and
certificates of public officials delivered
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Hopper Soliday & Co., Inc.
February __, 1999
Page 27
pursuant hereto. Such counsel may assume based upon a certificate of officers of
the Company and the Bank that any agreement is the valid and binding obligation
of any parties to such agreement other than the Bank. Such letter may be
governed by, and interpreted in accordance with, the Accord and, as a
consequence, references in such letter to such counsel's "knowledge" shall mean
"actual knowledge" as defined in the Accord (or knowledge based upon
certificates). In addition, such letter may be limited to present statutes,
regulations and judicial interpretations and to facts as they presently exist;
in rendering such letter, such counsel need assume no obligation to revise or
supplement them should the present laws be changed by legislative or regulatory
action, judicial decision or otherwise; and such counsel need express no view,
opinion or belief with respect to whether any proposed or pending legislation,
if enacted, or any regulations or any policy statements issued by any regulatory
agency, whether or not promulgated pursuant to any such legislation, would
affect the validity of the execution and delivery by the Bank of this Agreement.
(g) Counsel for the Manager shall have been furnished such
documents as they reasonably may require for the purpose of enabling them to
review or pass upon the matters required by the Manager, and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including, but not
limited to, resolutions of the Board of Directors of the Company and the Board
of Trustees of Bank regarding the authorization of this Agreement and the
transactions contemplated hereby.
(h) Prior to and at the Closing Date, in the reasonable
opinion of the Manager, (i) there shall have been no material adverse change in
the condition or affairs, financial or otherwise, of the Company or the Bank
from that as of the latest date as of which such condition is set forth in the
Prospectus except as referred to therein; (ii) there shall have been no material
transaction entered into by the Company or the Bank from the latest date as of
which the financial condition of the Company or the Bank is set forth in the
Prospectus other than transactions referred to or contemplated therein,
transactions in the ordinary course of business, and transactions which are not
material to the Company and the Bank, taken as a whole; (iii) neither the
Company nor the Bank shall have received from the Department or the FDIC any
direction (oral or written) to make any material change in the method of
conducting their respective businesses with which they have not complied or any
direction (oral or written) which materially and adversely would affect the
business, operations, financial condition or income of the Company and the Bank,
taken as a whole (which direction, if any, shall have been disclosed to
Manager); (iv) no action, suit or proceeding, at law or in equity or before or
by any federal or state commission, board or other administrative agency, shall
be pending or to the knowledge of the Company or the Bank, threatened against
the Company or the Bank or affecting any of their respective assets wherein an
unfavorable decision, ruling or finding materially and adversely would affect
the business, operations, financial condition or income of the Company and the
Bank, taken as a whole; (v) neither the Company nor the Bank shall have been in
default (nor shall an event have occurred which, with notice or lapse of time or
both, would constitute a default) under any provision of any agreement or
instrument relating to any outstanding indebtedness, which default would have a
material adverse effect on the Company and the Bank taken as a whole; and (vi)
the Shares shall have been qualified or registered for offering and sale by the
Company, where not exempt from such registration or qualification, under the
securities
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 28
or Blue Sky laws of such jurisdictions as the Manager and the Company shall have
agreed upon.
(i) At the Closing Date, the Manager shall receive a
certificate of the President and the principal accounting officer of each of the
Company and the Bank, dated the Closing Date, to the effect that: (i) they have
examined the Prospectus and in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading with respect to the Company and the Bank; (ii) since the date the
Prospectus became authorized for final use, no event has occurred which should
have been set forth in an amendment or supplement to the Prospectus which has
not been so set forth, including specifically, but without limitation, any
material adverse change in the business, financial condition, income or affairs
of the Company or the Bank, and the conditions set forth in clauses (a) and (b)
of this Section 7 have been satisfied; (iii) to their knowledge, no order has
been issued by any federal or state authority or the FDIC to suspend the
Offerings or the effectiveness of the Registration Statement or Prospectus, and
no action for such purposes has been instituted or threatened by any federal or
state authority or the FDIC; (iv) as of the Closing Date, except as contemplated
in the Prospectus, there has not been any increase in the long-term debt of the
Company or the Bank; (v) to the knowledge of such officers, no person has sought
to obtain review of the final action of the Department or the FDIC approving the
Plan; and, (vi) all of the representations and warranties contained in Sections
2 and 3 of this Agreement are true and correct, with the same force and effect
as though expressly made on the Closing Date.
(j) At the Closing Date (or as soon thereafter as available),
the Manager shall receive, among other documents, (i) a copy of the letters from
the Department and the FDIC authorizing the use of the Prospectus, (ii) a copy
of a letter from the Department evidencing the good standing of the Bank; (iii)
a copy of the letter from the Department evidencing the good standing of FSSB;
(iv) a copy of a certificate from the Pennsylvania Department of State
evidencing the good standing of the Company; (v) a copy of the Company's
articles of incorporation, certified by the appropriate Pennsylvania
governmental authority; (vi) a copy of the letters from the Department approving
the Bank's Stock Charter; and (vii) a copy of the letters from the Department
and the FDIC approving the Plan.
(k) The Manager shall have received a letter or letters at the
Closing Date, as the case may be, each dated the date of its delivery, from
Feldman Financial Advisors, Inc. confirming the results of its appraisal, that
the appraisal conforms to the requirements of the Department and the FDIC and
that it is independent with respect to the Company, the Bank, and the Manager
within the requirements of the Department and the FDIC.
(l) Concurrently with the execution of this Agreement, the
Manager shall receive a letter from Deloitte & Touche, LLP dated the date hereof
and addressed to the Manager: (i) confirming that Deloitte & Touche, LLP is a
firm of independent public accountants within the meaning of the Act and no
information concerning its relationship with or interests in the Company and the
Bank is required to be stated in the Prospectus, and stating in effect that in
Deloitte & Touche's opinion the consolidated financial statements of the Company
for the years ended June 30, 1998, 1997 and 1996, as are included in the
Prospectus
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 29
and covered by its opinion included therein, comply as to form in all material
respects with the applicable accounting requirements of the Conversion
Regulations and the related published rules and regulations of the Department
and the FDIC and generally accepted accounting principles; (ii) stating in
effect that, on the basis of certain agreed upon procedures (but not an audit
examination in accordance with generally accepted auditing standards) consisting
of a reading of the latest available unaudited interim consolidated financial
statements of the Company prepared by the Company, a reading of the minutes of
the meetings of the Board of Directors of the Company and consultations with
officers of the Company responsible for financial and accounting matters,
nothing came to their attention which caused them to believe that: (A) such
unaudited financial statements, including Recent Developments, if any, are not
in conformity with generally accepted accounting principles applied on a basis
consistent with that of the audited financial statements included in the
Prospectus; or (B) during the period from the date of the latest unaudited
consolidated financial statements included in the Prospectus to a specified date
not more than five (5) business days prior to the date hereof, there was any
material increase in borrowings of (defined as advances from the Federal Reserve
Bank of Philadelphia or the Federal Home Loan Bank of Pittsburgh, securities
sold under agreements to repurchase and any other form of debt other than
deposits) the Company (increases in borrowings will not be deemed material if
such increase in total borrowings outstanding does not exceed $250,000); or (C)
there was any decrease in consolidated retained earnings of the Company at the
date of such letter as compared with amounts shown in the latest unaudited
consolidated statement of condition included in the Prospectus or there was any
decrease in consolidated net income or net interest income of the Company for
the number of full months commencing immediately after the period covered by the
latest unaudited consolidated income statement included in the Prospectus and
ended on the latest month end prior to the date of the Prospectus or the date of
such letter as compared to the corresponding period in the preceding year; and
(iii) stating that, in addition to the audit examination referred to in their
opinions included in the Prospectus and the performance of the procedures
referred to in clause (ii) of this subsection (l), they have compared with (A)
the consolidated financial statements of the Company or (B) analyses and other
data prepared by the Company from the general accounting records of the Company,
which are subject to the internal controls of the Company, to the extent
specified in such letter, such amounts and/or percentages set forth in the
Prospectus as the Manager may reasonably request; and they have found such
amounts and percentages to be in agreement therewith (subject to rounding).
(m) At the Closing Date, the Manager shall receive a letter in
form and in substance satisfactory to counsel for the Manager from Deloitte &
Touche, independent certified public accountants, dated the Closing Date and
addressed to the Manager, confirming the statements made by them in the letter
delivered by them pursuant to the preceding subsection as of a specified date no
more than three (3) business days prior to the Closing Date.
(n) Concurrently with the execution of this Agreement, the
Manager shall receive a letter from Joseph N. Spaniel, CPA dated the date hereof
and addressed to the Manager: (i) confirming that Joseph N. Spaniel, CPA is a
firm of independent public accountants within the meaning of the Act and no
information concerning its relationship with or interests in the Company and the
Bank is required to be stated in the Prospectus, and stating in effect that in
Joseph N. Spaniel's opinion the consolidated financial statements of the Bank
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 30
for the years ended June 30, 1998, 1997 and 1996, comply as to form in all
material respects with the applicable accounting requirements of the Conversion
Regulations and the related published rules and regulations of the Department
and the FDIC and generally accepted accounting principles; (ii) stating in
effect that, on the basis of certain agreed upon procedures (but not an audit
examination in accordance with generally accepted auditing standards) consisting
of a reading of the latest available unaudited interim consolidated financial
statements of the Bank prepared by the Bank, a reading of the minutes of the
meetings of the Board of Directors of the Bank and consultations with officers
of the Bank responsible for financial and accounting matters, nothing came to
their attention which caused them to believe that: (A) such unaudited financial
statements, including Recent Developments, if any, are not in conformity with
generally accepted accounting principles applied on a basis consistent with that
of the audited financial statements referenced above; or (B) during the period
from the date of the latest unaudited consolidated financial statements for the
fiscal quarter ended immediately prior to the date hereof, to a specified date
not more than five (5) business days prior to the date hereof, there was any
material increase in borrowings of (defined as advances from the Federal Reserve
Bank of Philadelphia or the Federal Home Loan Bank of Pittsburgh, securities
sold under agreements to repurchase and any other form of debt other than
deposits) the Bank (increases in borrowings will not be deemed material if such
increase in total borrowings outstanding does not exceed $250,000); or (C) there
was any decrease in consolidated retained earnings of the Bank at the date of
such letter as compared with amounts shown in such latest unaudited consolidated
or there was any decrease in consolidated net income or net interest income of
the Bank for the number of full months commencing immediately after the period
covered by such latest unaudited consolidated income statement and ended on the
latest month end prior to the date of the Prospectus or the date of such letter
as compared to the corresponding period in the preceding year; and (iii) stating
that, in addition to the audit examination referred to in their opinions
included in such audited financial statement and the performance of the
procedures referred to in clause (ii) of this subsection (n), they have compared
with (A) the consolidated financial statements of the Bank or (B) analyses and
other data prepared by the Bank from the general accounting records of the Bank,
which are subject to the internal controls of the Bank, to the extent specified
in such letter, such amounts and/or percentages set forth in the Prospectus as
the Manager may reasonably request; and they have found such amounts and
percentages to be in agreement therewith (subject to rounding).
(o) At the Closing Date, the Manager shall receive a letter in
form and in substance satisfactory to counsel for the Manager from Joseph N.
Spaniel, CPA, independent certified public accountants, dated the Closing Date
and addressed to the Manager, confirming the statements made by them in the
letter delivered by them pursuant to the preceding subsection as of a specified
date no more than three (3) business days prior to the Closing Date.
(p) The Company and the Bank shall not have sustained since
the date of the latest financial statements included in the Prospectus any loss
or interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and since the respective dates as of which
information is given in the Prospectus, there shall not have been any change in
the consolidated long-term debt of the Company or Bank, or any change, or any
development involving a prospective change, in or
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 31
affecting the general affairs, management, financial position, stockholders'
equity or results of operations of the Company or the Bank, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in any such
case described above, is in the Manager's reasonable judgment sufficiently
material and adverse as to make it impracticable or inadvisable to proceed with
the Offerings or the delivery of the Shares on the terms and in the manner
contemplated in the Prospectus.
(q) The Manager shall have received a certified copy of the
Bank's stock charter to the extent one is issued by the Department.
All such opinions, certificates, letters and documents shall be deemed
to be in compliance with the provisions hereof only if they are, in the
reasonable opinion of the Manager and its counsel, satisfactory to the Manager
and its counsel. Any certificates signed by an officer or director of the
Company or the Bank and delivered to the Manager or to counsel for the Manager
shall be deemed a representation and warranty by the Company and the Bank to the
Manager as to the statements made therein. If any condition to the Manager's
obligations hereunder to be fulfilled prior to or at the Closing Date is not so
fulfilled, the Manager may terminate this Agreement or, if the Manager so
elects, may waive any such fulfillment. If the Manager terminates this Agreement
as aforesaid, the Company or the Bank shall pay the financial advisory fee
(previously paid) as a termination fee and reimburse the Manager for its
accountable expenses as provided in Section 4 hereof.
8. Indemnification. (a) The Company agrees to indemnify and hold
harmless the Manager, its officers, directors and employees and each person, if
any, who controls the Manager within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "Act") or Section 20(a) of the Exchange Act,
against any and all loss, liability, claim, damage and expense whatsoever and
shall further promptly reimburse such persons for any legal or other expenses
reasonably incurred by each or any of them in investigating, preparing to defend
or defending against any such action, proceeding or claim (whether commenced or
threatened) arising out of any misrepresentation by the Company or the Bank in
this Agreement or any breach of warranty by the Company or the Bank with respect
to this Agreement or arising from any theory of liability whatsoever relating to
the Prospectus or Conversion Application or Blue Sky Applications or any aspect
of the Conversion or arising out of or based upon any untrue or alleged untrue
statement of a material fact or the omission or alleged omission of a material
fact required to be stated or necessary to make not misleading any statements
contained in (i) any other document, advertisement, oral statement, or
communication ("Sales Information") prepared, made or executed by or on behalf
of the Company or the Bank with its consent or based upon written or oral
information furnished by the Company or the Bank, whether or not filed in any
jurisdiction in order to qualify or register the Shares under the securities
laws thereof; (ii) the Prospectus, (iii) any application (including the
Conversion Application and Blue Sky Applications) or other document or
communication (in this Section 8 collectively called "Application") prepared or
executed by or on behalf of the Company or the Bank or based upon written
information furnished by or on behalf of the Company or the Bank with its
consent, whether or not filed in any jurisdiction, to effect the Conversion or
qualify the Shares under the securities laws thereof or filed with the FDIC or
the Department unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 32
Company or the Bank with respect to the Manager by or on behalf of the Manager
expressly for use under the caption "THE MERGER AGREEMENT - Community Offering"
and "THE MERGER AGREEMENT - Marketing Arrangements" in the Prospectus or any
amendment or supplement thereof or in any Application, or (iv) any unwritten
statement made to a purchaser of the Shares by any director or officer or any
person employed by or associated with the Company or the Bank other than the
Manager, its officers, directors or employees. This indemnity shall be in
addition to any liability the Company or the Bank may have to the Manager
otherwise.
(b) The Manager agrees to indemnify and hold harmless the
Company and the Bank, their officers and directors and each person, if any, who
controls the Company and the Bank within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity
from the Company and the Bank to the Manager, but only with respect to
statements or omissions, if any, made in the Prospectus or any amendment or
supplement thereof or in any Application in reliance upon, and in conformity
with, written information furnished to the Company or the Bank with respect to
the Manager by or on behalf of the Manager expressly for use under the caption
"THE MERGER AGREEMENT Community Offering" and "THE MERGER AGREEMENT - Marketing
Arrangements" in the Prospectus or in any Application.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party, to
assume the defense thereof, with counsel satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to assume
the defense of any such action and retain counsel acceptable to the indemnified
party, the indemnified party may retain additional counsel but shall bear the
fees and expenses of such counsel unless (i) the indemnifying party shall have
specifically authorized the indemnified party to retain such counsel or (ii) the
parties to such suit include such indemnifying party and the indemnified party,
and such indemnified party shall have been advised by counsel that one or more
material legal defenses may be available to the indemnified party that may not
be available to the indemnifying party, in which case the indemnifying party
shall not be entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such counsel.
(d) Neither the indemnified party nor the indemnifying party
may agree to any settlement of any action, proceeding, or claim without the
written consent of the other, which consent shall be unreasonably withheld or
delayed.
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 33
9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or the Manager, the Company,
the Bank and the Manager shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding, but after deducting any contribution received by the Company
or the Bank or the Manager from persons other than the other party thereto, who
may also be liable for contribution) in such proportion so that the Manager is
responsible for that portion represented by the percentage that the fees paid to
the Manager pursuant to Section 4 of this Agreement (not including expenses)
bears to the gross proceeds received by the Company from the sale of the Shares
in the Subscription and Community Offering, and the Company and the Bank shall
be responsible for the balance. If, however, the allocation provided above is
not permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative fault of the Company and the
Bank on the one hand and the Manager on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions, proceedings or claims in respect thereof), but also the
relative benefits received by the Company and the Bank on the one hand and the
Manager on the other from the Offering, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Bank on
the one hand and Manager on the other shall be deemed to be in the same
proportion as the total gross proceeds from the Subscription and Community
Offering (before deducting expenses) received by the Company bear to the total
fees (not including expenses) received by the Manager. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company and/or the Bank
on the one hand or the Manager on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Bank and the Manager agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by pro-rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
Section 9. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or action, proceedings or claims in
respect thereof) referred to above in Section 8 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action, proceeding or claim.
It is expressly agreed that the Manager shall not be liable for any loss,
liability, claim, damage or expense or be required to contribute any amount
which in the aggregate exceeds the amount paid (excluding reimbursable expenses)
to the Manager under this Agreement. It is understood that the above-stated
limitation on the Manager's liability is essential to the Manager and that the
Manager would not have entered into this Agreement if such limitation had not
been agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation. The obligations of the Company and the Bank,
as well as the Manager, under this Section 9 and under Section 8 shall be in
addition to any liability which the Company and Bank and the Manager may
otherwise have. For purposes of this Section 9, each of the
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Hopper Soliday & Co., Inc.
February __, 1999
Page 34
Manager's, the Company's or the Bank's officers and directors and each person,
if any, who controls the Manager or the Company or the Bank within the meaning
of the Act and the Exchange Act shall have the same rights to contribution as
the Manager, the Company and the Bank. Any party entitled to contribution,
promptly after receipt of notice of commencement of any action, suit, claim or
proceeding against such party in respect of which a claim for contribution may
be made against another party under this Section 9, will notify such party from
whom contribution may be sought, but the omission to so notify such party shall
not relieve the party from whom contribution may be sought from any other
obligation it may have hereunder or otherwise under this Section 9.
10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company and the Bank and the Manager and the
representations and warranties of the Company and the Bank set forth in or made
pursuant to this Agreement shall remain in full force and effect, regardless of
any termination or cancellation of this Agreement or any investigation made by
or on behalf of the Manager or the Company and the Bank or any controlling
person or indemnified party referred to in Section 8 hereof, and shall survive
any termination of this Agreement and/or the issuance of the Shares, and any
successor or assign of the Manager, the Company, the Bank, any such controlling
person, and any legal representative of the Manager, the Company, the Bank and
any such controlling person shall be entitled to the full benefit of the
respective agreements, indemnities, warranties and representations. In addition,
the provisions of Section 4 of this Agreement shall survive termination of this
Agreement.
11. Termination. The Manager may terminate this Agreement by giving the
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or
occurrence has materially disrupted the United States securities markets such as
to make it, in the Manager's reasonable opinion, impracticable to proceed with
the offering of the Shares; or if trading on the New York Stock Exchange shall
have been suspended; or if the United States shall have become involved in a war
or major hostilities; or if a general banking moratorium has been declared by a
federal authority; or if there shall have been a material adverse change in the
capitalization, condition or business of the Company or the Bank; or if the
Company or the Bank shall have sustained a material loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act, whether or not said loss shall have been insured or if there shall be any
litigation, pending or threatened which makes it, in the Manager's opinion,
impracticable or inadvisable to offer the Shares.
(b) In the event the Company and the Bank fail to satisfy the
conditions set forth in Section 7 on the designated Closing Date or the Company
fails to sell the minimum number of the Shares within the period specified, in
accordance with the provisions of the Plan or as required by the Conversion
Regulations and applicable law, this Agreement shall terminate upon refund by
the Bank and the Company to each person who has subscribed for or ordered any of
the Shares the full amount which it may have received from such person, together
with interest as provided in the Offering Circular, and no party to this
Agreement shall have any obligation to the other hereunder, except for payment
by the Bank and/or the Company as set
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 35
forth in Sections 4, 6, and 9 hereof.
(c) If the Manager elects to terminate this Agreement as
provided in this Section 11, the Company and the Bank shall be notified promptly
by the Manager by telephone or telegram, confirmed by letter.
(d) If this Agreement is terminated by the Manager for any of
the reasons set forth in subsection (a) above, the Company and the Bank, to
fulfill their obligations pursuant to Sections 4, 6, 8(a) and 9 of this
Agreement, shall pay upon demand to the Manager the full amount properly owing
thereunder.
12. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, or by registered or certified mail, postage pre-paid to
the persons at the addresses set forth below (or at such other addresses or
facsimile numbers as may hereafter be designated as provided below), and shall
be deemed to have been delivered as of the date received by the Party to which,
or to whom it is addressed:
If to the Manager: Hopper Soliday & Co., Inc.
1703 Oregon Pike
P.O. Box 4548
Lancaster, PA 17604-4548
Fax: (717) 560-3063
Attn: Eric G. Hoerner, Senior Vice President
With a Copy to: Rhoads & Sinon LLP
One South Market Square, P.O. Box 1146
Harrisburg, PA 17108
Fax: (717) 231-6676
Attn: Dean H. Dusinberre, Esq.
If to the Company: First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, PA 18018
Fax: (610) 997-5655
Attn: Joseph T. Svetik, President & CEO
With a Copy to: Malizia, Spidi, Sloane & Fisch
1301 K Street, N.W., Suite 700E
Washington, D.C. 20005
Fax: (202) 434-4661
Attn: Gregory A. Gehlmann, Esq.
<PAGE>
Hopper Soliday & Co., Inc.
February __, 1999
Page 36
If to the Bank: Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, PA 18240
Fax: (717) 669-6773
Attn: Francis X. Koomar, President
With a copy to:
13. Parties. The Company and the Bank shall be entitled to act and rely
on any request, notice, consent, waiver or agreement purportedly given on behalf
of the Manager when the same shall have been given by the undersigned. The
Manager shall be entitled to act and rely on any request, notice, consent,
waiver or agreement purportedly given on behalf of the Company or the Bank, when
the same shall have been given by the undersigned or any other officer of the
Company or the Bank. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Manager, the Company, the Bank and the controlling
persons and identified parties referred to in Section 8 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision herein
contained.
14. Closing. The closing for the sale of the Shares shall take place
on the Closing Date, at such location as mutually agreed upon by the Manager and
the Company. The Company or the Bank shall deliver to the Manager in immediately
available funds the remaining financial advisory fees and expenses due and owing
to the Manager as set forth in Sections 4 and 6 hereof and the opinions and
certificates required hereby and other documents deemed reasonably necessary by
the Manager shall be executed and delivered to effect the sale of the Shares as
contemplated hereby and pursuant to the terms of the Prospectus.
15. Partial Invalidity. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstance or
situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
16. Construction. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
17. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
EXHIBIT 2
<PAGE>
AMENDED MERGER CONVERSION AGREEMENT
-----------------------------------
THIS MERGER CONVERSION AGREEMENT ("Agreement") is entered into as of
this ___ day of February, 1999 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, on August 14, 19998, First Star, the Bank and NSB entered into
a Merger Conversion Agreement ("Conversion Agreement");
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, First Star, the Bank and NSB have filed various applications
and notices with the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation ("FDIC");
WHEREAS, pursuant to discussions with the FDIC regarding the
determination of the market price of First Star's common stock and other items,
the parties have determined to amend the Conversion Agreement;
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
<PAGE>
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):
(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
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<PAGE>
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
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
4
<PAGE>
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
thereof, radon, radioactive material, asbestos, asbestos containing material,
urea formaldehyde foam 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
average 25 trading days of the First Star Common Stock as reported on the OTC
Bulletin Board prior to the date the Prospectus is deemed effective by the SEC,
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, (b) changes in
GAAP or regulatory accounting requirements applicable to banks and thrifts
generally, or (c) direct and indirect costs incurred to implement this
Agreement.
(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.
5
<PAGE>
(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 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.
6
<PAGE>
(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.
(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
7
<PAGE>
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, preference in the Community Offering will be given first to
the Bank's Employee Stock Ownership Plan ("ESOP"), second to current
shareholders of First Star, and third to persons residing in the Local
Community, as defined in the Plan.
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.
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
8
<PAGE>
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 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.
9
<PAGE>
(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 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
10
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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 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
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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) 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
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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 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.
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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, 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
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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,
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
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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 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,
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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 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
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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.
(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.
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(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, 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.
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(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, 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.
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(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.
(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
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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 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.
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(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.
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
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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.
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
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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 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
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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 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.
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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.
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
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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 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,
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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.
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.
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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 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
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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 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.
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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.
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
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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.
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.
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(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:
"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.
(iv) Additional Agreements. First Star agrees to
implement the activities or programs set forth at Exhibit B hereto.
(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;
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(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.
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.
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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.
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;
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(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;
(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. 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;
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(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 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;
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(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 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
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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;
(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
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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 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 canceled
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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 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
Amended 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 Voting Depositors of NSB at a special meeting of the Voting
Depositors to be called to consider the Merger Conversion by the affirmative
vote of Voting Depositors 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 Amended Merger Conversion
Agreement, dated as of February __, 1999, 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 Voting Depositors 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 Voting Depositors 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 Voting
Depositors 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 Voting Depositors 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 first, to the Bank's Employee Stock Ownership Plan, second to
shareholders of First Star, and third, 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 $100,000 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 $100,000 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. Depositors 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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<PAGE>
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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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.H. of this Plan.
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EXHIBIT B
1. First Star will agree to construct a new facility, including a
drive-up window, ATM machine and off street parking.
2. First Star will make donations of $25,000 to local charitable
organizations during the twelve months after completion of the
transaction, with priority given to those charities that have
had accounts on deposit at 12/31/97 and 12/31/98.
3. First Star will offer a 50 basis point discount (on its
already discounted rates) on $1,000,000.00 in small business
loans to companies located primarily in Nesquehoning and
surrounding communities (Weatherly, Jim Thorpe, Coaldale,
Lansford, Summit Hill and Lehighton), including but not
limited to SBA guaranteed loans. In the event First Star
cannot make such loans within a two-year period, it will
commit to make up any difference in charitable contributions
to the Nesquehoning community.
4. First Star will ^ make a pro rata distribution of $400,000 to
depositors who had deposit accounts at ^ June 30, 1998 and who
continue to maintain the account through June 30, 2000.
5. First Star will offer personal checking and business checking,
commercial lending and safe deposit boxes.
6. First Star will match or beat any local deposit rate paid by a
competitor to any Nesquehoning resident and customer as of
12/31/98 for a period through June 30, 2000.
7. First Star will match or beat any mortgage interest rate paid
by any local federally insured financial institution to any
depositor or borrower of NSB at 12/31/98 through the date June
30, 2000.
8. First Star will agree to complete the rehabilitation of the
old Nesquehoning High School. First Star will continue to work
with the FHLB, of Pittsburgh to acquire Affordable Housing
Program ("AHP") funds for the facility.
9. First Star will continue to sponsored the $210,000 AHP grant
for the next town of Weatherly, Pa. in order to assist Carbon
County build 27 units for the elderly.
EXHIBIT 5.1
<PAGE>
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
February 10, 1999
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"), 58,840 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 assume no obligation to advise you of changes that may hereafter be
brought to our attention.
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
and Tax Matters" in the Prospectus forming a part of the Registration Statement.
^ 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.
EXHIBIT 5.2
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------------------------------------------------------
1725 K STREET, NW - SUITE 205
WASHINGTON, DC 20006
(202) 467-6862 o FAX (202) 467-6963
^February 10, 1999
Board of Trustees
Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
Gentlemen:
It is the opinion of Feldman Financial Advisors, Inc., that the subscription
rights to be received by the eligible account holders and other eligible
subscribers of Nesquehoning Savings Bank (the "Bank"), pursuant to the Plan of
Conversion and Merger Conversion Agreement adopted by the Board of Trustees of
the Bank, do not have any economic value at the time of distribution or at the
time the rights are exercised in the subscription offering.
Such opinion is based on the fact that the subscription rights are acquired by
the recipients without payment therefor, are nontransferable and of short
duration, and afford the recipients the right only to purchase shares of common
stock of First Star Bancorp, Inc., at a price approximately equal to their
estimated fair market value. ^
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
EXHIBIT 23.2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. ^4 of the Registration
Statement of First Star Bancorp, Inc. on Form SB-2 of our report dated August
19, 1998, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February ^10, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,013
<INT-BEARING-DEPOSITS> 253
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,806
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 178,379
<ALLOWANCE> 1,543
<TOTAL-ASSETS> 331,643
<DEPOSITS> 155,236
<SHORT-TERM> 24,300
<LIABILITIES-OTHER> 3,652
<LONG-TERM> 132,768
27
27
<COMMON> 372
<OTHER-SE> 15,587
<TOTAL-LIABILITIES-AND-EQUITY> 331,643
<INTEREST-LOAN> 3,564
<INTEREST-INVEST> 2,388
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,952
<INTEREST-DEPOSIT> 1,881
<INTEREST-EXPENSE> 4,165
<INTEREST-INCOME-NET> 1,787
<LOAN-LOSSES> 97
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,001
<INCOME-PRETAX> 848
<INCOME-PRE-EXTRAORDINARY> 848
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.68
<YIELD-ACTUAL> 2,483
<LOANS-NON> 2,483
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 168
<ALLOWANCE-OPEN> 1,489
<CHARGE-OFFS> 0
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,543
<ALLOWANCE-DOMESTIC> 1,543
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99.3
<PAGE>
NESQUEHONING SAVINGS BANK
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
(717) 669-6521
---------------------------------
NOTICE OF SPECIAL MEETING OF DEPOSITORS
----------------------------------
Notice is hereby given that a Special Meeting of the Depositors of
Nesquehoning Savings Bank ("Nesquehoning") will be held at Nesquehoning Savings'
office, 301 West Catawissa Street, Nesquehoning, Pennsylvania, on
_________________, 1999 at ____:00 ____.m., local time, to consider and vote
upon:
1. The Merger Conversion Agreement and Plan of Conversion
(collectively, the "Plan") pursuant to which Nesquehoning will (i)
convert from a Pennsylvania-chartered mutual savings bank to a
Pennsylvania-chartered stock savings bank; and (ii) simultaneously
merge with and into First Star Savings Bank, a Pennsylvania-chartered
stock savings bank headquartered in Bethlehem, Pennsylvania ("First
Star Savings"); and (iii) First Star Bancorp, Inc., a Pennsylvania
stock holding company of First Star Savings (the "First Star Bancorp"))
will offer for sale in a stock offering shares of its common stock
("Common Stock") in an amount equal to approximately 90% of the market
value of Nesquehoning (as determined by an independent valuation) on a
priority basis to certain of the Nesquehoning's depositors and certain
others; and
2. Such other business as may properly come before the meeting
and any adjournment(s) thereof. Management is not aware of any other
matters that may come before the Special Meeting.
The record date for determining Nesquehoning's depositors entitled to
notice of, and to vote at, the Special Meeting, and at any adjournment(s)
thereof, is _______________, 1999 (the "Voting Record Date"). Only holders of
Nesquehoning withdrawable accounts as of the Voting Record Date ("Voting
Depositors") will be entitled to vote at the Special Meeting or at any
adjournment(s) thereof. A deposit account creates a single depositor
relationship for voting purposes, even though more than one person has an
interest in such deposit account. Each Voting Depositor who is a holder of any
Nesquehoning withdrawable account has one vote for each $100, or fraction
thereof, on deposit in such account. No Voting Depositor will be entitled to
cast more than 1,000 votes. Approval of the Plan requires the affirmative vote,
cast in person or by proxy, of a majority of the total votes entitled to be cast
by Voting Depositors at the Special Meeting.
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY CARD(S)
IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. THIS WILL ASSURE YOUR REPRESENTATION AT THE
SPECIAL MEETING AND MAY AVOID THE COST OF ADDITIONAL COMMUNICATIONS. THIS WILL
NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY
REVOKE YOUR WRITTEN PROXY BY A WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY
<PAGE>
OF NESQUEHONING AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING. PROPERLY
COMPLETED PROXIES WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS INDICATED
THEREON, OR IF NO INSTRUCTIONS ARE INDICATED, FOR APPROVAL OF THE PLAN.
YOUR PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF NESQUEHONING. THE BOARD OF
TRUSTEES UNANIMOUSLY RECOMMENDS THAT VOTING DEPOSITORS VOTE "FOR" APPROVAL OF
THE PLAN. FAILURE TO RETURN A PROXY OR TO VOTE IN PERSON WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE PLAN. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE
ANY PERSON TO PURCHASE COMMON STOCK, AND VOTING AGAINST THE PLAN OR A FAILURE TO
VOTE WILL NOT PRECLUDE ANY SUCH PURCHASE.
YOUR PROXY IS SOLICITED FOR THE SPECIAL MEETING ONLY, AND ANY ADJOURNMENT(S)
THEREOF, AND WILL NOT BE USED FOR ANY OTHER MEETING. THIS PROXY STATEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, COMMON
STOCK. SUCH COMMON STOCK TO BE OFFERED TO VOTING DEPOSITORS AND CERTAIN OTHERS
IS BEING OFFERED ONLY BY MEANS OF THE ACCOMPANYING PROSPECTUS.
BY THE BOARD OF TRUSTEES
____________________, 1999
<PAGE>
NESQUEHONING SAVINGS BANK
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
PROXY STATEMENT
SPECIAL MEETING OF DEPOSITORS
TO BE HELD ON ________________, 1999
INTRODUCTION
Purpose of the Special Meeting
This Proxy Statement is being furnished to holders of withdrawable
accounts as of ________________, 1999 (the "Voting Record Date," and such
depositors "Voting Depositors") of Nesquehoning Savings Bank ("Nesquehoning") in
connection with the solicitation by the Board of Trustees of Nesquehoning of
proxies to be voted at a special meeting of depositors (the "Special Meeting")
to be held on ______________, 1998 at ____:00 ____.m. local time, at
Nesquehoning's office, 301 West Catawissa Street, Nesquehoning, Pennsylvania.
The purpose of the Special Meeting is to consider and vote upon the Merger
Conversion Agreement and Plan of Conversion (the "Plan"), which Plan is
available at Nesquehoning's office, and which may be obtained upon written
request to the Secretary of Nesquehoning at the address given above. If the Plan
is approved, Nesquehoning will merge (the "Merger") with and into First Star
Savings Bank, a Pennsylvania-chartered stock savings bank headquartered in
Bethlehem, Pennsylvania ("First Star Savings"). In connection with the Merger,
First Star Bancorp, Inc. ("First Star Bancorp"), a Pennsylvania corporation that
owns 100% of the common stock of First Star Savings, will offer for sale shares
of its common stock ("Common Stock") in an amount equal to approximately 90% of
the market value of the First Star Bancorp's Common Stock, as determined by an
independent valuation, on a priority basis in a subscription offering (the
"Subscription Offering") to Eligible Account Holders, Supplemental Eligible
Account Holders, and Voting Depositors (as such terms are defined in the
accompanying Prospectus). If shares of Common Stock remain available after the
Subscription Offering, such shares may be offered to certain members of the
general public in a community offering with preference given first, to First
Star Savings' Employee Stock Ownership Plan, second, to existing shareholders of
First Star Bancorp and third, to persons located in the Nesquehoning Community
(the "Community Offering" and together with the Subscription Offering, the
"Offering"). No person is obligated to purchase shares of Common Stock in the
Offering.
Only Voting Depositors will be entitled to vote at the Special Meeting
and any adjournment(s) thereof. The Plan must be approved by the affirmative
vote, cast in person or by proxy, of a majority of the total votes entitled to
be cast by Voting Depositors at the Special Meeting. The Voting Depositors also
may be asked to consider such other business as may properly come before the
Special Meeting (although management knows of no other business to be
presented).
THE BOARD OF TRUSTEES OF NESQUEHONING UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE PLAN.
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF TRUSTEES
OF NESQUEHONING FOR USE AT THE SPECIAL MEETING OF DEPOSITORS,
-1-
<PAGE>
AND ANY ADJOURNMENT(S) OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE
FOREGOING NOTICE OF SPECIAL MEETING; THIS PROXY WILL NOT BE USED AT ANY OTHER
MEETING.
THE NESQUEHONING BOARD OF TRUSTEES URGES YOU TO VOTE "FOR" THE PLAN.
FAILURE TO RETURN YOUR PROXY OR TO VOTE AT THE MEETING IN PERSON WILL HAVE THE
EFFECT OF A NEGATIVE VOTE.
VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE ANY PERSON TO PURCHASE
COMMON STOCK, AND VOTING AGAINST OR FAILING TO VOTE ON THE PLAN WILL NOT
PRECLUDE ANY SUCH PURCHASE.
Voting Rights, Voting of Proxies and Vote Required for Approval
Nesquehoning's Board of Trustees has fixed the close of business on
_______________, 1999 as the Voting Record Date for the purpose of determining
the Voting Depositors entitled to notice of, and to vote at, the Special
Meeting. All holders of withdrawable accounts at Nesquehoning as of the Voting
Record Date are considered Voting Depositors and are entitled to notice of, and
to vote at, the Special Meeting. Each such Voting Depositor will be entitled to
one vote for each $100 or fraction thereof, on deposit in the Voting Depositor's
account on the Voting Record Date. However, no Voting Depositor may cast more
than 1,000 votes. An account will create a single depositor relationship for
voting purposes. Only one proxy may be cast for any such account, even though
more than one person has an interest in such an account.
Any questions as to the eligibility of a Voting Depositor to vote or
the number of votes allocated to each Voting Depositor, or on any other matters
relating to the voting, will be finally resolved by the Secretary of
Nesquehoning at or prior to the Special Meeting, and the records of Nesquehoning
will control.
Voting Depositors of Nesquehoning who are eligible to vote may vote at
the Special Meeting or any adjournments thereof in person or by proxy. A Voting
Depositor granting a proxy has the power to revoke it at any time prior to the
vote at the Special Meeting by submitting another duly executed proxy prior to
the Special Meeting or by filing written instructions revoking the earlier proxy
with the Secretary of Nesquehoning. A proxy also may be revoked by appearing at
the Special Meeting and voting in person.
All properly completed proxies will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated as to the Plan,
proxies will be voted FOR approval of the Plan. If any other matters are
properly presented at the Special Meeting and may properly be voted on, the
proxies solicited hereby will be voted on such matters in accordance with the
best judgment of the proxy holders named therein. Management is not aware of any
other business to be presented at the Special Meeting. This proxy is being
solicited for the Special Meeting called to consider the Plan and any
adjournment(s) of the Special Meeting, and will not be used for any other
meeting.
The Plan must be approved by a majority of the total votes entitled to
be cast by Voting Depositors at the Special Meeting. As of _______________,
1999, Nesquehoning's records disclosed that there were _______ votes entitled to
be cast, of which _______ constituted a majority of the total votes entitled to
be cast.
-2-
<PAGE>
Persons Making the Solicitations
Management expects to use the services of Nesquehoning's trustees,
officers, and other employees to solicit proxies personally or by telephone,
telegraph or mail. The directors, officers and employees will not be
additionally compensated for such solicitation, but may be reimbursed for
our-of-pocket expenses incurred in connection therewith. Nesquehoning also has
retained _______________________ to act as proxy solicitation agent to, among
other things, assist in the solicitation of proxies, for a total fee of
$_______, plus expenses (up to a maximum of $_______). The costs of solicitation
will be borne by Nesquehoning.
THE MERGER CONVERSION
The following discussion of the Merger Conversion Agreement and of the
Plan of Conversion does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the Merger
Conversion Agreement and the Plan of Conversion which are attached hereto as
Appendices A and B, respectively.
THE MERGER CONVERSION IS SUBJECT TO APPROVAL BY THE DEPARTMENT OF
BANKING AND THE ISSUANCE OF A LETTER OF NON-OBJECTION TO THE PLAN OF CONVERSION
FROM THE FDIC, SUBJECT TO APPROVAL BY NESQUEHONING MEMBERS AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS. SUCH APPROVAL AND NON- OBJECTION, HOWEVER, WILL NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION AND/OR THE
MERGER CONVERSION BY THE DEPARTMENT OF BANKING OR THE FDIC.
The Parties to the Merger
Information regarding Nesquehoning, First Star Savings and the First
Star Bancorp is incorporated by reference from the section of the accompanying
Prospectus entitled "Summary--The Companies."
Background and Reasons for the Merger
Since the enactment of the Financial Institutions Reform Recovery and
Enforcement Act of 1989, the Board of Trustees of Nesquehoning has observed the
increasing costs and burdens associated with ongoing compliance with federal and
state regulations governing financial institutions. The Board has also observed
the increasingly competitive market for deposit and lending products, with
substantial competition coming from both larger financial institutions, as well
as from larger non-financial institution providers of financial services. In
Pennsylvania and elsewhere, the Board has witnessed increased consolidation
within the financial services industry, which trend toward consolidation the
Board believes will continue, especially in light of recent federal legislation
authorizing interstate banking on a national basis. These trends have resulted
in more competitors, most of which are substantially larger than Nesquehoning
and which are able to offer a wider range of financial services. The more
numerous and larger competitors are also better positioned to keep abreast of
technological developments in the delivery, and types, of products offered to
and demanded by consumers.
In 1997 and early 1998 the board of trustees of Nesquehoning evaluated
the opportunities available by going public vs. seeking a partner in a
merger/conversion transaction. The board met with the investment banking firm
Trident Financial Corporation to help evaluate the benefits, opportunities and
-3-
<PAGE>
risks of going public. Because of the ages of Francis X. Koomar (82) and Stephen
Koomar (70), the executive officers of Nesquehoning, it was decided by the board
of trustees that (1) the work, risks, transaction costs, and size of
Nesquehoning did not justify conversion to a stock institution; (2) a merger
conversion was deemed to be the best approach for the institution; and (3)
again, because of the ages of the executive officers, a merger conversion
partner should be selected in the immediate future.
On March 20, 1998 Nesquehoning sent letters to six potential merger
candidates requesting their interest in entering into a merger/conversion with
Nesquehoning. These institutions were community institutions with offices within
10 miles of Nesquehoning. Nesquehoning requested a response by April 9, 1998.
The letter expressed the desire of the Nesquehoning board to continue to serve
the people of Nesquehoning, the fact that depositors had been loyal to the
institution and the board wanted to continue serving their needs, the board
wished to offer continuing opportunity for the staff, management and board.
At a April 17, 1998 meeting of the board of trustees of Nesquehoning,
the Board reviewed indications of interest from five of the six institutions.
One institution informed Nesquehoning that it was not interested. After
reviewing the proposals, the board determined to continue negotiating, with the
assistance of counsel, simultaneously with First Star Bancorp and one other
institution. During this period, each party contemplated the due diligence
performed, tax implications of any transaction and the structure of any
potential transaction.
Nesquehoning received and considered the revised bids from the two
parties. Upon review of the proposals, the Board of Trustees of Nesquehoning
concluded that the proposed transaction with First Star was consistent with
Nesquehoning's strategy.
On July 6, 1998, First Star, First Star Bancorp and Nesquehoning
entered into a letter of intent setting forth the primary terms of a proposed
Merger Conversion. On August 14, 1998, pursuant to resolutions by the Boards of
First Star, First Star Bancorp, and Nesquehoning, the parties entered into a
merger agreement ("Merger Conversion Agreement") setting forth the terms and
conditions of the proposed transactions. Under the terms of the Merger
Conversion Agreements, Nesquehoning will convert to stock form ("Conversion")
and merge with and into First Star Bancorp with First Star Bancorp being the
survivor (the "Merger").
In selecting First Star Bancorp over the other institution, the board
considered the following items:
1. First Star will offer depositors of Nesquehoning the opportunity to
purchase its Common Stock at a 10% discount off the average market price as
determined in the Merger Conversion Agreement. The other institution did not
offer Nesquehoning depositors a discount on the purchase of its stock.
2. The other institution already had an office in Nesquehoning and it
was unlikely that a second office would be maintained. This would result in
staff reductions and an inconvenience to depositors since the other
institution's branch was in a supermarket. First Star has committed to upgrade
Nesquehoning's branch with a drive-up, ATM machine and safe deposit box, as well
as off-street parking, none of which currently exist at Nesquehoning.
-4-
<PAGE>
3. First Star Savings has a record of paying a higher interest rate on
deposits and charging a lower interest rate on loans than other banks in the
community.
4. First Star Bancorp was approximately twice the size of the other
institution. The board thought the size advantage would give depositors who
invested in stock greater liquidity with First Star.
5. First Star Bancorp's geographic diversity and its position in the
economically strong Allentown-Bethlehem-Easton area of Pennsylvania would
provide a better investment opportunity for those who purchased stock.
6. People living in Nesquehoning consider the
Allentown-Bethlehem-Easton area to be stronger economically than the
Nesquehoning-Jim Thorpe area. The Board believes that Depositors in Nesquehoning
would, therefore, be more likely to purchase stock in First Star Bancorp than in
the other institution.
7. The Board concluded the merger with First Star's ability to offer
more services to Nesquehoning customers would increase competition in the area.
For example, First Star Savings will offer personal checking and business
checking. Neither of these services are currently offered by Nesquehoning.
8. First Star's commitment to finance the renovation of one of the few
large buildings in downtown Nesquehoning (the old Nesquehoning High School) into
32 units for the elderly and First Star's efforts to sponsor a $210,000 AHP
grant to assist Carbon County build 21 units for the elderly in the town of
Weatherly, Pennsylvania, in the board's opinion, are evidence of First Star's
commitment to Nesquehoning's customers and its community.
Furthermore, pursuant to an amended Agreement dated February __, 1999,
First Star has agreed if the Merger Conversion is completed to:
1. make donations of $25,000 to local charitable organizations
during the twelve months after completion of the transaction,
with priority given to those charities that have had accounts
on deposit at December 31, 1997 and December 31, 1998;
2. offer a 50 basis point discount (on its already discounted
rates) on $1,000,000.00 in small business loans to companies
located primarily in Nesquehoning and surrounding communities
(Weatherly, Jim Thorpe, Coaldale, Lansford, Summit Hill and
Lehighton), including but not limited to SBA guaranteed loans.
In the event First Star cannot make such loans within a
two-year period, it will commit to make up any difference in
charitable contributions to the Nesquehoning community;
3. ^ make a pro rata distribution of $400,000 to depositors who
had deposit accounts at ^ June 30, 1998 and who continue to
maintain the account through June 30, 2000.
4. offer personal checking and business checking, commercial
lending and safe deposit boxes;
5. match or beat any local deposit rate paid by a competitor to
any Nesquehoning resident and customer as of December 31, 1998
for a period through June 30, 2000;
-5-
<PAGE>
6. match or beat any mortgage interest rate paid by any local
federally insured financial institution to any depositor or
borrower of NSB at December 31, 1998 through the date June 30,
2000;
7. complete the rehabilitation of the old Nesquehoning High
School and continue to work with the FHLB, of Pittsburgh to
acquire Affordable Housing Program ("AHP") funds for the
facility.
8. continue to sponsored the $210,000 AHP grant for the next town
of Weatherly, Pa. in order to assist Carbon County build 27
units for the elderly.
Interests of Certain Persons in the Merger
Upon completion of the Merger Conversion, First Star Bancorp has agreed
to adopt a stock option plan (subject to stockholder approval if necessary) that
will reserve for issuance up to 10% of the shares of stock sold in the Merger
Conversion. In accordance with the Merger Conversion Agreement, non-employee
trustees (3 persons) will each receive 5% of such options and each
officer/trustee (2 persons) will receive 25% of such options.
Upon completion of the Merger Conversion, the board of directors and
officers of First Star Bancorp shall be the same as those currently existing.
The board of First Star Savings Bank will be expanded to include all five
existing directors of Nesquehoning. As of the date of the Merger Agreement,
board members of First Star Savings Bank received a monthly fee of $450 for each
meeting attended. Furthermore, during the fiscal year ended June 30, 1998, each
non-officer director of First Star Savings received a cash bonus of $1,500.
Nesquehoning trustees currently receive $300 for each meeting attended.
First Star Savings Bank will enter into a three-year employment
agreement with Stephen Koomar at an initial base salary of $60,000. Mr. Koomar's
current base salary is $54,000.
Effects of the Merger Conversion
For a discussion of the effects of the Merger Conversion on depositors
and borrowers of Nesquehoning, see "The Merger Conversion - Effects of Merger
Conversion on Depositors and Borrowers of Nesquehoning Savings Bank" in the
Prospectus.
Regulatory Approvals
The parties are awaiting the approval of their primary regulator, the
Pennsylvania Department of Banking (the "Department"). However, all state
chartered savings banks must notify the Federal Deposit Insurance Corporation
("FDIC") of its proposed or pending conversion (including the Reorganization) by
supplying the FDIC with all relevant information regarding the Reorganization,
including, but not limited to, any applications filed with any state and federal
banking and/or securities regulators. The institution is prohibited from
consummating a reorganization without the FDIC either: (i) notifying the
institution of its intention not to object to the proposed reorganization or
(ii) failing to comment within 60 days after a complete notice and a copy of all
application materials are filed with the FDIC or within the 20 day period after
the last applicable state or other federal regulator has acted on the proposed
reorganization, whichever is later. The FDIC may, in its discretion, extend by
written
-6-
<PAGE>
notice to the institution the initial 60-day period by an additional 60 days. On
January 9, 1999, the FDIC notified the parties that it had extended the review
period until March 10, 1999.
The Merger Conversion cannot be completed if the FDIC objects to the
transaction. If the FDIC determines that the proposed reorganization poses a
risk to the institution's safety and soundness, violates any law or regulation,
or presents a breach of fiduciary duty, then the FDIC will issue a letter to the
institution stating its objection to the proposed reorganization and advising
the institution that the reorganization cannot be consummated until such letter
is rescinded. The FDIC has indicated that it generally expects proposed
reorganizations to substantially satisfy the standards found in the
mutual-to-stock conversion regulations of the Office of Thrift Supervision
("OTS"), the primary federal regulator of state and federal savings
associations. Any variance from those regulations will be closely scrutinized.
Compliance with OTS requirements will not, however, necessarily be sufficient
for FDIC regulatory purposes. Furthermore, because the transaction is a Merger
Conversion, the FDIC will review the transaction independently from OTS
policies.
The parties have notified the FDIC of its proposed Merger Conversion,
have filed the required material with the FDIC and have requested a letter of
non-objection regarding the Merger Conversion. There can be no assurance as to
when or whether the FDIC will issue a letter of non-objection to the
Reorganization. In the event that the FDIC's letter of non-objection, if issued,
is not received at the proposed time of consummation of the Merger Conversion,
the consummation of the Merger Conversion may be delayed. In such event,
subscribers will not be permitted to change their orders and funds provided for
the purchase of common stock of First Star Bancorp will continue to be held by
First Star Bancorp pursuant to the terms of the Plan until such time as the
Merger Conversion is consummated or abandoned. First Star Bancorp will be
required to resolicit subscribers if the First Star Bancorp is not completed
within 90 days of the commencement of the Subscription Offering, as defined
herein, or if the FDIC, the Department or any other regulatory agency so
requires. In the event of a resolicitation, subscribers will be given the
opportunity to revise or cancel their orders. If the FDIC objects to the terms
of the Merger Conversion, the parties may be required to modify certain aspects
of the Merger Conversion. If the requested modification is material: (i) First
Star Bancorp may be required to resolicit, whereby subscribers will be given the
opportunity to revise or cancel their orders, and (ii) Nesquehoning may be
required to resolicit depositors for approval of such modifications.
The Plan, and the Terms of the Merger and Offering
Information regarding the Plan and the terms of the Merger and the
Offering is incorporated by reference from the section of the accompanying
Prospectus entitled "Summary--The Offering and Merger of Nesquehoning; The
Offering" and "The Offering and Merger."
THE PROSPECTUS CONTAINS DETAILED INFORMATION ABOUT FIRST STAR SAVINGS,
FIRST STAR BANCORP AND THE MERGER CONVERSION, INCLUDING THE RIGHTS OF ELIGIBLE
ACCOUNT HOLDERS AND OTHER PERSONS TO SUBSCRIBE FOR SHARES OF THE BANK'S COMMON
STOCK. VOTING DEPOSITORS ARE URGED TO CONSIDER SUCH INFORMATION CAREFULLY PRIOR
TO SUBMITTING THEIR PROXIES.
Conditions to Consummation of the Merger Conversion
The Plan and the Merger are subject to, among other approval things
by the Department of Banking and Nesquehoning, a letter of non-objection
with respect to the Conversion from ^
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<PAGE>
the FDIC, and approval of the Merger Conversion by Nesquehoning's depositors.
Such approvals and non-objection may be based on different considerations than
those that would be important to a Subscription Purchaser (or Community
Purchaser, as the case may be) in making an investment decision to purchase
First Star Bancorp Common Stock.
IN NO EVENT SHOULD SUCH APPROVALS AND NON-OBJECTION BE CONSTRUED AS A
RECOMMENDATION TO SUBSCRIPTION PURCHASERS AND COMMUNITY PURCHASERS BY ANY
REGULATORY AGENCY TO PURCHASE FIRST STAR BANCORP COMMON STOCK. WHILE THE FDIC
AND THE DEPARTMENT HAVE APPROVED THE MERGER AND REVIEWED THIS JOINT PROXY AND
THE ATTACHED PROSPECTUS, SUCH APPROVAL AND REVIEW SHOULD NOT BE CONSTRUED TO
MEAN THAT THE DEPARTMENT OR THE FDIC HAVE PASSED ON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT AND/OR THE PROSPECTUS.
Consummation of the Merger Conversion is also subject to the approval
of the Nesquehoning depositors holding a majority of the votes eligible to vote
at the Nesquehoning Bancorp.
First Star's obligation to consummate the Merger Conversion is subject
to the following conditions, each of which is subject to waiver, in whole or in
part, by First Star Bancorp: (i) the receipt of an officer's certificate to the
effect that certain representations and warranties made by Nesquehoning are true
and correct in all respects as of the date of the consummation of the Merger
Conversion (the "Closing Date") (except where the failure to be true and correct
would not be reasonably likely to have a material adverse effect or a material
adverse change in Nesquehoning's financial condition, results of operation or
business or its ability to perform its obligations under the Amended and
Restated Plan of Merger (a "Material Adverse Effect")); (ii) the absence of any
order, decree, or injunction of a court or government agency having jurisdiction
which enjoins or prohibits the consummation of the Merger Conversion or other
legal restraints or prohibition, prohibiting or making illegal the consummation
of the Merger Conversion; and (iii) receipt of other customary letters and
certificates including, but not limited to, the Tax Opinions.
Nesquehoning's obligation to complete the Merger Conversion is subject
to the following conditions, each of which is subject to waiver, in whole or in
part, by Nesquehoning: (i) the receipt of an officer's certificate to the effect
that representations and warranties made by First Star are true and correct in
all respects as of the Closing Date with the same effect as though made upon and
as of such date (unless the effect or consequence of a breach of such
representations or warranties, either individually or in the aggregate, would
not constitute a Material Adverse Effect); (ii) the absence of any order,
judgment, or decree of a court or government agency having jurisdiction which
enjoins or prohibits the consummation of the Merger Conversion or other legal
restraints or prohibitions, prohibiting or making illegal the consummation of
the Merger Conversion; and (iii) receipt of other customary letters and
certificates including, but not limited to, the Tax Opinions.
The Merger Agreement also contains certain limitations on the ability
of Nesquehoning, pending the Merger Conversion, to, among other things, make
capital expenditures of $50,000 or more, modify employee benefits (including
making severance or terminations arrangements) or otherwise take action other
than in the ordinary course of Nesquehoning's business prior to the consummation
of the Merger Conversion. These limitations are not expected to have any
material effect on the operations of Nesquehoning.
-8-
<PAGE>
Termination, Amendment and Waiver
The Merger Conversion may be terminated at any time, as follows: (i) by
the mutual consent of First Star and Nesquehoning at any time prior to the
Closing Date; (ii) by First Star or Nesquehoning, on or after
____________________, if the Merger Conversion has not been consummated; (iii)
by First Star or Nesquehoning, in the event of a material breach by the other
party of any term of the Plan of Merger that has not been cured or cannot be
cured in accordance with the Plan; (iv) by First Star or Nesquehoning, if the
depositors of Nesquehoning do not approve the Merger Conversion.
The Merger Conversion Agreement and/or the Plan of Conversion may be
substantively amended as a result of comments from the FDIC, the Department of
Banking, or otherwise, at any time prior to solicitation of proxies from
depositors of Nesquehoning to vote on the Merger Conversion and at any time
thereafter with the concurrence of the FDIC, and the Department of Banking. No
resolicitation of depositors of Nesquehoning will be made following any such
amendments to the Plan of Merger and/or the Plan of Conversion made after
approval by the Nesquehoning depositors, unless otherwise required by the FDIC
or the Department of Banking.
In the event that new regulations pertaining to conversions are adopted
by the FDIC or the Department of Banking prior to the consummation of the Merger
Conversion, the Plan of Conversion may be amended to conform to such
regulations, but no resolicitation of depositors will be made. In the event that
such conversion regulations contain optional provisions, the Plan of Conversion
may be amended to incorporate such optional provisions at the discretion of the
Board of Directors of First Star and the Board of Trustees of Nesquehoning
without a resolicitation of depositors.
Recommendation of the Board of Trustees
THE BOARD OF TRUSTEES OF NESQUEHONING UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE PLAN. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE
ANY PERSON TO PURCHASE COMMON STOCK AND VOTING AGAINST THE PLAN OR FAILING TO
VOTE ON THE PLAN WILL NOT PRECLUDE ANY
SUCH PURCHASE. Because a majority of the votes eligible to be cast is required
for approval, the failure by any Voting Depositor to return a proxy card or to
attend the Special Meeting and vote in person will have the same effect as a
vote against the Plan. In adopting the Plan and approving the Merger Agreement,
the Board of Trustees of Nesquehoning determined that the proposed transactions
are in the best interests of Nesquehoning, its depositors and other customer and
the community served by Nesquehoning.
THE DEPARTMENT HAS APPROVED THE PLAN SUBJECT TO THE APPROVAL OF
NESQUEHONING'S DEPOSITORS AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
HOWEVER, DEPARTMENT APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY THE DEPARTMENT.
THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK. THE COMMON STOCK BEING
OFFERED IN THE OFFERING IS BEING OFFERED ONLY BY MEANS OF THE ACCOMPANYING
PROSPECTUS.
-9-
<PAGE>
THE SHARES OF COMMON STOCK BEING OFFERED IN CONNECTION WITH THE
PROPOSED TRANSACTIONS ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENTAL AGENCY.
Nesquehoning Financial Information
This Proxy Statement is also accompanied by Nesquehoning's Financial
Statements as of and for the years ended December 31, 1998 and 1997, which
financial information is incorporated into this Proxy Statement by reference.
Such financial statements are included as Appendix C.
How to Obtain Additional Information and Incorporation by Reference
The Prospectus, which is incorporated by reference herein, contains
audited financial statements of First Star Bancorp, including statements of
income for the past three years; management's discussion and analysis; a
description of lending, savings and investment activities; remuneration and
other benefits of trustees and officers; further information about the business
and financial condition of First Star Savings and First Star Bancorp; and
additional information about the Reorganization, the Subscription Offering and,
if held, the Community Offering. The Plan sets forth the terms, conditions and
provisions of the proposed Merger Conversion.
If you would like to receive an additional copy of the Prospectus or
the Plan, or a copy of the Pennsylvania Articles of Incorporation and Bylaws of
the First Star Bancorp, you may request such material by calling the Stock
Information Center at (____) ___-____, 9:00 a.m. to 4:00 p.m., Monday through
Friday. The Stock Information Center is located at ____________________,
Pennsylvania. Such request must be received by any of the parties no later than
February __, 1999. Requesting such materials does not obligate you to purchase
the shares. If the parties do not receive your request by _______, 1998, you
will not be entitled to have such materials mailed to you. You will, however, be
able to obtain an Prospectus and a Stock Order Form from the nearest office of
First Star Savings or the office of Nesquehoning until 12:00 noon on ________,
1999. See also "Where You Can Find Additional Information" in the Prospectus.
Other Matters
The Board of Trustees is not aware of any business to come before the
Special Meeting other than those matters described above in this Proxy
Statement. However, if any other matters should properly come before the Special
Meeting, it is intended that proxies in the accompanying form will be voted in
respect thereof in accordance with the judgment of the person or persons voting
the proxies.
BY ORDER OF THE BOARD OF TRUSTEES
----------------------------------------
Secretary
Nesquehoning, Pennsylvania
____________________, 1999
-10-
<PAGE>
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF NESQUEHONING SAVINGS BANK
FOR A SPECIAL MEETING OF DEPOSITORS
TO BE HELD ON ________, 1999
The undersigned hereby acknowledges prior receipt of the Notice of
Special Meeting of Depositors ("Special Meeting"), Proxy Statement and
Prospectus describing the matters set forth below, and indicating the date, time
and place of the Special Meeting and hereby appoints the Board of Trustees of
Nesquehoning Savings Bank (the "Bank") the Proxy of the undersigned, to cast all
votes to which the undersigned is entitled at the Special Meeting, and at any
adjournment thereof, on the matters referred to below in the manner specified on
the reverse side hereof. Note:
The Board of Trustees is not aware of any other matter that may come before the
Special Meeting.
This Proxy will be voted as directed by the undersigned member. Unless
otherwise marked, this Proxy will be voted FOR approval of the Plan of
Reorganization. If any other business is presented at the Special Meeting, this
Proxy will be voted in accordance with the best judgment of the Board of
Trustees. This Proxy may be revoked at any time before it is voted either by a
written revocation of the proxy filed with the Secretary of the Bank or by
submitting a later dated proxy. The presence of a member at the Special Meeting
shall not revoke a proxy unless a written revocation is filed with the Secretary
of the Special Meeting prior to the voting of such proxy. Voting for the Plan of
Reorganization and signing this proxy card does not obligate you to buy any
stock.
<PAGE>
Please mark
your votes [X]
as this
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE
AGREEMENT OF MERGER CONVERSION, INCLUDING THE PLAN OF CONVERSION
For Against The Merger Conversion Agreement and Plan of Conversion
[ ] [ ] (collectively, the "Plan") pursuant to which Nesquehoning will
(i) convert from a Pennsylvania-chartered mutual savings bank to
a Pennsylvania-chartered stock savings bank; and (ii)
simultaneously merge with and into First Star Savings Bank, a
Pennsylvania-chartered stock savings bank headquartered in
Bethlehem, Pennsylvania ("First Star Savings"); and (iii) First
Star Bancorp, Inc., a Pennsylvania stock holding company of First
Star Savings (the "First Star Bancorp")) will offer for sale in a
stock offering shares of its common stock ("Common Stock") in an
amount equal to approximately 90% of the market value of
Nesquehoning (as determined by an independent valuation) on a
priority basis to certain of the Nesquehoning's depositors.
In their discretion, upon any other matters that may properly
come before the Special Meeting or any adjournment thereof.
Please sign your name exactly as it appears hereon. When
signing as an attorney, administrator, agent, corporation,
officer, executor, trustee, guardian or similar position,
please add your full title to your signature.
Signature(s) Date
--------------------------------------- -------------------
NOTE: Only one signature is required in the case of a joint account.
