As filed with the Securities and Exchange Commission on ^ January 15, 1999
Registration No. 333-^ 64475
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
First Star Bancorp, Inc.
(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
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
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(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 65,730 $50.30 $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 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 ^ 50,198 Shares of Common Stock
(Anticipated Maximum)
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
================================================================================
Nesquehoning Savings Bank is converting from the mutual to the stock
form of organization. As part of the conversion, Nesquehoning Savings Bank will,
pursuant to a merger conversion agreement, merge with and into First Star
Savings Bank, a wholly owned subsidiary of First Star Bancorp, Inc. Furthermore,
in connection with the conversion, the common stock of First Star Bancorp, Inc.
is being offered for sale to the public in accordance with a plan of conversion.
The merger conversion agreement and the plan of conversion must be approved by
the Pennsylvania Department of Banking and by a majority of the votes eligible
to be cast by qualifying depositors of Nesquehoning Savings Bank. Furthermore,
the Federal Deposit Insurance Corporation must not object to the merger and
conversion. No common stock will be sold if Nesquehoning Savings Bank does not
receive these approvals or if First Star Bancorp, Inc. does not receive orders
for at least the minimum number of shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted Nesquehoning Savings Bank to be between $2,125,000 and $2,875,000
which establishes the number of shares to be offered. Based on these estimates,
we are making the following offering of shares of common stock:
<TABLE>
<CAPTION>
<S> <C> <C>
o Estimated (Subscription) Price Per Share: ^ $50.30
o Number of Shares
Minimum/Midpoint/Maximum: ^ 35,288 to ^ 42,743 to ^ 50,198
o Underwriting Commissions and Other Expenses
Minimum/Midpoint/Maximum: $350,000
o Net Proceeds to First Star Bancorp, Inc.
Minimum/Midpoint/Maximum: $1,775,000 to $2,150,000 to $2,525,000
o Net Proceeds per Share ^ $40.38 to ^ $42.11 to ^ $43.33
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..................................
Summary.........................................................................
Selected Financial and Other Data...............................................
Recent Developments ............................................................
Risk Factors....................................................................
Proposed Purchases by Trustees and Officers of Nesquehoning Savings Bank........
Use of Proceeds.................................................................
Dividends.......................................................................
Market for the Common Stock.....................................................
Capitalization..................................................................
Historical and Pro Forma Regulatory Capital Compliance..........................
Pro Forma Data..................................................................
The Merger Conversion...........................................................
Management's Discussion and Analysis ...........................................
Business of First Star Bancorp, Inc.............................................
Business of First Star Savings Bank.............................................
Regulation......................................................................
Principal Security Holders......................................................
Management of First Star Bancorp, Inc...........................................
Restrictions on Acquisition of First Star Bancorp, Inc..........................
Description of Capital Stock....................................................
Indemnification of Officers and Directors.......................................
Legal and Tax Matters...........................................................
Experts.........................................................................
Registration Requirements.......................................................
Where You Can Find Additional Information.......................................
Index to Consolidated Financial Statements......................................
This document contains forward-looking statements which involve risks
and uncertainties. First Star Bancorp, Inc.'s actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 10 of this document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What do I need to do now?
A: Although you are not required to do anything, first, 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 a small, single branch savings bank simply cannot compete
effectively (or possibly even survive) with larger institutions with
greater capital resources and depth of management and offering more
diversified financial products and services. Furthermore, Nesquehoning's
two principal officers: Francis X. Koomar and Stephen Koomar are 82 and 70
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. Among the alternatives considered by the trustees of Nesquehoning was
a standard mutual to stock conversion. However, a standard mutual to stock
conversion would not significantly increase Nesquehoning's ability to
compete or to survive. A successful conversion would result in
Nesquehoning's being overcapitalized, without the resources necessary to
expand the range of its financial products and utilize its additional
capital. An unsuccessful conversion would result in a significant and
perhaps crippling charge to earnings. After considering all the
alternatives to the ^ merger conversion, the Trustees of Nesquehoning
decided that the most desirable alternative for Nesquehoning was to
identify and pursue a combination with a well capitalized, conservatively
managed community savings bank that shared Nesquehoning's operating
philosophy and commitment to its community. The Trustees 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 Northhampton. The Trustees believe that, in the event the Merger
Conversion is not consummated, it will be difficult, if not impossible, to
continue to successfully run a small, single branch savings bank.
In short, the ^ 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
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1
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interests of both institutions, First ^ Star Bancorp's shareholders,
Nesquehoning's depositors and the communities which 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 10 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, eligible
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 $50.30 was determined pursuant to the
Merger Agreement. Such price equals the average of the last 10 real time
trades of First Star Bancorp's Common Stock as reported on the OTC Bulletin
Board prior to mailing this prospectus.
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. Because the factors that led the Board of
Trustees to seek an appropriate merger partner have not changed, the Board
of Trustees would necessarily reconsider all alternatives.
Q: How many votes are required for the Nesquehoning Depositors to approve the
Merger Conversion?
A: A majority of the outstanding votes eligible to be cast by Nesquehoning
Depositors is required to approve the Merger Conversion. Each Nesquehoning
Depositor who is a depositor will receive one vote and one additional vote
for each $100 in his or her Nesquehoning accounts, up to a maximum of 1,000
votes.
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2
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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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3
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the consolidated financial statements
of First Star Bancorp, Inc. References in this document to "we", "us", and "our"
refer to First Star Bancorp, Inc. In certain instances where appropriate, "we",
"us", or "our" refers collectively to First Star Bancorp, Inc. and First Star
Savings Bank. References ^ to "Nesquehoning" refer to Nesquehoning Savings Bank.
Furthermore, references in this document to the "Merger Conversion" refer to the
entire proposed transaction.
The Companies
First Star Bancorp, Inc.
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
First Star Bancorp, Inc. a bank holding company, organized under the
corporation laws of Pennsylvania in March, 1993. Its principal activity is
holding all of the stock of First Star Savings Bank. At June 30, 1998, we had
total assets of $316.1 million, deposits of $145.1 million, and total
stockholders' equity of $15.1 million.
First Star Savings Bank
418 West Broad Street
Bethlehem, Pennsylvania 18018
(610) 691-2233
First Star Savings Bank is a Pennsylvania-chartered stock savings bank
which was established in ^ 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 ___.
The Stock Offering
We are offering between ^ 35,288 and ^ 50,198 shares of common stock at
^ $50.30 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").
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4
<PAGE>
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Stock Purchases
The shares of common stock will be offered on the basis of the
priorities described in this prospectus. If you are a qualifying 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 eligible 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.
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 ^ $50.20 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 last ten (10) real time trades of the
common stock of First Star Bancorp. See "Pro Forma Combined Condensed Financial
Statements." 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 $2,875,000, you will be notified and will have the
opportunity to modify or cancel your order. See pages __ to __.
Termination of the Offering
The subscription offering will terminate at 12:00 noon, Bethlehem,
Pennsylvania Time, on ^ February __, ^ 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, which may benefit the President and other officers and directors of
Nesquehoning. The stock option plan may not be adopted until after the Merger
Conversion and is subject to stockholder approval and compliance with Department
and FDIC regulations.
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5
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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 to repay some of our borrowings and possibly for
other general corporate purposes.
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 ____.
Important Risks in Owning First Star Bancorp, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages ___ to ___ of this document.
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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>
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(1) Includes a non-recurring expense of $745,000 for the year ended June 30,
1997 for a one-time deposit insurance premium to recapitalize the SAIF.
(2) Includes dividends paid on Series A Preferred Stock.
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8
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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>
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(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.
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9
<PAGE>
^ RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between what we earn on our
interest-earning assets (such as mortgage loans and investment securities) and
what we pay on our interest-bearing liabilities (such as deposits and
borrowings). Given the current interest rate environment, most of our mortgage
loans have rates of interest which are fixed and are generally originated with
terms of up to 30 years, while our deposit accounts have significantly shorter
terms to maturity. Fixed-rate loans with terms of over 15 years are sold in the
secondary market. Some of our interest-earning assets have fixed-rates of
interest and have longer effective maturities than our interest-bearing
liabilities, which results in the yield on our interest-earning assets generally
adjusting more slowly to changes in interest rates than the cost of our
interest-bearing liabilities. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates,
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. An active trading market may not
develop or be maintained. If an active market does not develop, you may not be
able to sell your shares promptly or at a price equal to or above the price you
paid for them. See "Market for the Common Stock."
Extensive Governmental Regulation of the Financial Institution Industry
We are subject to extensive regulation by the FDIC and are periodically
examined by the FDIC to test compliance with various regulatory requirements.
Such supervision and regulation is intended primarily for the protection of
depositors and the deposit insurance fund, and not for the maximization of
shareholder value. Our lending and savings activities are also subject to
various "consumer protection" laws that impose significant liability for
noncompliance, whether intentional or not. Accordingly, the operations and
profitability of financial institutions and their holding companies are
significantly affected by legislation and the policies of the various federal
banking agencies. Since 1989, numerous legislation has been enacted that imposes
increased regulatory restrictions and obligations on the operations of financial
institutions and mandates the development of regulations designed to empower
regulators to take prompt corrective action with respect to institutions that
fall below certain capital standards.
10
<PAGE>
The Possible Decline in the Market for Common ^ Stock After the Offering
^ Our Common Stock is being offered to qualifying Nesquehoning
depositors at a 10% discount to the current market price 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,
it is possible that the receipt, exercise, or lapse of subscription rights may
result in tax liability for certain Eligible Account Holders. In such case,
Eligible Account Holders may also be inclined to sell Common Stock to realize
sufficient cash to pay the tax liability resulting therefrom. Any such sales,
depending on the volume and timing, could cause the market price of Common Stock
to decline. You should consider these possibilities in determining whether to
purchase our stock and, the timing of any sale of such stock. See "Market
Information" and the Merger Conversion--Stock Pricing and Number of Shares to be
Issued," "--The Independent Valuation" and "--Certain Federal Income Tax
Consequences."
Inability to Resell the Common Stock Until the Issuance and Receipt of
Certificates
Except for shares issued to a person who is deemed an affiliate of
Nesquehoning Savings Bank or ^ First Star Bancorp for purposes of the federal
securities laws, the Common Stock purchased in the Merger Conversion will be
freely transferable under the federal securities laws. However, until
certificates for Common Stock are delivered to purchasers, purchasers may not be
able to sell the shares of Common Stock for which they subscribe. Accordingly,
during such period subscribers will bear the risk of any decline in the market
price in the Common Stock. We 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
supermajority provisions for the approval of certain business combinations. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current board of directors or management of ^ First Star Bancorp more
difficult. In addition, the effect of these provisions could be to limit the
trading price potential of our stock. See "Restrictions on Acquisition of First
Star Bancorp, Inc" and "--Voting Control by Directors and Officers."
Voting Control by Directors and Officers
Based upon the midpoint of the estimated valuation range, officers and
trustees of Nesquehoning intend to purchase approximately ^ 13.3% of the common
stock offered in the Merger Conversion.
11
<PAGE>
These purchases together with common stock and common stock equivalents
currently owned by our 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 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. -- Executive Compensation," "Description of Capital Stock,"
and "Restrictions on Acquisition of First Star Bancorp, Inc."
Possible Dilutive Effect of Stock Options
Upon completion of the Merger Conversion, shareholders will be asked to
approve the stock option plan. If approved, we will issue options to purchase
our stock to Nesquehoning officers and directors through this plan. If the
shares for the stock options are issued from our authorized but unissued stock,
your voting interests may be diluted by up to approximately ^ 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 $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 our members at which the Plan is being
submitted for approval. If delays are experienced, significant changes may occur
in our estimated pro forma market value upon conversion together with
corresponding changes in the offering price and the ^ net proceeds to be
realized by us from the sale of the shares. In the event the conversion is
terminated,
12
<PAGE>
we will charge all conversion expenses against current income and any funds
collected by us in the offering will be promptly returned, with interest, to
each potential investor.
PROPOSED PURCHASES BY TRUSTEES AND OFFICERS
OF NESQUEHONING SAVINGS BANK
The following table sets forth the approximate purchases of common
stock by each trustee and executive officer and their associates in the Merger
Conversion. Shares purchased by officers and trustees in the conversion may not
be sold for at least one year. The table assumes that ^ 42,743 shares (the
midpoint of the estimated valuation range) of the common stock will be sold at ^
$50.30 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 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 849 50,000 2.22
William P. Gardiner Trustee 849 50,000 2.22
Martin S. Kovich, Jr. Trustee 849 50,000 2.22
Francis X. Koomar Trustee, President and
Chairman of the Board 1,988 100,000 4.44
Stephen P. Koomar Vice President,
Secretary and
Managing Officer 849 50,000 2.22
------ ------- -----
5,384 $300,000 13.32%
====== ======= =====
</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 46,685 shares of common stock, intend to purchase approximately
4,148 shares or 8.89% of common stock in the offering.
(2) Based on the sale of 42,743 shares of common stock.
USE OF PROCEEDS
Based on the Appraised Value of $2,500,000 (the midpoint of the
Valuation Range) and a Subscription Price of ^ $50.30 per share, ^ First Star
Bancorp estimates it will receive $2,150,000 in net proceeds from the sale of
the Conversion Stock offered hereby. The net proceeds will ^ most likely be
utilized by First Star Bancorp to pay down short-term borrowings and for other
general corporate purposes^.
Net proceeds cannot be precisely determined as of the date hereof. The
amount of such proceeds is dependent upon the actual number of shares of
Conversion Stock subscribed for and sold, whether such shares are sold in the
Subscription Offering or the Community Offering and the actual expenses of the
merger Conversion. The following table shows estimated gross and net proceeds
based upon $2,125,000, $2,500,000, and $2,875,000 of Conversion Stock
(respectively, the minimum, midpoint and maximum of the Valuation Range) issued
in the Merger Conversion at the Subscription Price. In each case, it is
13
<PAGE>
assumed that (i) 100% of the Conversion Stock is sold in the Subscription
Offering; (ii) no shares of Conversion Stock are issued in the Community
Offering and no additional fees are paid to registered securities firms, and
(iii) the expenses related to the Merger Conversion are $350,000. There can be
no assurances that the dollar amount of the expenses related to the Merger
Conversion will not vary significantly from the amount estimated.
Minimum Midpoint Maximum
Appraised Appraised Appraised
Value ^(1) Value ^(1) Value ^(1)
---------- ---------- ----------
(In thousands)
Number of shares to be issued....... ^ 35,288 42,743 50,198
Subscription Purchase Price
per share......................... ^ $50.30 ^ $50.30 ^ $50.30
Gross proceeds...................... $2,125 $2,500 $2,875
Expenses............................ 350 350 350
------ ------ ------
Net proceeds........................ $1,775 $2,150 $2,525
===== ===== =====
- -------------------
(1) Gross proceeds include $212,500, $250,000 and $287,500 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 Capital Compliance", "The Merger Conversion -- Effects
of Merger Conversion to Stock Form on Depositors and Borrowers of Nesquehoning
Savings Bank -- Liquidation Account" and "Regulation -- Dividend and Other
Capital Distribution Limitations."
^ 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 "Taxation ^--
Federal Taxation" and Note 12 to
14
<PAGE>
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 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 50.00
December 31 __.__^ __.__ --
1999
- ----
March 31 (up to
January __)
- -------------------
(1) Represents annualized dividend.
The last trade of our Common Stock on ^ January __, 1999 was at a price
of ^ $_____ 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 the Common Stock.
15
<PAGE>
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 ^ Estimated
Valuation Range ("EVR") at a price of ^ $50.30 per share.
<TABLE>
<CAPTION>
Pro Forma ^ Combined Capitalization
At September 30, 1998 Based on the Sale of
-------------------------------- -------------------------------------------------
^ Historical ^ 35,288 ^ 42,743 ^ 50,198
First Star Nesquehoning Shares(1) Shares(1) Shares(1)
---------- ------------ --------- --------- ---------
(In thousands^, except per share data)
<S> <C> <C> <C> <C> <C>
Deposits(2) .................................. $155,235 $^14,276 $169,512 $169,512 $169,512
Borrowed funds................................ ^156,768 -- ^156,768 156,768 156,768
-------- ------- -------- ------- -------
Total deposits and borrowed funds........... $312,003 $^14,276 $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
Common stock, $1.00 par value, 2,500,000
shares authorized; total shares to be
issued as reflected........................ 372 N/A ^ 407 ^ 415 ^ 422
Additional paid-in capital.................... 8,423 N/A ^ 10,163 10,530 10,898
Retained earnings............................ ^ 6,298 2,194 8,482 8,482 8,482
ESOP(3)..................................... (300) ^-- (513) (550) (588)
Net unrealized gains on
available-for-sale securities............. ^ 1,166 -- ^ 1,166 ^ 1,166 ^ 1,166
--------- -------- --------- ---------- --------
Total stockholders' equity.................... $^ 15,987 $^ 2,194 $ ^ 19,733 $ ^ 20,071 $ 20,408
========= ======== ========= ========== =======
Total stockholders' equity
as a % of total assets...................... 4.82% 13.06% 5.66% 5.76% 5.86%
Fully diluted book value per share of ^
Common Stock................................ $ 27.48 N/A ^$ 31.34 ^ $ 31.49 ^$ 31.63
Shares outstanding............................ ^ 771,920 N/A ^ 807,208 814,663 822,118
</TABLE>
- --------------------------
(1) Assumes all shares are sold to eligible depositors of Nesquehoning at
a price of $48.20 per share at the minimum, midpoint and maximum of
the valuation range.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock. Such withdrawals would reduce pro forma deposits by
the amount of such withdrawals.
(3) Assumes the ESOP purchases 10% of the Conversion Stock or $213,000,
$250,000 and $288,000 at the minimum, midpoint and maximum of the
Valuation Range.
16
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
Set forth below is a summary of the historical regulatory capital at ^
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 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.
17
<PAGE>
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 ^ 42,743 shares of First Star common stock
at ^ $50.30 per share or $2,500,000 in aggregate (the midpoint of the Estimated
Price Range), less offering expenses of $350,000. The pro forma combined
condensed balance sheet assumes the Merger took place on September 30, 1998 and
June 30, 1998 and combines First Star'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's historical financial information for the three months ended September 30,
1998 and the year ended June 30, 1998 and Nesquehoning historical financial
information for the three months ended September 30, 1998 and the twelve months
ended June 30, 1998 and assumes ^ 42,743 shares of First Star Bancorp, Inc.
common stock were sold at the midpoint of the valuation range.
The ^ stock price per share was determined by taking a 10% discount on
the average of the last ten (10) real time trades of the common stock of First
Star Bancorp, Inc. as reported by the OTC Bulletin Board prior to the mailing of
the 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
------------- ---------------
12/23/98 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
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
18
<PAGE>
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."
The pro forma condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
First Star set forth elsewhere in this Prospectus.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
------------------------------ Conversion
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash................................................... $ 1,013 $ 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 43 (1) 415
Paid-in capital........................................ 8,423 4,241 (4) 12,664
Retained earnings...................................... 6,298 2,194 (2,194)(2) 6,298
ESOP debt.............................................. (300) (250)(3) (550)
Unrealized gain........................................ 1,166 1,166
-------- ------ ------- -------
Total equity.................................. 15,987 2,194 1,840 20,021
Liabilities & equity.......................... $331,643 $16,795 $ 2,195 $360,633
======= ====== ======= =======
</TABLE>
- ---------------
(1) Represents the cash proceeds of the offering of $2,150,000 net of estimated
fees of $350,000.
(2) To remove Nesquehoning retained earnings and mark assets and liabilities to
market value. Allocation of purchase price is based on management's best
estimate but is preliminary. The Company will perform a final allocation of
the purchase price.
(3) Represents purchase by ESOP in the offering.
(4) Represents additional paid-in capital from the offering and additional paid
in capital from recording the assets and liabilities to market value and
removing Nesquehoning's retained earnings.
19
<PAGE>
The pro forma condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
First Star set forth elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 1998
(In thousands)
Historical Pro Forma Pro Forma
------------------------------- Conversion
First Star Nesquehoning Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash................................ ^$ 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 ^ 4,241 (4) 12,664
Retained earnings................... 5,777 2,175 ^(2,194)(2) 5,758
ESOP debt........................... (300) ^(250)(3) (550)
^ Unrealized gain................... ^ 813 ^ 813
-------- ------- -------- -------
Total ^ equity............. 15,113 2,175 ^ 1,840 19,128
------- ------ ------- -------
Liabilities and ^ equity. $316,102 $16,549 $^ 2,188 $334,839
======= ====== ======= =======
</TABLE>
- ----------------
(1) Represents the cash proceeds of the offering of $2,150,000 ^ net of
estimated fees ^ of $350,000.
(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. The Company 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's retained earnings.
20
<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
---------- ------------ ----------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
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 42,743(3) 414,827
Common assuming dilution...................... 771,920 N/A 42,743(3) 814,663
</TABLE>
- -------------------------
(1) Represents gross annualized return of 5.37% on net proceeds, a tax rate of
38.0% on the net proceeds, and a net return of 3.33% on such proceeds.
(2) Assumes the ESOP purchases 10% of the Conversion Stock for $250,000 with a
loan from First Star Bancorp, such loan will be paid over a 15-year period.
(3) Assumes all 42,743 shares are outstanding for the entire period.
21
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
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)
<S> <C> <C> <C> <C>
Interest income:
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 ^ 4.94
Earnings per ^ assuming full dilution......... $4.90 N/A 4.74
Average ^ shares outstanding:
^ Common..................................... 295,025 N/A ^ 42,743(3) 337,768
Common assuming ^ dilution.................... 548,780 N/A ^ 42,743(3) 591,523
</TABLE>
- -------------------------
(1) Represents gross annualized return of 5.37% on net proceeds, a tax rate of
38.0% on the net proceeds, and a net return of 3.33% on such proceeds.^
(2) Assumes the ESOP purchases 10% of the Conversion Stock for $250,000 with a
loan from First Star Bancorp, such loan will be paid over a 15-year period.
(3) Assumes all ^ 42,743 shares are outstanding for the entire fiscal year.
22
<PAGE>
THE MERGER CONVERSION
General
The Merger Conversion is being conducted pursuant to the Agreement and
the Plan. The Merger Conversion ^ is subject to, among other things, approval of
the Agreement by Nesquehoning's depositors 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 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 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)(F) of the Code, and no gain or loss will be recognized by us by reason
of the proposed Merger Conversion; (ii) no gain or loss will be recognized by us
upon the receipt of money from ^ First Star Bancorp for our stock; (iii) our
assets will have the same basis before and after the Merger Conversion; (iv) the
holding period of our assets will include the period during which the assets
were held by us in our mutual form; (v) no gain or loss will be recognized by
the Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Depositors upon the issuance to them of withdrawable savings accounts in us in
the stock form in the same dollar amount as their savings accounts in us in the
mutual form plus an interest in our liquidation account in the stock form in
exchange for their savings accounts in us in the mutual form; (vi) provided that
the amount to be paid for the shares
23
<PAGE>
pursuant to the subscription rights is equal to the fair market value of such
shares, no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Depositors under the Plan upon
the distribution to them of nontransferable subscription rights; (vii) the basis
of each account holder's savings accounts after the Merger Conversion will be
the same as the basis of his savings accounts prior to the conversion, decreased
by the fair market value of the nontransferable subscription rights received and
increased by the amount, if any, of gain recognized on the exchange; (viii) the
basis of each account holder's interest in the liquidation account will be zero;
(ix) the holding period of the common stock acquired through the exercise of
subscription rights shall begin on the date on which the subscription rights are
exercised; (x) we will succeed to and take into account our earnings and profits
or deficit in earnings and profits as of the date of conversion; (xi)
immediately after conversion, we will succeed to the bad debt reserve accounts
previously held by us, and the bad debt reserves will have the same character in
our hands after conversion as if no distribution or transfer had occurred; and
(xii) the creation of the liquidation account will have no effect on our taxable
income.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based ^ on the
assumption that the exercise price of the subscription rights will be
approximately equal to the fair market value of those shares at the time of the
completion of the proposed conversion. We have received an opinion of Feldman
Financial Advisors which^ concludes that the subscription rights to be received
by Eligible Account Holders and other eligible subscribers do not have any
economic value at the time of distribution or at the time the subscription
rights are exercised. Such opinion is based on the fact that such rights are:
(i) acquired by the recipients without payment therefor, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase shares at a price equal to their estimated fair market value, which
will be the same price at which shares for which no subscription right is
received in the subscription offering will be offered in a public offering. If
the subscription rights granted to Eligible Account Holders or other eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable only to those Eligible Account Holders or other eligible
subscribers who exercise the subscription rights in an amount equal to such
value (either as a capital gain or ordinary income), and we could recognize gain
on such distribution.
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia, Spidi, Sloane & Fisch, P.C. that the conversion will be
treated for Pennsylvania state tax purposes similar to the conversion's
treatment for federal tax purposes. The opinion has been filed as an exhibit to
the registration statement to which this prospectus is a part and covers those
state tax matters that are material to the transaction.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C. and Feldman Financial Advisors have no binding effect or official
status, and no assurance can be given that the conclusions reached in any of
those opinions would be sustained by a court if contested by the IRS or the
Pennsylvania tax authorities.^
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.
24
<PAGE>
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
of our other general creditors. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled upon our complete liquidation after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, July 31, 1997. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, September 30, 1998. The interest as
to each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date (December 31) is less
than the amount in such account on the respective qualifying dates, then the
interest in this special liquidation account would be reduced at that time by an
amount proportionate to any such reduction, and the interest would cease to
exist if such deposit account was closed. The interest in the special
liquidation account will never be increased despite any increase in the related
deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
Non-transferable subscription rights to purchase shares of the common
stock have been granted to persons and entities entitled to purchase shares in
the subscription offering under the Plan. If the community offering or
syndicated community offering, as described below, extends beyond 45 days
following the completion of the subscription offering, subscribers will be
resolicited. Subscription priorities have been established for the allocation of
stock to the extent that more shares are subscribed for than are to be issued in
the conversion subject to the purchase limitations set forth in the Plan and as
described below under "-- Limitations on Purchases and Transfer of Shares." The
following priorities have been established:
Category 1: Eligible Account Holders (First Priority). Eligible Account Holders
are persons who had a deposit account of at least $50 with us on July 31, 1997.
Each Eligible Account Holder will receive non-transferable subscription rights
on a priority basis to purchase that number of shares of common stock which is
equal to the greater of $100,000 of Common Stock, or 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Eligible Account Holder and the denominator is the
total amount of qualifying deposits of all Eligible Account Holders (subject to
the maximum purchase limitation). If there is an oversubscription in this
category, shares shall be allocated among subscribing Eligible Account Holders
so as to permit each such account holder, to the extent
25
<PAGE>
possible, to purchase the lesser of 100 shares or the total amount of his
subscription. Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Only a
person(s) with a qualifying deposit as of the eligibility record date (or a
successor entity or estate) shall receive subscription rights in this category.
Any Person(s) added to a Savings Account after the Eligibility Record Date is
not an Eligible Account Holder. Subscription rights received by officers and
directors in this category based on their increased deposits with us in the
one-year period preceding July 31, 1997, are subordinated to the subscription
rights of other Eligible Account Holders. See "-- Limitations on Purchases and
Transfer of Shares."
Category 2: Supplemental Eligible Account Holders (Second Priority).
Supplemental Eligible Account Holders are persons who had a deposit account of
at least $50 with us on ^ 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 purchase limitation). If the allocation made in this
paragraph results in an oversubscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. See "--Limitations on Purchases and Transfer of
Shares."
The rights of Supplemental Eligible Account Holders to subscribe for
shares is subordinate to the rights of the Eligible Account Holders to subscribe
for shares.
Category 3: Other Depositors (Third Priority). Other Depositors are persons who
have a deposit account of at least $50 on ^ _____________, 1999, the voting
record date of our special meeting, and borrowers also as of the voting record
date of our special meeting. Each Other Depositor who is not an Eligible Account
Holder or Supplemental Eligible Account Holder, will receive non-transferable
subscription rights to purchase up to $100,000 of Common Stock to the extent
such shares are available following subscriptions by Eligible Account Holders,
Employee Plans, and Supplemental Eligible Account Holders. In the event there
are not enough shares to fill the orders of the Other Depositors, the
subscriptions of the Other Depositors will be allocated so that each subscribing
Other Depositor will be entitled to purchase the lesser of 100 shares or the
number of shares ordered. Any remaining shares will be allocated among Other
Depositors whose subscriptions remain unsatisfied on a 100 share (or whatever
lesser amount is available) per order basis until all orders have been filled on
the remaining shares have been allocated. See "-- Limitations on Purchases and
Transfer of Shares."
Depositors in Non-Qualified States. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign country;
(ii) the granting of subscription rights or offer or sale of shares of common
stock to
26
<PAGE>
those persons would require either us or our employees to register under the
securities laws of that state or foreign country as a broker or dealer, or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his or her account. Each person subscribing for shares will be
required to certify that he/she is purchasing shares solely for his/her own
account and has not entered into an agreement or understanding regarding the
sale or transfer of those shares. The regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase subscription rights or shares of common stock prior to the completion
of the Merger Conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
that we believe involve the transfer of subscription rights or which appear to
us to present other irregularities.
Expiration Date. The Subscription Offering will expire at 12:00 noon,
Bethlehem, Pennsylvania Time, on ^ February __, ^ 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 to our Employee Stock
Ownership Plan, our shareholders and 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 the same price as all shares in the subscription
offering. 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 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
[Nesquehoning] 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
27
<PAGE>
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 Conversion, a certificate for the appropriate amount of shares
will be forwarded to ____________________________ as nominee for the beneficial
owner. In the event that an order is not accepted in the community offering or
that the Conversion is not consummated, we will promptly refund ^ 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
28
<PAGE>
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 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 subscription offering and by
making payment for shares on the date of completion of the conversion.
Federal regulations prohibit us from lending funds or extending credit
to any person to purchase shares in the conversion.
29
<PAGE>
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, ^ within five days following consummation of
the conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the offering have been distributed to eligible
subscribers by mail. Additional copies are available at our Stock Information
Center. Our officers 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.
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.
30
<PAGE>
Stock Pricing
We have retained Feldman Financial Advisors, Inc., an independent
consulting and appraisal firm, which is experienced in the evaluation and
appraisal of business entities, including savings institutions involved in the
conversion process to prepare an appraisal of our estimated market value.
Feldman Financial Advisors will receive fees of $15,000 for preparing the
appraisal and also will be reimbursed reasonable out-of-pocket expenses. We have
agreed to indemnify Feldman Financial Advisors under certain circumstances
against liabilities and expenses arising out of or based on any misstatement or
untrue statement of a material fact contained in the information we supplied to
Feldman Financial Advisors.
Feldman Financial Advisors has prepared the appraisal in reliance upon
the information contained herein, including the financial statements. The
appraisal contains an analysis of a number of factors including, but not limited
to, our financial condition and operating trends, the competitive environment
within which we operate, operating trends of certain savings institutions and
savings and loan holding companies, relevant economic conditions, both
nationally and in the Commonwealth of Pennsylvania which affect the operations
of savings institutions, and stock market values of certain savings
institutions. In addition, Feldman Financial Advisors has advised us that it has
considered the effect of the additional capital raised by the sale of the shares
on our estimated aggregate pro forma market value.
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 $2,500,000. Department
regulations require, however, that the appraiser establish a range of value for
the stock to allow for fluctuations in the aggregate value of the stock due to
changing market conditions and other factors. Accordingly, Feldman Financial
Advisors has established a range of value from $2,125,000 to ^ $2,525,000 for
the offering, the EVR. The EVR will be updated prior to consummation of the
conversion and the EVR may increase to ^ $2,875,000 without resolicitation of
subscriptions.
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The board of
directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions.
In order for stock sales to take place, Feldman Financial Advisors must
confirm to the Department that, to the best of Feldman Financial Advisors'
knowledge and judgment, nothing of a material nature has occurred which would
cause Feldman Financial Advisors to conclude that the aggregate sale price for
the shares would not be compatible with Feldman Financial Advisors' estimate of
our pro forma market value immediately upon conversion. If, however, facts do
not justify such a statement, an amended EVR may be established.
The appraisal is not a recommendation of any kind as to the
advisability of purchasing these shares. In preparing the appraisal, Feldman
Financial Advisors has relied upon and assumed the accuracy and completeness of
financial and statistical information provided by us. Feldman Financial Advisors
did not independently verify the financial statements and other information
provided by us, nor did Feldman Financial Advisors independently value our
assets and liabilities. The appraisal considers us only as a going concern and
it should not be viewed as our liquidation value. Moreover, because the
appraisal is based upon estimates and projections of a number of matters which
are subject to change, the market price of the common stock could decline.
31
<PAGE>
Change in Number of Shares to be Issued in the Merger Conversion
Depending on market and financial conditions at the time of the
completion of the offerings, we may significantly increase or decrease the
number of shares to be issued in the conversion. In the event of an increase in
the valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro forma net income
and net worth (book value) on an aggregate basis. In the event of a material
reduction in the valuation, we may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease pro forma net
income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the Merger
Conversion results in an offering which is either less than $2,125,000 or more
than $3,306,250. Persons who did not subscribe for shares will not have the
opportunity to do so.
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
Common Stock (or 2,075 shares). In addition, no person or persons ordering
through a single account, together with their associates, or group of persons
acting together, may purchase more than $100,000 of Common Stock (or 2,075
shares). However, the ESOP may purchase up to 10% of the shares sold.
Furthermore, the Plan of Conversion provides that officers and directors of
Nesquehoning and their associates may not purchase, in the aggregate, more than
35% of the shares issued pursuant to the conversion.
Depending on market conditions and the results of the offering, the
board of directors may, if the Department agrees, increase or decrease any of
the purchase limitations without the approval of our members and without
resoliciting subscribers. If the maximum purchase limitation is increased,
persons who ordered the maximum amount will be given the first opportunity to
increase their orders. In doing so the preference categories in the offerings
will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders; (ii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account
Holders; (iii) in the event that there is an oversubscription by Other
Depositors, to fill unfulfilled subscriptions of Other Depositors; and (iv) to
fill unfulfilled subscriptions in the community offering to the extent possible.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as
32
<PAGE>
trustee or in a similar fiduciary capacity (excluding tax-qualified employee
stock benefit plans), and (iii) any relative or spouse of such person or any
relative of such spouse, who has the same home as such person or who is one of
our directors or officers, or a director or officer of any of our subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of that person, and therefore all shares purchased by that corporation
would be included with the number of shares which that person individually could
purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, secretary and
treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
To order shares in the conversion, persons must certify that their
purchase does not conflict with the purchase limitations. In the event that the
purchase limitations are exceeded by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such persons),
we will have the right to purchase from that person at ^ $50.30 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 Repurchase of Shares
Generally, during the first year following the conversion, ^ First Star
Bancorp may not repurchase its shares and during each of the second and third
years following the conversion, ^ First Star Bancorp may repurchase up to five
percent of the outstanding shares provided they are purchased in open-market
transactions. Repurchases must not cause us to become undercapitalized and at
least 10 days prior notice of the repurchase must be provided to the Department.
The Department may disapprove a repurchase program upon a determination that (1)
the repurchase program would adversely affect our financial condition, (2) the
information submitted is insufficient upon which to base a conclusion as to
whether the financial condition would be adversely affected, or (3) a valid
business purpose was not demonstrated. However, the Department may grant special
permission to repurchase shares after six months following the conversion and to
repurchase more than five percent during each of the second and third years. In
addition, the Securities and Exchange Commission ("SEC") rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by ^ First Star Bancorp and affiliated purchasers. If, in the
future, the rules and regulations regarding the repurchase of stock are
liberalized, ^ First Star Bancorp may utilize the rules and regulations then in
effect.
Restrictions on Sales and Purchases of Shares by Trustees and Officers
Shares purchased by trustees and officers of ^ 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
33
<PAGE>
to directors and officers as a stock dividend, stock split, or otherwise with
respect to restricted stock shall be subject to the same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the Department has approved the purchase or the purchase is an
arm's length transaction and involves more than one percent of the outstanding
shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our
interpretations are final. Amendments to the Plan after the receipt of member
approval will not need further member approval unless required by the Department
and /or FDIC.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of a majority of the total number of votes eligible to be
cast by our members, and (ii) completion of the sale of shares within 24 months
following approval of the Plan by our members. If these conditions are not ^
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 members to vote on the Plan or at any time
thereafter with the approval of the Department and non-objection by the FDIC.
Other
All statements made in this document are hereby qualified by the
contents of the Plan of Conversion, the material terms of which are set forth
herein. The Plan of Conversion is attached to the proxy statement mailed to
certain depositors. Copies of the Plan are available from us and should be
consulted for further information. Adoption of the Plan by Nesquehoning's
depositors authorizes us to interpret, amend or terminate the Plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is intended to assist you in
understanding our financial condition and results of operations. The information
in this section should also be read with our Consolidated Financial Statements
and Notes to the Consolidated Financial Statements included elsewhere in this
document.
General
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
noninterest income, including, income from customer deposit account service
charges, gains on sales of loans, gains and losses from the sale of investments
and mortgage-backed securities and noninterest expense, including, primarily,
compensation and employee benefits, federal deposit insurance premiums, office
occupancy cost, and data processing cost. Our results of operations are also
affected significantly by general and economic and
34
<PAGE>
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 73% of our loan portfolio at June 30, 1998. To manage the
interest rate risk on this type of loan portfolio, we emphasize the origination
of adjustable-rate loans and sell a portion of our fixed-rate mortgage ^ loan
originations . At June 30, 1998, adjustable-rate mortgage loans totalled $62.7
million or 31.7% of our total loan portfolio. We also maintain a portfolio of
liquid assets which includes investment securities and mortgage-backed
securities. As an asset/liability management tool, we may use alternative
sources of funding if deposit pricing in our local market area is not
acceptable. Maintaining liquid assets tends to reduce potential net income
because liquid assets usually provide a lower yield than other interest-earning
assets.
Net Portfolio Value
^ 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.
35
<PAGE>
Changes
in Market $ %
Interest Rates NPV Amount Change Change in NPV NPV Ratio(1)
-------------- ---------- --------- ------------ -------------
(basis points)
+400 5,409 (17,808) (76.7) 1.87%
+300 11,437 (11,779) (50.7) 3.83%
+200 16,112 (7,105) (30.6) 5.27%
+100 20,344 (2,873) (12.4) 6.50%
0 23,217 -- -- 7.28%
-100 23,352 135 .6 7.21%
-200 21,427 (1,789) (7.7) 6.53%
-300 19,884 (3,333) (14.4) 5.98%
-400 19,217 (4,000) (17.2) 5.68%
- ----------------
(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 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.
36
<PAGE>
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 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.
37
<PAGE>
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.
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<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.
39
<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.
40
<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 1,673 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.
41
<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.
42
<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.
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
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
$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. ^
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets, primarily loans,
investment and mortgage-backed securities and interest we pay on our
interest-bearing liabilities, primarily deposits. Net interest income depends on
the volume of and rates earned on interest-earning assets and the volume of and
rates paid on interest-bearing liabilities.
Total Interest Income. For the fiscal year ended June 30, 1998, total
interest income increased to $21.2 million from $16.2 million for fiscal year
ended June 30, 1997. This increase of $5 million or 30.86% is due primarily to
an increase in income on loans receivable to ^ $13.2 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,
43
<PAGE>
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
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
44
<PAGE>
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.
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.
45
<PAGE>
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.
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
46
<PAGE>
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.
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 they expect to be Year
2000 compliant prior to the Year 2000. First Star Bancorp is in the process of
contacting all significant customers and non-information technology suppliers
(i.e. utility systems, telephone systems, etc.), regarding their year 2000 state
of readiness.
First Star Savings mailed questionnaires to approximately 45 commercial
loan customers. 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. 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. Any customers with greater than
low risk level will receive follow-up attention in the first quarter of calendar
1999. This questionnaire is also used in the underwriting for new commercial
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
47
<PAGE>
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.
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
48
<PAGE>
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 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 Northhampton
Counties. Our market area includes the counties of Lehigh, Northhampton, Carbon,
Bucks and, Monroe in their ^ entireties. Carbon, Lehigh and Northhampton
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.
49
<PAGE>
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. Median household income in the Lehigh Valley
exceeds the national average and the unemployment rate during the past two years
has been below the national average. A recently-completed interstate highway
network through the Lehigh Valley has benefitted the local economy by providing
convenient access to New York, New England and Philadelphia.
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.
50
<PAGE>
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 ^128,33 ^87.38 ^128,614 ^80.05 ^101,459 76.83
5
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>
^
51
<PAGE>
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- 18,161 7,791 25,952
family.................
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>
52
<PAGE>
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
53
<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
54
<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.
55
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
At June 30,
At September 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
56
<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 c^
apital.
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.
57
<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 June 30,
At September 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>
58
<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 June 30,
At September 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
======= ======= ======= ======= ======= =======
176,686
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.
59
<PAGE>
Mortgage-backed securities represent a participation interest in a pool of
single-family or other type of mortgages. Principal and interest payments are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as us. The quasi-governmental
agencies guarantee the payment of principal and interest to investors and
include the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government
National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA").
At ^ 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>
^
^
60
<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>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total 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% $12,306
6.28%
Mortgage-backed
securities......... -- -- ^ 526 7.22 -- -- ^ 77,091 6.20 77,617 6.21 77,617
Corporate debt
securities......... ^ 1,009 7.01 7,213 7.36 2,726 7.88 33,967 7.14 ^44,915 7.22 ^ 44,915
Marketable
equity
securities......... -- -- -- -- -- -- ^ 1,968 6.49 ^ 1,968 6.49 ^ 1,968
-------- ----- ------- --------- -------- --------
Total
investments......$ ^ 1,009 7.01% $9,754 7.28% $ ^ 4,452 7.26% $121,591 6.62% $136,806 6.65% $136,806
======== ===== ======== ======= ======= =======
</TABLE>
61
<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.
62
<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)
Interest Rate
<S> <C> <C> <C> <C>
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
-----------------------------------------------------
Interest Rate After
- ------------- 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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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.
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
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<PAGE>
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.
65
<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.
<TABLE>
<CAPTION>
Year Total Book Owned
Address Opened Investment Value Lease
------- ------ ---------- ----- -----
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------
(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.
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
67
<PAGE>
^ or unsound business practice and may direct any trustee, officer, attorney or
employee of a savings bank engaged in an objectionable activity, after the
Department has ordered the activity to be terminated, to show cause at a hearing
before the Department why such person should not be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in another state (a "foreign
institution") to acquire the voting stock of, merge or consolidate with, or
purchase assets and assume liabilities of, a Pennsylvania-chartered savings bank
and (ii) the establishment of branches in Pennsylvania by foreign institutions,
in each case subject to certain conditions including (A) reciprocal legislation
in the state in which the foreign institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania savings institutions and (B)
approval by the Department. Pennsylvania law also provides for nationwide
branching by Pennsylvania- chartered savings banks and savings and loan
associations, subject to the Department's approval and certain other conditions.
On September 29, 1994, the United States Congress enacted the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Law"), which amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The Interstate Banking Law will allow, effective September 29, 1995,
the acquisition by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
will be allowed effective June 1, 1997, however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting laws that specifically
prohibit such interstate transactions. States may, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. Pursuant to the Interstate Banking Law, states may also
enact legislation to allow for de novo interstate branching by out of state
banks.
Pennsylvania has enacted "opt-in" legislation authorizing full
interstate branching for state-chartered financial institutions prior to June 1,
1997. This legislation allows out-of-state banks to branch into Pennsylvania
either by buying an existing bank or converting it into a branch or by setting
up a de novo branch. The law requires reciprocity from the other state until
June 1, 1997. The legislation also allows state-chartered banks the same rights
as federally chartered banks to branch into other states that allow interstate
branching.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and savings institutions and safeguards the safety and soundness of the
banking and savings industries. Two separate insurance funds, the Bank Insurance
Fund ("BIF") for commercial banks, state savings banks and some federal savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. ^ 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 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
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<PAGE>
fund if necessary to restore the fund's ratio of reserves to insured deposits to
its target level within a reasonable time and may decrease such assessment rates
if such target level has been met. The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under this system, assessments
are set within a range, based on the risk the institution poses to its deposit
insurance fund. This risk level is determined based on the institution's capital
level and the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings associations were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for SAIF-insured deposits. Legislation to
capitalize the SAIF and to eliminate the significant premium disparity between
the BIF and the SAIF became effective December 31, 1996. The recapitalization
plan provided for a special assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured deposits were required to
pay a lower special assessment. Based on its deposits at March 31, 1995, on
November 27, 1996, ^ 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 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.
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<PAGE>
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
A bank which has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
We are also subject to more stringent Department guidelines. Although
not adopted in regulation form, the Department utilizes capital standards
requiring a minimum of 6.0% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
^ First Star Savings was in compliance in both the FDIC and
Pennsylvania capital requirements at ^ September 30, 1998. See "Historical and
Pro Forma Capital Compliance."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by FDIC regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. ^ First
Star Savings received a "satisfactory" rating in its last CRA examination in
October, 1996.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to ^ 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
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<PAGE>
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 Savings - Transactions With Management and Others."
Federal Home Loan Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Trustees of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At ^ 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.
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
71
<PAGE>
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
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 the Common Stock. The
following table sets forth, as of June 30, 1998, certain information as to those
persons who were beneficial owners of more than 5% of ^ First Star Bancorp's
outstanding shares of Common Stock and as to the Common 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%
(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.
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<PAGE>
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 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%
- --------------------------------
(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.
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(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.
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.
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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 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.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
June 30, 1998 and 1997. No other employee earned in excess of $100,000 for the
year ended June 30, 1998.
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------
Stock Based
Other Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation # of Options Compensation
- --------------------------- ---- ------ ----- ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph T. Svetik 1998 $149,581 $58,026 -- -- $26,175(2)
Director, President and CEO 1997 133,519 24,450 -- -- ^ 23,370(2)
Paul J. Sebastian 1998 142,103 58,026 -- -- ^ 25,614(3)
Director, Senior Vice President 1997 126,843 24,450 -- -- ^ 23,976(3)
</TABLE>
- ---------------------
(1) Other annual compensation does not equal the lesser of $50,000 or 10% of
the total of individual's annual salary and bonus.
(2) Includes First Star matching contributions of $2,175 and $870 under the
401(k) Plan and First Star contributions of $24,000 and $22,500 made
pursuant to the Employee Stock Ownership Plan during 1998 and 1997,
respectively.
(3) Includes First Star matching contributions of $1,614 and $1,652 under the
401(k) Plan and First Star contributions of $24,000 and $22,324 made
pursuant to the Employee Stock Ownership Plan during 1998 and 1997,
respectively.
Employment Agreements. We have entered into employment agreements with
Joseph T. Svetik and Paul J. Sebastian ("Employment Agreements"). The Employment
Agreements have a term of five years. The agreements are terminable by us for
"cause" as defined in the agreements. If we terminate the individual without
cause or such person terminates for good reason, he will be entitled to two
times his salary. The ^ Merger Agreement provides that we will enter into ^ an
employment agreement for three years with Stephen Koomar of Nesquehoning.
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. The loan is expected to be for a term
of [ten] years at an annual interest rate equal to the prime rate as published
in The Wall Street Journal. Presently it is anticipated that the ESOP will
purchase up to 10% of the common stock to be issued in the offering (i.e., 4,668
shares, based on the midpoint of the EVR). The loan will be secured by the
shares purchased and earnings of ESOP assets. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. We anticipate contributing approximately $25,000 annually
(based on a $250,000 purchase) to the ESOP to meet principal obligations under
the ESOP loan, as proposed. It is anticipated that all such contributions will
be tax-deductible. This loan is expected to be fully repaid in approximately 10
years.
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<PAGE>
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.
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. 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
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<PAGE>
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 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.
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 will 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 will be divided into three
staggered classes, with directors in each class elected for three-year terms.
Thus, it would take two annual elections to replace a majority of ^ 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.
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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, 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."
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Regulatory Restrictions. Federal regulations require that, prior to
obtaining control of an insured institution, a person, other than a company,
must give 60 days notice to the Federal Reserve Board and have received no
Federal Reserve Board objection to such acquisition of control, and a company
must apply for and receive Federal Reserve Board approval of the acquisition.
Control, involves a 25% voting stock test, control in any manner of the election
of a majority of the institution's directors, or a determination by the Federal
Reserve Board that the acquiror has the power to direct, or directly or
indirectly to exercise a controlling influence over, the management or policies
of the institution. Acquisition of more than 10% of an institution's voting
stock, if the acquiror also is subject to any one of either "control factors,"
constitutes a rebuttable determination of control under the regulations. The
determination of control may be rebutted by submission to the Federal Reserve
Board, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock after the effective
date of the regulations must file with the Federal Reserve Board a certification
that the holder is not in control of such institution, is not subject to a
rebuttable determination of control and will take no action which would result
in a determination or rebuttable determination of control without prior notice
to or approval of the Federal Reserve Board, as applicable.
DESCRIPTION OF CAPITAL STOCK
^ 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 53,688 shares of common stock in the
Merger Conversion. We do not intend to issue any shares of serial preferred
stock in the Merger Conversion, nor are there any present plans to issue such
preferred stock following the Merger Conversion. The aggregate par value of the
issued shares will constitute the capital account of First Star 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.
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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.
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.
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.
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
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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.
^ 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
83
<PAGE>
in these applications. The Applications may be examined at the principal office
of the Department, located at 333 Market Street, Harrisburg, Pennsylvania 17101,
and at the New York Regional Office of the FDIC, located at 452 5th Avenue, 21st
Floor, New York, New York 10018. The most recent appraisal by Feldman Financial
Advisors, Inc., may be examined at the main office of the First Star located at
418 West Broad Street, Bethlehem, Pennsylvania 18018 and Nesquehoning Savings
Bank, 301 West Catawissa Street, Nesquehoning, Pennsylvania 18240 during regular
business hours.
A copy of the Plan of Conversion as well as copies of the Articles and
Bylaws of each of ^ 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.
84
<PAGE>
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 19S7........ 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
Notes to Unaudited Consolidated Financial Statements........................................................ S-6
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
</TABLE>
^
85
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of First Star Bancorp and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of First Star Bancorp and subsidiaries (the "Bancorp") as of June 30, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1998.
These consolidated financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Star Bancorp and subsidiaries
at June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
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> <C>
^
2 Merger Conversion Agreement dated August 14, 1998 between
First Bancorp, Inc., First Star Savings Bank and
Nesquehoning Savings Bank, including a Plan of Conversion of
Nesquehoning Savings Bank*
3(i) Articles of Incorporation of First Star Bancorp, Inc.*
3(ii) Bylaws of First Star Bancorp, Inc.*
4 Specimen Stock Certificate of First Star Bancorp, Inc.^
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered*
5.2 Opinion of ^ Fedman Financial Advisors, Inc. as to the value
of subscription rights^
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.***
8.2 State Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.***^
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained
in its opinions filed as Exhibits 5.1 8.1 and 8.2)
23.2 Consent of Deloitte & Touche, LLP^
23.3 Consent of Feldman Financial Advisors, Inc.^
24 Power of Attorney (reference is made to the signature page)*
27 Financial Data Schedule**
99.1 Stock Order Form ^ 99.2 Marketing Materials ^
99.3 Proxy Statement - Nesquehoning Savings Bank
^* Previously filed.
** Electronic filing only.
*** To be filed by amendment.
</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 ^ January 15, 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 ^ January 15, 1998.
/s/ Joseph T. Svetik /s/ Paul J. Sebastian
- --------------------------------------------------------------------------------
Joseph T. Svetik Paul J. Sebastian
President, Chief Executive Officer and Director Chairman of the Board and
Director
(Principal Executive Officer)
/s/ Martin A. Marschang* /s/ Harold J. Suess*
- --------------------------------------------------------------------------------
Martin A. Marschang Harold J. Suess
Director Director
/s/ Mark Parseghian, Jr.*
Mark Parseghian, Jr. Tighe J. Scott
Director Director
/s/ Michael Styer
Michael Styer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
- ------------------
* Pursuant to power of attorney
EXHIBIT 4
<PAGE>
================================================================================
COMMON STOCK First Star Bancorp, Inc. CUSIP
CERTIFICATE NO.
INCORPORATED UNDER THE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE OWNER OF:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$1.00 PAR VALUE PER SHARE OF
First Star Bancorp, Inc.
The shares represented by this certificate are transferable only on the
stock transfer books of the corporation by the holder of record hereof in
person, or by his duly authorized attorney or legal representative, upon the
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all the provisions
contained in the corporation's official corporate papers filed with the
Department of State of the Commonwealth of Pennsylvania (copies of which are on
file with the Transfer Agent), to all of the provisions the holder by acceptance
hereof, assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
In Witness Whereof, First Star Bancorp, Inc. has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.
DATED:
____________________________________ ______________________________________
PRESIDENT SECRETARY
SEAL
Incorporated 1993
================================================================================
<PAGE>
================================================================================
FIRST STAR BANCORP, INC.
The Board of Directors of the corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations, and
restrictions thereof. The corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The shares represented by this certificate may not be cumulatively
voted in the election of directors of the corporation. The Articles also require
the approval of not less than 66 2/3% of the corporation's voting stock prior to
the corporation engaging in certain business combinations (as defined in the
Articles) with a person who is the beneficial owner of 10% or more of the
corporation's outstanding voting stock, or with an affiliate or associate of the
corporation. This restriction does not apply if certain approvals are obtained
from the Board of Directors. The affirmative vote of holders of 80% of the
outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) is required to amend this and certain other provisions of the Articles.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF TRANS MIN ACT - _______________Custodian_______________
(Cus) (Minor)
under Uniform Transfers to Minors Act
_______________________
(State)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
<TABLE>
<CAPTION>
<S> <C>
________________________________________________________________________________________________________
________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
shares of the common stock represented by the within certificate and do hereby irrevocably constitute and appoint
___________________________________________________________________________________________________ Attorney
to transfer the said shares on the books of the within named corporation with full power of substitution in the premises.
Dated _____________________ X_____________________________________________________
X_____________________________________________________
</TABLE>
NOTICE: The signatures to this assignment must correspond with the
name(s) as written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS, AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
Countersigned and Registered:
Transfer Agent and Registrar
By:
____________________________________________________
Authorized Signature
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
January 15, 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 equal to their estimated fair
market value, which will be the same price at which unsubscribed shares will be
sold in the community offering.
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
EXHIBIT 23.2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this 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
January 15, 1999
EXHIBIT 23.3
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------------------------------------------------------
1725 K STREET, NW - SUITE 205
WASHINGTON, DC 20006
(202) 467-6862 o FAX (202) 467-6963
January 15, 1999
Board of Trustees
Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, Pennsylvania 18240
Gentlemen:
We hereby consent to the use of our firm's name, Feldman Financial Advisors,
Inc., in the offering prospectus and regulatory merger applications filed by
First Star Bancorp, Inc. and First Star Savings Bank, and any amendments
thereto, for our Pro Forma Valuation Appraisal ("Appraisal") regarding the
valuation of Nesquehoning Savings Bank in connection with its Merger Conversion
with First Star Bancorp, Inc., and our opinion ("Opinion") regarding
subscription rights, both filed as exhibits to the regulatory merger
applications. We also consent to the use of our firm's name and the inclusion
of, summary of, and references to our Appraisal and Opinion in the offering
prospectus and any amendments thereto.
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
<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> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,385
<INT-BEARING-DEPOSITS> 857
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 178,125
<ALLOWANCE> 1,489
<TOTAL-ASSETS> 316,102
<DEPOSITS> 145,096
<SHORT-TERM> 27,935
<LIABILITIES-OTHER> 647
<LONG-TERM> 121,930
0
27
<COMMON> 372
<OTHER-SE> 15,113
<TOTAL-LIABILITIES-AND-EQUITY> 316,102
<INTEREST-LOAN> 13,234
<INTEREST-INVEST> 8,006
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,236
<INTEREST-DEPOSIT> 6,638
<INTEREST-EXPENSE> 14,610
<INTEREST-INCOME-NET> 6,630
<LOAN-LOSSES> 385
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 3,581
<INCOME-PRETAX> 4,423
<INCOME-PRE-EXTRAORDINARY> 4,423
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,607
<EPS-PRIMARY> 5.04
<EPS-DILUTED> 4.90
<YIELD-ACTUAL> 7.59
<LOANS-NON> 3,082
<LOANS-PAST> 3,082
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 236
<ALLOWANCE-OPEN> 1,156
<CHARGE-OFFS> 52
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,489
<ALLOWANCE-DOMESTIC> 1,489
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99.1
<PAGE>
First Star Bancorp, Inc.
Nesquehoning Savings Bank
301 West Catawissa Street
Nesquehoning, PA 18240
Stock Order Form
The Subscription Offering and the Community Offering expire at 0:00 p.m. Eastern
Daylight time, on January 00, 1999 unless extended. If you are subscribing for
shares of First Star Bancorp Common Stock in the Subscription Offering or the
Community Offering, you must mail your Stock Order Form in the accompanying
postage-paid return envelope, properly executed and with correct payment or
appropriate instructions authorizing a withdrawal from a Nesquehoning Savings
deposit account, so that it is received at the Stock Information Center by the
expiration of the Subscription Offering, or of the Community Offering as
appropriate, or it will be considered void. You may also hand deliver your
properly executed Stock Order Form accompanied with correct payment or
appropriate instructions for withdrawal from an eligible Nesquehoning Savings
deposit account to the Nesquehoning Savings office or any First Star office.
Stock Order Forms will be deemed to be received, whether hand delivered or
mailed, as appropriate, at the date and time of actual receipt at any of the
above locations. All subscription rights exercisable under this Stock Order Form
are non-transferable. All subscriptions for First Star Common Stock are
irrevocable and will be considered final upon receipt.
PLEASE SIGN AND DATE THIS STOCK ORDER FORM ON THE REVERSE SIDE. THIS STOCK ORDER
FORM IS NOT VALID IF NOT SIGNED.
<TABLE>
<CAPTION>
<S> <C>
Eligibility -------------------------------------------------------------
THIS SECTION MUST BE COMPLETED IN ORDER FOR THIS STOCK
I. Subscription Offering Category FORM TO BE VALID.
A. Category 1 (First Priority): Persons who had a
Nesquehoning deposit account of at least $50 on July - See "Eligibility" section for description of priorities.
31, 1997. - Please answer each of the following questions.
B. Category 2 (Second Priority): Persons who had a
Nesquehoning deposit account of at least $50 on Are you a Category 1 Depositor? ____Yes ____No
September 30, 1998?. Are you a Category 2 Depositor? ____Yes ____No
Are you a Category 3 Depositor/Borrower? ____Yes ____No
C. Category 3 (Third Priority): Persons who had a Are you a First Star Bancorp shareholder?____Yes ____No
Nesquehoning deposit account of at least $50 and Are you a resident of Carbon/Lehigh
Nesquehoning borrowers on April 30, 1998?. /Northampton county? ____Yes ____No
-------------------------------------------------------------
II. Community Offering
A. First Star Employee Stock Ownership Plan -------------------------------------------------------------
B. First Star shareholders Enter the number of shares and dollar amount of First Star
C. Residents of Carbon, Lehigh and Northampton Bancorp Common Stock for which you wish to subscribe in each
Counties of Pennsylvania offering:
I. Subscription Offering (Minimum of 00 shares)
First Star Bancorp Common Stock Purchase __________ shares x $00.00/share = $_________________________
Enter the dollar amount and number of shares for which you wish II. Community Offering (Minimum of 00 shares)
to subscribe in each offering. The price per share will be: __________ shares x $00.00/share = $_________________________
- - Subscription Offering: $00.00 If you are a Category I, Category II or Category III Holder,
- - Community Offering: $00.00 please be sure to order stock in the Subscription Offering.
If you are a resident of Carbon, Lehigh or Northampton
The minimum purchase is: Counties, please be sure to order stock in the Community
- - Subscription Offering: $000.00 (00 shares) Offering.
- - Community Offering: $000.00 (00 shares) -------------------------------------------------------------
No fractional shares will be issued. Therefore, all orders in the -------------------------------------------------------------
Subscription Offering must be in a multiple of $00.00 and all [_] Enclosed is a check or money order payable to First Star
orders in the Community Offering must be in a multiple of Bancorp for $____________________ (or cash, if presented
$00.00. in person.
[_] I authorize Nesquehoning Savings to make withdrawals
In the event of an oversubscription, persons who subscribe for below and understand the amounts will not be otherwise
shares in the Subscription Offering will receive priority over those available for withdrawals.
who subscribe for shares in the Community Offering. To the
extent the shares subscribed for are not available for purchase, the Nesquehoning Savings
funds (or an appropriate portion thereof) herein forwarded to Account Number(s) Amount(s)
Nesquehoning Savings (or authorized for withdrawal) will be
refunded (or released). _________________________ $____________________
PLEASE SIGN AND DATE THIS STOCK ORDER FORM ON _________________________ $____________________
THE REVERSE SIDE. THIS STOCK ORDER FORM IS NOT
VALID IF NOT SIGNED. _________________________ $____________________
Payment Total Withdrawal $____________________
Check the box(es) that indicate how you want to pay for the First Important: Individuals interested in utilizing funds
Star Bancorp Common Stock. Payment by check or money order currently in an IRA should contact the Stock Information
should be made payable to "First Star Savings Bank". Cash Center at (000) 000-0000.
payments must be delivered in person to the Stock Information
Center or Nesquehoning Savings or any First Star office. Those No early withdrawal penalty will be assessed on a
who wish to subscribe for shares in the Community Offering may Nesquehoning Savings certificate of deposit account if funds
deliver payment to any of the locations described above. Do not are used from such account to order First Star Bancorp
mail cash. Common Stock.
-------------------------------------------------------------
If you are eligible to subscribe for shares of First Star Bancorp
Common Stock in the Subscription and/or the Community PLEASE CALL OUR STOCK INFORMATION CENTER AT (000) 000-0000
Offerings, you may choose to pay for shares by withdrawal from WITH ANY QUESTIONS (WE WILL ACCEPT COLLECT CALLS.
an eligible deposit account at Nesquehoning Savings. If so, you
should enter the account number(s) and the dollar amount(s) you THIS FORM MUST BE COMPLETED (FRONT AND BACK) AND
wish to withdraw from each account(s). If you want to purchase RECEIVED WITH PAYMENT IN FULL AT THE NESQUEHONING
through your Individual Retirement Account ("IRA"), please call SAVINGS OFFICE OR ANY FIRST STAR OFFICE NO LATER THAN
000-000-0000. If more than one signature is required for JANUARY 00, 1999 AT 0:00 P.M. EASTERN DAYLIGHT TIME UNLESS
withdrawal from a Nesquehoning deposit account, each required THE DEADLINE IS EXTENDED.
signature must be included in the Acknowledgment box.
Payment to be made through authorized withdrawals from deposit
accounts as described above will remain in the designated
account(s), and will continue to accrue at the account's
contractual rate of interest, and may not be withdrawn by the
account holder until the completion or termination of the
Subscription and the Community Offering.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------------------------------
First Star Bancorp Common Stock Registration Stock Registration
Before completing this section, please review the Form of Stock Ownership:
guidelines below. Print the name(s) in which you want the
First Star Bancorp Common Stock registered and the [_] Individual
address to which you want the First Star Bancorp [_] Joint Tenants
Common Stock certificate mailed. Subscription rights are [_] Tenants in Common
not transferable. Enter the Social Security or Tax ID [_] Corporation
number of one registered owner. Only one number is [_] Fiduciary/Trust Under Agreement dated:
required. Check only the box that shows how you want the ____________________________________
legal ownership of the First Star Bancorp Common Stock
to appear. If necessary, mark "Other" and enter the [_] Partnership
correct ownership, such as corporation, trust or estate. To [_] Uniform Gift to Minors
purchase First Star Bancorp Common Stock for a trust, [_] Uniform Transfer to Minors
include the date of the trust agreement and trust title. [_] Individual Retirement Account Other:
______________________________________________
Acknowledgment
Please type or print clearly:
Please sign and date the Stock Order Form. When
purchasing as a custodian, corporate officer, etc., include Name(1)______________________________________________________
your full title. An additional signature is required only
when payment is by withdrawal from an account that
requires more than one signature to withdraw funds. Name(2)______________________________________________________
This order is not valid if not signed
Street Address___________________________________________________
Your order will be filled according to the provisions of the
Plan of Conversion and the Offering circular. If you do
not complete the Stock Order Form according to these City ____________________________ State ________________________
instructions, First Star Bancorp may not be able to fill
your stock order. If you need help completing this form, Zip Code _____________ County of Residence_______________________
call (000) 000-0000 between 9:00 a.m. and 5:00 p.m.
Monday through Friday (Eastern Daylight Time). Social Security No. or Tax ID ___________________________________
NASD Affiliation Daytime Telephone _______________________________________________
Please refer to the National Association of Securities Evening Telephone________________________________________________
Dealers, Inc. ("NASD") affiliation section and check the
box only if applicable. The NASD's interpretation with -----------------------------------------------------------------
respect to Fee-Riding and Withholding restricts the sale of -----------------------------------------------------------------
stock to NASD members, persons associated with NASD Acknowledgment
members and certain members of their families. Such
persons must certify on the Stock Order Form that they By signing below, I acknowledge receipt of the Offering Circular
will comply with certain conditions required for an dated January 00, 1999 at least 48 hours prior to the delivery of
exemption from these restrictions which may be granted the Stock Order Form to Nesquehoning Savings or First Star
by the NASD. By signing the Stock Order Form, you are Bancorp and the provisions therein and understand that I may not
certifying that you will comply with applicable NASD change or revoke my order once it is received by Nesquehoning
regulations. Savings or First Star Bancorp. also certify that the stock order
is for my account only and there is no agreement or
understanding regarding any further sale or transfer of these
- ------------------------------------------------------------ shares. Under penalties of perjury, I certify that the Social
[_] Check here if you are a member of the NASD or a Security or Tax ID number given is correct and I am not subject
person associated with a NASD member or a to backup withholding tax. Pennsylvania law prohibits any person
member of the immediate family of any such from transferring conversion subscription rights. Nesquehoning
person to whose support such person contributes Savings or First Star Bancorp will pursue any and all legal and
directly or indirectly or if you have any account in equitable remedies in the event they become aware of the transfer
which a NASD member or person associated with of subscription rights and will not honor orders involving such
a NASD member has a beneficial interest, in transfer.
accordance with the conditions for an exception
from the NASD's interpretation with respect to Signature (Please sign below):
Free-Riding and Withholding. I agree (I) not to
sell or transfer the stock for a period of 150 days Sign and date below. When purchasing as a custodian, corporate
following conclusion of the offering and (ii) to officer, etc., include your full title.
report this subscription in writing to the applicable
NASD member with whom I am associated within _________________________ ________________________ ____________
one day of payment for First Star Common Stock. Authorized Signature Title (if applicable) Date
- ------------------------------------------------------------
_________________________ ________________________ ____________
Authorized Signature Title (if applicable) Date
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH
THE PROVISIONS OF THE OFFERING CIRCULAR.
THIS ORDER IS NOT VALID IF NOT SIGNED.
-----------------------------------------------------------------
</TABLE>
First Star Bancorp Common Stock is not a deposit and
will NOT be insured by the FDIC or any other governmental agency.
Guidelines for Registering Stock
The stock transfer industry has developed a uniform system of shareholder
registrations that we will use in the issuance of First Star Bancorp Common
Stock. Print the name(s) in which you want the stock registered and the mailing
address of the registration. Include the first name, middle initial, and last
name of the shareholder. Avoid the use of initials. Please omit words that do
not affect ownership rights, such as "Mrs.", "Mr.:, "Dr.", "Special account",
etc.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL The stock is to be registered in an individual's name only. You may not list
beneficiaries for this ownership.
- ------------------------------------------------------------------------------------------------------------------------------------
JOINT TENANTS Joint tenants with right of survivorship identifies two or more owners. When
stock is held by joint tenants with rights of survivorship, ownership
automatically passes to the surviving joint tenant(s) upon the death of any joint
tenant. You may not list beneficiaries for this ownership.
- ------------------------------------------------------------------------------------------------------------------------------------
TENANTS IN Tenants in common also identifies two or more owners. When stock is held by
COMMON tenants in common, upon the death of one co-tenant, the deceased co-tenant's
ownership interest in the stock will be held by his or her estate in accordance
with the laws of descent and distribution. You may not list beneficiaries for
this transaction.
- ------------------------------------------------------------------------------------------------------------------------------------
UNIFORM GIFT Stock may be held either in the name of a custodian for the benefit of a minor
TO MINORS/ under the Uniform transfer to Minors Act or Uniform gift to Minors Act of the
UNIFORM individual states. Under either form of ownership, the minor is the actual
TRANSFER TO owner of the stock with the adult custodian being responsible for the investment
MINORS until the minor reaches legal age.
On the first "NAME" line, print the name of the custodian, with the abbreviation
"CUST" after the name. On the second "NAME" line, print the name of the minor.
Only one minor may be designated.
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATION/ Corporation/Partnerships may purchase stock in this offering. Please provide the
PARTNERSHIP Corporation/Partnership's legal name and Tax ID number. To have subscription rights,
the Corporation/Partnership must have an account in the legal name. Please contact
the Stock Information Center to verify depositor rights and purchase limitations.
- ------------------------------------------------------------------------------------------------------------------------------------
FIDUCIARY/ Generally, fiduciary relationships (such as Trusts, Estates, Guardianships, etc.) are
TRUST established under a form of trust agreement or pursuant to a court order. Without a
legal document establishing a fiduciary relationship, your stock may not be registered
in a fiduciary capacity.
On the first "NAME" line, print the name of the fiduciary if the fiduciary is an
individual. If the fiduciary is a corporation, list the corporate title on the first
"NAME" line. Following the name, print the fiduciary "title" such as trustee,
executor, personal representative, etc.
On the second "NAME" line, print either the name of the maker, donor, or testator or
the name of the beneficiary. Following the name, indicate the type of legal document
establishing the fiduciary relationship (agreement, court order, etc.). In the blank
after "Under Agreement Dated", fill in the date of the document governing the
relationship. The date of the document need not be provided for a trust created by a
will."
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 99.2
<PAGE>
- --------------------------------------------------------------------------------
(Nesquehoning Savings Bank Logo)
----------------------------------
YOU ARE CORDIALLY INVITED TO
A COMMUNITY INFORMATION
MEETING AND RECEPTION
----------------------------------
Please join the Board of Trustees of Nesquehoning Savings Bank, the Board of
Directors of First Star Bancorp and the Senior Management Team of both
Nesquehoning and First Star at the community information meeting listed below.
We will tell you more about our merger and stock offering. Seating will be
limited. To reserve a place for yourself and your friends who may have an
interest in becoming a shareholder of First Star Bancorp, please call us at
(000) 000-0000.
January 00 at 6 p.m.
At the Lake Hauto Banquet Hall
FIRST STAR SAVINGS BANK
[Nesquehoning Savings Bank Logo]
This announcement is neither an offer to sell nor a solicitation of
an offer to buy the stock of First Star Bancorp. The offer is made
only by the Offering Circular which should be read with care.
- --------------------------------------------------------------------------------
<PAGE>
[Nesquehoning Savings Bank Letterhead]
Dear Voting Member of Nesquehoning Savings Bank:
The Board of Trustees of Nesquehoning Savings Bank is pleased to announce
that Nesquehoning Savings has received regulatory approval to convert from a
Pennsylvania chartered mutual savings bank to a Pennsylvania chartered stock
savings bank pursuant to a Plan of Conversion that was unanimously adopted by
the Board of Trustees. As part of the conversion, Nesquehoning Savings will
merge with First Star Bancorp, Inc., a community bank holding company
headquartered in Bethlehem, PA. These transactions are referred to as the
"Merger Conversion."
Let me assure you that the Merger Conversion will not affect the balance or
terms of any of your existing deposit accounts or change the terms of any
existing loans at Nesquehoning Savings. Depositors of Nesquehoning Savings will
continue to have their accounts insured by the FDIC to the maximum extent
permitted by law.
A favorable vote of the Voting Members of Nesquehoning Savings is required
to complete the Merger Conversion. A Special Meeting of Members will be held on
December 00, 1998 at which time the members of Nesquehoning Savings may vote by
proxy or in person. The enclosed Proxy Statement contains important information
to assist you in learning how to vote. Unless you plan to attend the annual
meeting and vote in person, you should use the enclosed proxy card to record
your vote. The Board of Trustees of Nesquehoning Savings has unanimously
approved the Plan of Merger and urges you to vote "FOR" the Plan of Merger.
Failure to return your signed proxy card or to vote in person could have the
same effect as a vote against the Merger Conversion.
Nesquehoning Savings has operated successfully as an independent mutual
savings institution since 1913. Today the Board of Trustees of Nesquehoning
Savings believes that it is in the best interest of Nesquehoning Savings, its
customers and the communities served by Nesquehoning Savings for Nesquehoning
Savings to join with First Star Bancorp. The Merger Conversion should enhance
Nesquehoning Savings' ability to meet a wider range of its customers' financial
needs and offer its customers greater convenience.
First Star Savings Bank was founded in 1893 (as the Greater Bethlehem
Savings & Loan Association) with the intent of providing community banking
services to the Lehigh Valley. As of September 30, 1998 First Star Bancorp had
total assets of $000 million and deposits of $000 million. First Star offers a
wide range of banking products, including checking accounts, MAC cards, debit
cards as well as car loans, home equity loans and business loans. First Star has
six offices in the Lehigh Valley. First Star plans to renovate and expand the
current Nesquehoning Savings headquarters office after completion of the Merger
Conversion.
As a Voting Member of Nesquehoning Savings (as defined in the Proxy
Statement), you have the right to subscribe for First Star Bancorp Common Stock
on a priority basis and at a discount to the market price. Your vote on the
Merger Conversion has no bearing on your right to subscribe for stock. Please
read the Offering Circular for more information about buying stock.
For your convenience and to answer any questions you may have, we have
established a Stock Information Center. If you have questions, please call us at
(000) 000-0000. To submit your vote for the Plan of Merger, please complete,
date, sip and return the enclosed Proxy Card. If you decide to subscribe for
stock, you must return the enclosed Stock Order Form, properly completed, with
full payment to the Stock Information Center, Nesquehoning Savings' office or
any First Star office not later than 1:00 p.m., 1999.
Sincerely,
Francis X. Koomar
Chairman
This letter is not an offer to sell nor a solicitation of an offer to buy
common stock of First Star Bancorp. The offer is made only by the
Offering Circular which should be read with care.
<PAGE>
FIRST STAR SAVINGS BANK
[Nesquehoning Savings Bank Logo)
Dear Friend:
The Board of Directors of First Star Bancorp, Inc. and the Board of
Trustees of Nesquehoning Savings Bank are pleased to announce that Nesquehoning
Savings has received regulatory approval to convert from a Pennsylvania
chartered mutual savings bank to a Pennsylvania chartered stock savings bank
pursuant to a Plan of Conversion that was unanimously adopted by the Board of
Trustees of Nesquehoning Savings. As part of the conversion, Nesquehoning
Savings will merge with First Star Bancorp. These transactions are referred to
as the "Merger Conversion."
Enclosed you will find a package of information regarding the Merger
Conversion and how to order stock in this offering. Please review these
documents carefully prior to making your investment decision.
Nesquehoning Savings has operated successfully as an independent mutual
savings institution since 1913. Today the Board of Trustees of Nesquehoning
Savings believes that it is in the best interest of Nesquehoning Savings, its
customers and the communities served by Nesquehoning Savings for Nesquehoning
Savings to join with First Star. The Merger Conversion should enhance
Nesquehoning Savings' ability to meet a wider range of its customers' financial
needs and offer its customers greater convenience. First Star plans to renovate
and expand the current Nesquehoning headquarters office upon completion of the
Merger Conversion.
For your convenience, we have established a Stock Information Center.
If you have questions, please call us at (000) 000-0000. If you decide to order
stock, you must return the enclosed Stock Order Form properly completed with
full payment to the Stock Information Center or any Nesquehoning Savings or
First Star office not later than 1:00 p.m., ______________, 1999.
Sincerely,
Joseph T. Svetik
President and Chief Executive Officer
This letter is not an offer to sell nor a solicitation of an offer to buy common
stock of First Star Bancorp. The offer is made only by the Offering Circular
which should be read with care.
<PAGE>
FIRST STAR SAVINGS BANK
{Nesquehoning Savings Bank Logo)
Dear Friend:
Thank you for your interest in the merger conversion transaction
involving Nesquehoning Savings Bank and First Star Bancorp, Inc. Enclosed you
will find an Offering Circular and a brochure to answer some of the questions
that you may have. Please review the documents carefully prior to making your
investment decision
For your convenience and to answer any question you may have, we have
established a Stock Information Center. If you have questions, please call the
Stock Information Center at (000) 000-0000. If you decide to subscribe for
stock, you must return the enclosed Stock Order Form, properly completed and
with full payment to the Stock Information Center, the Nesquehoning Savings Bank
office or any First Star office not later than 0:00 p.m., January 00, 1999.
Sincerely,
Joseph T. Svetik Francis X. Koomar
President & Chief Executive Officer Chairman
First Star Bancorp, Inc. Nesquehoning Savings Bank
This letter is not an offer to sell nor a solicitation of an offer to buy common
stock of First Star Bancorp, Inc. The offer is made only by the Offering
Circular which should be read with care.
<PAGE>
========================================
---------------------------------------
Questions & Answers
about our proposed
Merger conversion
---------------------------------------
FIRST STAR SAVINGS BANK
(Nesquehoning Savings Bank Logo)
XXXX========================================
<PAGE>
===============================================
INTRODUCTION
Nesquehoning Savings Bank has
agreed to be acquired by First Star
Bancorp, Inc. through a transaction
called a "Merger Conversion".
Nesquehoning will convert from a
mutual savings bank to a stock savings
bank and, at the same time, be
acquired by First Star. The Merger
Conversion must be approved by
Nesquehoning Savings' depositors and
several governmental agencies. The
Merger Conversion is also subject to
the successful completion of an
offering of First Star Common Stock.
Q. What are the Nesquehoning
depositors being asked to vote on?
A. Nesquehoning depositors are
being asked to vote upon the
Merger Conversion.
Q. What is the Merger Conversion?
A. The First Star Directors and
Nesquehoning Trustees have
determined that it is in the best
interests of First Star and
Nesquehoning for Nesquehoning
to merge with and into First Star.
However, in order for First Star
and Nesquehoning to merge,
Nesquehoning must first convert
from a mutual to the stock form
of ownership. Concurrent with
this conversion, Nesquehoning
will merge with and into First
Star. After the Merger
Conversion, Nesquehoning will
operate as the downtown
Nesquehoning office of First Star
Savings Bank.
Q. Why should I vote for the Merger
Conversion?
===============================================
<PAGE>
============================================
A. Nesquehoning depositors should
vote for the Merger Conversion
because, in today's highly
competitive banking environment,
the parties believe a small, single
branch savings bank simply cannot
compete effectively (or possibly
even survive) with larger
institutions with greater capital
resources and depth of
management and offering more
diversified financial products and
services. Among the alternatives
considered by the trustees of
Nesquehoning was a standard
mutual to stock conversion.
However, a standard mutual to
stock conversion would not
significantly increase
Nesquehoning's ability to compete
or to survive. A successful
conversion would result in
Nesquehoning being
overcapitalized, without the
resources necessary to expand the
range of its financial products and
utilize its additional capital. An
unsuccessful conversion would
result in a significant and perhaps
crippling charge to earnings. After
considering all the alternatives to
the Merger Conversion, the
Trustees of Nesquehoning decided
that the most desirable alternative
for Nesquehoning was to identify
and pursue a combination with a
well capitalized, conservatively
managed community savings bank
that shared Nesquehoning's
operating philosophy and
commitment to its community.
In short, the Board of Trustees of
Nesquehoning and the Directors of
First Star believe that the
Nesquehoning Depositors should
vote "FOR" the Merger
Conversion because it is in the
best interests of both institutions,
First Star's shareholders,
Nesquehoning's depositors and the
communities which they serve.
============================================
<PAGE>
=========================================
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, eligible
Nesquehoning depositors will be
entitled to subscribe for shares of
First Star Common Stock at a
10% discount to the market price
in the Subscription Offering.
Q. What happens if the Merger
Conversion is not approved?
A. Nesquehoning would not convert
to a stock form of ownership and
the merger would not take place.
Because the factors that led the
Board of Trustees to seek an
appropriate merger partner have
not changed, the Board of
Trustees would necessarily
reconsider all alternatives.
Q. Is First Star's Common Stock
listed on a stock exchange?
A. No. First Star's Common Stock
has always traded in privately
negotiated transactions. An
investment in First Star Bancorp
should be considered long-term
due to the current lack of an
active trading market for the
stock.
=========================================
<PAGE>
===========================================
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 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. What do I need to do now?
A. First, plan to attend the Special
Meeting or complete and mail
your proxy approving the Merger
Conversion. Then, when you
receive the information relating
to the Offering, if you wish to
take advantage of the opportunity
to purchase shares of First Star's
Common Stock, complete your
stock order form and submit it
together with the applicable
purchase price.
Q. What changes will I notice after
the Merger Conversion?
A. In some respects, there will be
little change. Like Nesquehoning,
First Star emphasizes personal,
individualized service and a high
degree of personal contact.
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 (000)
000-0000.
===========================================
<PAGE>
=================================================
This brochure does not constitute an
offer to sell or the solicitation of an
offer to buy any shares of First Star
Bancorp Common Stock offered in
connection with the Merger
Conversion, nor does it constitute the
solicitation of a proxy in connection
with the Merger Conversion. Offers to
sell and solicitations of offers to buy
are made only by means of the
Offering Circular and solicitations of
proxies are made only by means of the
Proxy Statement. There shall be no
sale of First Star Bancorp Common
Stock in any state in which any offer,
solicitation of an offer or sale of First
Star Bancorp Common Stock would be
unlawful prior to the registration or
qualification of such shares under the
securities laws of any such state. A
Proxy Statement and/or an Offering
Circular can be obtained by calling the
Stock Information Center.
THE SHARES OF FIRST STAR
BANCORP COMMON STOCK
OFFERED IN THE MERGER
CONVERSION ARE NOT DEPOSITS
AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
FIRST STAR SAVINGS BANK
(Nesquehoning Savings Bank Logo)
Stock Information Center
301 West Catawissa Street
Nesquehoning, PA 18240
Phone (000) 000-0000
=================================================
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 merge
with and into First Star Savings Bank, a Pennsylvania-chartered stock
savings bank headquartered in Bethlehem, Pennsylvania ("First Star
Savings") and 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 OF
NESQUEHONING AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING.
<PAGE>
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, Other Depositors, and First Star Bancorp's Employee Stock
Ownership Plan ("ESOP") (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 (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,
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<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.
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<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
Exhibits A and B, respectively.
THE DEPARTMENT OF BANKING HAS APPROVED AND THE FDIC HAS ISSUED A LETTER
OF NON-OBJECTION TO THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY NESQUEHONING
MEMBERS AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH APPROVAL AND
NON-OBJECTION, HOWEVER, DOES 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
risks of going public. Because of the ages of Francis X. Koomar (82) and Stephen
Koomar (70), the
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<PAGE>
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. 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, MAC machine and safe deposit box, as well
as off-street parking, none of which currently exist at Nesquehoning.
2. 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. This would benefit existing Nesquehoning customers and the community
as a whole.
3. 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.
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<PAGE>
4. 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.
5. The other institution already had an office in Nesquehoning while
First Star Bancorp did not. The board concluded the addition of another bank
would increase competition in the area.
6. The other institution did not offer Nesquehoning depositors a
discount on the purchase of its stock. First Star Bancorp offered a discount to
depositors.
7. 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.
8. First Star's commitment to finance the renovation of one of the few
large buildings in downtown Nesquehoning and First Star's plans to build a new
office adjacent to Nesquehoning's current location are steps that, in the
board's opinion, are evidence of First Star's commitment to Nesquehoning's
customers and its community.
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 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.
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<PAGE>
Regulatory Approvals
The parties have received 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 notice to the institution the initial 60-day period by an additional 60
days.
A reorganization may not be completed if the FDIC objects to the
proposed reorganization. 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.
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 Reorganization, the
consummation of the Reorganization may be delayed. In such event, subscribers
will not be permitted to change their orders and funds provided for the purchase
of Common Stock 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, the First Star Bancorp may be required to resolicit,
whereby subscribers will be given the opportunity to revise or cancel their
orders.
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."
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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 of Conversion and the Merger have been approved by the
Department of Banking and Nesquehoning has received a letter of non-objection
with respect to the Conversion from the FDIC, subject to, among other things,
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 FEDERAL
RESERVE BANK HAS 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
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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.
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 concurrenceof 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 Members 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.
Effects of The Merger Conversion
See page ________ of the Prospectus.
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
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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.
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.
Additional Information
Certain depositors of Nesquehoning have subscription rights for the
shares of Common Stock. Such shares are offered only by means of the
accompanying Prospectus. All persons receiving this proxy are also being given
the Prospectus. Additional copies of the Prospectus may be obtained by returning
the enclosed postage paid card or by otherwise requesting such Prospectus in
writing at the office of Nesquehoning. The Prospectus contains additional
information concerning the Merger and First Star. The Plan is available to
members at the office of Nesquehoning, and will be mailed to any depositor upon
written request.
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.
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 Stock Articles 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
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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
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