As filed with the Securities and Exchange Commission on October 6, 1999
Registration Nos. 333-87357-01
333-87357
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FIRST STAR CAPITAL TRUST
FIRST STAR BANCORP, INC.
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(Name of Small Business Issuers in Their Charters)
Delaware Requested
Pennsylvania 6035 23-2753108
- --------------------------------- --------------- ---------------------
(States or Other Jurisdictions (Primary SIC No (I.R.S. Employer
of Incorporation or Organization) Identification Nos.)
First Star Bancorp, Inc. First Star Capital Trust
418 West Broad Street, c/o Bankers Trust (Delaware)
Bethlehem, Pennsylvania 18018 1101 Centre Road, Suite 200, Trust Department
(610) 691-2233 Wilmington, Delaware 19805
(302) 636-3301
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(Address and Telephone Number of Principal Executive Offices)
Mr. Joseph T. Svetik
Chief Executive Officer
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. Jeffrey Waldon, Esq.
Gregory A. Gehlmann, Esq. Wesley Kelso, Esq.
MALIZIA SPIDI & FISCH, PC STEVENS & LEE, PC
1301 K Street, N.W., Suite 700 East One Penn Square
Washington, D.C. 20005 Lancaster, Pennsylvania 17608
(202) 434-4660 (610) 964-1480
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier 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. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Amount to be Proposed Proposed Maximum Amount of
Securities Being Registered Registered Offering Price Aggregate Offering Registration Fee
Price(1)
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<S> <C> <C> <C> <C>
__.__% Preferred Securities of First Star 1,380,000 $10.00 $13,800,000 $3,836.40
Capital Trust (1)
__.__% Junior Subordinated Debentures of
First Star Bancorp, Inc. (2)
Guarantee of First Star Bancorp, Inc. of
certain obligations under the Preferred
Securities (3)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
exclusive of accrued interest and dividends, if any.
(2) The Junior Subordinated Debentures will be purchased by First Star Capital
Trust with the proceeds of the sale of the Preferred Securities. Such
securities may later be distributed for no additional consideration to the
holders of the Preferred Securities upon the dissolution of the Trust and
the distribution of its assets.
(3) This Registration Statement is deemed to cover the Guarantee. Pursuant to
Rule 457(n) under the Securities Act, no separate registration fee is
payable for the Guarantee.
The prospectus contained in this Registration Statement will be used in
connection with the offering of the following securities: (1)__.__% Preferred
Securities of First Star Capital Trust; (2)__.__% Junior Subordinated Debentures
of First Star Bancorp, Inc.; and (3) a Guarantee of First Star Bancorp, Inc. of
certain obligations under the Preferred Securities.
The registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the registrants
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>
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _____________ __, 1999
[LOGO]
$12,000,000
First Star Capital Trust
_.__% Preferred Securities
(Liquidation Amount $10 per Preferred Security)
guaranteed by
First Star Bancorp, Inc.
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First Star Capital Trust: First Star Capital Trust is a subsidiary of First Star
Bancorp, Inc. and is a Delaware business trust. The Offering: In connection with
this offering, the Trust will:
o sell preferred securities to the public and common securities to First Star
Bancorp, Inc.,
o use the proceeds from these sales to buy an equal principal amount of _.__%
junior subordinated debentures due December 31, 2029 issued by First Star
Bancorp, Inc. and
o distribute the cash payments it receives on the junior subordinated
debentures to the holders of the preferred and common securities.
The preferred securities represent undivided beneficial interests in
the assets of the Trust. For each preferred security that you own, you will be
entitled to receive cumulative cash distributions at an annual rate of _.__% of
the $10 liquidation amount, payable quarterly on the last business day of March,
June, September and December, beginning on ______________, 1999. We may defer
payment of distributions at any time for periods of up to 20 consecutive
quarters. The preferred securities mature on __________, 2029. The Trust may
redeem the preferred securities, at a redemption price of $10 per preferred
security plus accrued and unpaid distributions, at any time on or after
___________, 2004, or earlier under certain circumstances.
We will fully and unconditionally guarantee the preferred securities
based on its obligations under a guarantee, a trust declaration and an
indenture.
There is currently no public market for the preferred securities. We
expect the preferred securities to be quoted on the Nasdaq National Market under
the symbol "FSANP."
================================
You should carefully read the factors set forth in "Risk Factors" beginning on
page ___.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Pennsylvania Department of Banking, nor 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.
Per Preferred Security Total
---------------------- -----
Public Offering Price....................... $ $
Underwriting Discounts and Commissions...... $ $
Proceeds to Trust before expenses........... $ $
This offering is for $12,000,000 of preferred securities of the Trust; however,
Hopper Soliday, a division of Tucker Anthony Incorporated, has a 30-day option
to purchase up to an additional $1,800,000 of preferred securities at the same
price and on the same terms, solely to cover over-allotments, if any.
Hopper Soliday
A Division of Tucker Anthony Incorporated
______________, 1999
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[MAP PAGE]
Forward-looking statements relating to future performance or expectations
We have used "forward-looking statements" in this prospectus. Words
such as "believes," "expects," "may," "will," "should," "projected,"
"contemplates" or "anticipates" may constitute forward-looking statements. These
statements are within the meaning of the Private Securities Litigation Reform
Act of 1995 and are subject to risks and uncertainties that could cause our
actual results to differ materially. We have used these statements to describe
our expectations and estimates throughout this prospectus.
Our actual results could vary materially from the future results
covered in our forward-looking statements. The statements in the "Risk Factors"
section are cautionary statements identifying important factors, including
certain risks and uncertainties, that could cause our results to vary materially
from the future results covered in such forward-looking statements. Other
factors, such as the general state of the United States economy, could also
cause actual results to vary materially from the future results covered in such
forward-looking statements. We disclaim any obligation to announce publicly
future events or developments that affect the forward-looking statements in this
prospectus.
Activities that may maintain or stabilize the market price of the preferred
securities
In connection with this offering and in compliance with applicable law and
industry practice, the underwriters may overallot or effect transactions which
stabilize, maintain or otherwise affect the market price of the preferred
securities at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, purchasing preferred securities
to cover syndicate short positions and imposing penalty bids. These stabilizing
transactions, if commenced by the underwriters, may be discontinued at any time.
See "Underwriting."
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SUMMARY
To understand this offering fully, you should read this entire
prospectus 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. A
reference to the "bank" refers to First Star Savings Bank.
First Star Bancorp, Inc.
We are a bank holding company, organized under the laws of the
Commonwealth of Pennsylvania in 1993. Our principal activity is holding all of
the stock of First Star Savings Bank. Our bank is a Pennsylvania-chartered stock
savings bank which traces its origins to 1893. The bank's principal business
consists of attracting deposits from the general public and originating loans
secured by residential properties.
Our bank conducts its operations through our main office located in
Bethlehem, Pennsylvania, and five branch offices located throughout the Lehigh
Valley in Bath, Palmer, Allentown, Nazareth and Alburtis. During the past twenty
years, the economy of the Lehigh Valley has shifted from one principally
dominated by manufacturing to an economy characterized by a diverse group of
industries including service and distribution firms, health care, technology,
manufacturing and retail firms. Although we currently do not have any plans to
do so, we would look to add branch locations in contiguous market areas with
customer bases that would be receptive to our strategy if economical
opportunities become available.
At June 30, 1999, we had total assets of $363.7 million, deposits of
$190.1 million and total stockholders' equity of $15.5 million. Since June 30,
1996, our assets, loans and deposits have grown at annual compounded rates of
26.1%, 8.5%, and 18.5%, respectively. Over that same period, our net income has
grown at an annual compounded rate of 27.2%, and our return on average equity
has increased from 12.9% for fiscal 1996 to 15.9% for fiscal 1999.
We have built our bank around a strategy of being a low-cost provider
of savings opportunities in our market area. We believe that our customers value
competitively priced products, and by building a culture of expense control and
efficiency, we have been able to pass these savings on to our customers by
providing attractive deposit rates and loan products.
Our principal executive office is located at 418 West Broad Street,
Bethlehem, Pennsylvania. Our telephone number is (610) 691-2233.
First Star Capital Trust
The Trust is a Delaware business trust which we created solely to:
o issue and sell the preferred securities and the common
securities;
o use the proceeds it receives from the sale of the common
securities and preferred securities to purchase the junior
subordinated debentures from us;
o distribute the cash payments it receives on the junior
subordinated debentures to the holders of the preferred and
common securities; and
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o engage in other activities that are incidental to the activities
described above.
The Trust will issue all of the preferred securities to purchasers in
the offering and will issue all of the common securities to us. The common
securities will represent an aggregate liquidation amount equal to at least 3%
of the total capital of the Trust.
The junior subordinated debentures will be the only assets of the
Trust, and our payments to the Trust under the junior subordinated debentures
will be the Trust's sole source of revenue.
The Offering
<TABLE>
<CAPTION>
<S> <C>
The Issuer........................... First Star Capital Trust, a Delaware statutory business trust.
The Securities that are being
Offered.......................... 1,200,000 preferred securities having a liquidation amount of $10
per preferred security. The preferred securities represent preferred
undivided beneficial interests in the assets of the Trust, which will
consist solely of junior subordinated debentures. We will guarantee
payments on the preferred securities to the extent of funds in the
Trust. We have granted Hopper Soliday an option, exercisable
within 30 days after the date of the offering, to purchase up to an
additional 180,000 preferred securities at the initial offering price,
solely to cover over-allotments, if any.
The Offering Price................... $10 per preferred security.
The Payment of
Distributions.................... The Trust will pay distributions to you on each preferred security at
an annual rate of __.__%. The distributions will be cumulative,
will accumulate from December 31, 1999, and will be payable in
arrears at the end of each calendar quarter, commencing _________
__, 1999.
Junior Subordinated
Debentures....................... The Trust will invest the proceeds from the issuance of the
preferred securities and the common securities in an equivalent
amount of our __.__% junior subordinated debentures.
Maturity............................. The junior subordinated debentures are scheduled to mature on
____________ __, 2029 unless we voluntarily shorten the maturity
date to a date not earlier than ____________, 2004. We will not
shorten the maturity date unless we have received prior approval if
it is then required under the applicable regulatory requirements.
The Trust must redeem the preferred securities when the junior
subordinated debentures are paid on the maturity date, or following
any earlier redemption of the junior subordinated debentures.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
We have the Option to Extend
the Interest Payment
Period........................... At any time we are not in default under the junior subordinated
debentures, we may defer payments of interest on the junior
subordinated debentures for up to 20 consecutive quarters, but not
beyond their stated maturity date. The Trust would defer quarterly distributions
on the preferred securities while we are deferring payment on the junior
subordinated debentures. Deferred quarterly distributions will accumulate
additional distributions at an annual rate of __.__% compounded quarterly.
During any period that we are deferring interest payments, we may not declare or
pay any cash distributions on our capital stock or debt securities that are of equal
or lower rank than the junior subordinated debentures. After the end of any period in
which we are deferring interest payments, if we have paid all deferred and current
interest under the junior subordinated debentures, we may defer interest payments
again. If we defer interest payments, you will be required to include deferred
interest income in your gross income for United States federal income tax purposes
before you have received deferred interest payments.
Redemption of the Preferred
Securities is Possible........... The Trust may redeem the preferred securities in whole or in part if
we repay the junior subordinated debentures. Subject to any
regulatory approval that may then be required, we may redeem the
junior subordinated debentures prior to their scheduled maturity (1)
on or after ___________, 2004, in whole at any time or in part
from time to time, or (2) at any time, in whole, but not in part,
within 90 days after:
o certain tax events occur or become likely to occur;
o the Trust is or becomes likely to be deemed to be an investment
company; or
o there is a change in the regulatory capital treatment of the
preferred securities
Upon any redemption of the junior subordinated debentures we will use the
cash proceeds of the redemption to pay you a liquidation amount for the preferred
securities. The liquidation amount you will receive will be $10 per preferred
security plus any accrued and unpaid distributions to the date of redemption.
How the Securities will Rank
in Right of Payment.............. The preferred securities will rank equally with the common
securities. The Trust will pay distributions on the preferred
securities and the common securities pro rata. However, if we
default by failing to pay interest payments on the junior
subordinated debentures then no distributions on the common
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
securities will be paid until all accumulated and unpaid distributions on
the preferred securities have been paid.
Our obligations under the junior subordinated debentures are unsecured and
generally will rank junior in priority to our senior and other subordinated
indebtedness. If we create any new trusts similar to the Trust, then the junior
subordinated debentures will rank equally with any other junior subordinated
debentures we issue to such trusts.
Our obligations under the guarantee are unsecured and will rank junior to our
senior and other subordinated indebtedness. If we issue any guarantees
in the future relating to preferred securities issued by new trusts, then the
guarantee issued in this transaction will rank equally with those guarantees.
Because we are a holding company, the junior subordinated debentures and the
guarantee will effectively be subordinated to all existing and future liabilities of
our subsidiaries.
The Junior Subordinated
Debentures May Be
Distributed to You............... Under certain circumstances and after we obtain any necessary
regulatory approvals, we may dissolve the Trust. If we dissolve the
Trust, after satisfaction of any of the Trust's liabilities to creditors,
the Trust will distribute your pro rata share of the junior
subordinated debentures to you in liquidation of the Trust.
Our Guarantee of
Payments......................... We will fully and unconditionally guarantee the preferred securities
based on:
o our obligations to make payments on the junior subordinated
debentures;
o our obligations under a guarantee executed for the benefit of the
holders of the preferred securities; and
o our obligations under the trust agreement.
If we do not make payments on the junior subordinated debentures, the Trust will
not have sufficient funds to make payments on the preferred securities. The guarantee
does not cover payments when the Trust does not have sufficient funds.
Limited Voting Rights................ You will have no voting rights except in limited circumstances.
The Use of Proceeds.................. The Trust will invest all of the proceeds from the sale of the preferred and the
common securities in our junior subordinated
debentures. We intend to use the net proceeds from our sale of the
junior subordinated debentures to make a contribution to the bank
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
to fund its operations and growth, including an investment in back- office
systems technology designed to further increase operating efficiencies, and for
general corporate purposes. Initially, we may leverage the capital by investing in
mortgage-backed and agency securities and funding these purchases with borrowings.
Listing of the Preferred
Securities....................... Application has been made to have the preferred securities listed on
the Nasdaq National Market under the symbol "FSANP." If
approved for listing, we expect trading to commence within 30 days
after the preferred securities are first issued.
Book-entry........................... The preferred securities will be represented by a global security that will
be deposited with and registered in the name of The Depository
Trust Company, New York, New York, or its nominee. This means that you will not receive a
certificate for your preferred securities.
ERISA Considerations................. You must carefully consider the information set forth under
"Certain ERISA Considerations."
Risk Factors
Before purchasing the preferred securities offered by this prospectus, you
should carefully consider the "Risk Factors" beginning on page ___.
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</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following is our selected consolidated information. This information is
only a summary, and you should read it together with our consolidated financial
statements and the notes beginning on page F-1.
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
-------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Selected Results of Operations:
Net interest income.................................. $7,684 $6,630 $5,787
Provision for loan losses............................ 423 385 220
Non-interest income.................................. 796 1,760 720
Non-interest expenses................................ 3,974 3,582 4,036(2)
Net income(1)........................................ 2,566 2,816 1,509
Less preferred dividends............................. (43) (45) (44)
Net income applicable to common stockholders......... 2,523 2,771 1,465
Per Share Data(3):
Earnings per common share- basic..................... $ 6.90 $ 7.68 $ 4.00
Earnings per common share - diluted.................. 3.76 4.15 2.53
Book value per share, fully diluted.................. 27.90 27.55 23.55
Selected Balance Sheet Data:
Total Assets......................................... 363,706 315,802 270,899
Loans receivable, net(4)............................. 184,264 176,386 149,476
Securities available for sale........................ 160,438 123,759 103,271
Total Deposits....................................... 190,148 145,096 118,662
Advances from Federal Home Loan Bank................. 146,180 144,485 129,400
Subordinated debentures.............................. 5,480 5,480 5,480
Total Stockholders' equity........................... 15,476 15,113 12,015
Performance Ratios:
Return on average assets............................. 0.75 0.97 0.68
Return on average equity............................. 15.85 19.81 13.37
Net interest margin ................................. 2.26 2.32 2.67
Efficiency ratio .................................... 46.86 42.69 50.58(5)
Asset Quality Ratios:
Nonperforming loans to total loans .................. 1.22 1.91 2.72
Allowance for loan losses to total loans............. 0.96 0.84 0.77
Allowance for loan losses to nonperforming
loans............................................. 77.4 43.6 27.8
First Star Bancorp Capital Ratios:
Average stockholders' equity to average assets....... 4.70 4.90 5.12
Leverage ratio....................................... 4.72 4.93 5.22
Tier 1 risk-based capital ratio...................... 7.92 8.88 8.81
Total risk-based capital ratio....................... 10.89 12.85 13.74
</TABLE>
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(1) Excluding the write-off of $111,000, net of income taxes, related to an
attempted merger/conversion transaction to acquire Nesquehonig Savings Bank
that was abandoned, net income for fiscal 1999 would have been $2,631,000.
(2) Includes a non-recurring expense of $745,000 for a one-time deposit
insurance premium to recapitalize the SAIF.
(3) Adjusted for two 20% stock dividends declared during fiscal 1998.
(4) Does not include loans available for sale of $1,468,000 and $1,654,000 at
June 30, 1997 and 1996.
(5) Does not include the non-recurring expense of $745,000 for a one-time
deposit insurance premium to recapitalize the SAIF.
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RISK FACTORS
An investment in the preferred securities involves a number of risks,
some of which relate to the terms of the preferred securities or the junior
subordinated debentures and others of which relate to us and our business. You
should carefully review the following information about these risks together
with other information contained in this prospectus before deciding whether this
investment is suitable for you.
Risk Factors Relating to the Preferred Securities
Our obligations under the guarantee and under the junior subordinated debentures
will be deeply subordinated and we will pay our other debt obligations before we
pay you.
Our obligations under the junior subordinated debentures and the
guarantee are unsecured and are subordinate in right of payment to all of our
existing and future senior debt, subordinated debt and additional senior
obligations, which totaled $151.7 million at June 30, 1999, excluding $190
million of deposits. The issuance of the junior subordinated debentures will
raise our debt to total capital ratio to 50.8%, 56.0% if Hopper Soliday
exercises the over-allotment option. In addition, after the issuance of the
junior subordinated debentures, our pre-tax interest coverage ratio will be
approximately 3.56x, 3.30x if Hopper Soliday exercises the over-allotment
option. Neither the indenture governing the junior subordinated debentures, nor
the trust agreement and guarantee relating to the preferred securities, limit
our ability to incur additional indebtedness, including indebtedness that ranks
senior to the junior subordinated debentures and guarantee.
The junior subordinated debentures and the guarantee also are
effectively subordinated to all existing and future liabilities of our
subsidiary, First Star Savings Bank. The bank will pay its creditors before it
pays dividends to us, and the bank's creditors will generally have priority over
us and you in any distribution of the bank's assets in a liquidation,
reorganization or other transaction. In the event that distributions from the
bank to us are not sufficient to cover our payment obligations under the junior
subordinated debentures or the guarantee, we may be unable to make those
payments. See "Description of Junior Subordinated Debentures -- Subordination"
on page ___ and "Business of First Star Savings Bank -- Sources of Funds --
Borrowings" and "-- Subordinated Debentures" on page ___.
If we do not make payments on the junior subordinated debentures, the Trust will
not be able to make payments on the preferred securities and the guarantee will
not apply.
The ability of the Trust to timely pay amounts due on the preferred
securities depends solely upon our making the related payments on the junior
subordinated debentures when due. If we default on our obligation to pay
principal of or interest on the junior subordinated debentures, the Trust will
not have sufficient funds to pay distributions on, or the $10 liquidation amount
of, the preferred securities.
In that event, you would not be able to rely on the guarantee for
payment because the guarantee applies only when the Trust has funds available
for payment. Instead, you or the property trustee would have to sue us to
enforce the property trustee's rights under the indenture relating to the
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junior subordinated debentures. See "Relationship Among the Preferred
Securities, the Junior Subordinated Debentures, and the Guarantee" on page ___.
Payments on the junior subordinated debentures by us to the Trust will depend
primarily on any dividends we may receive from the bank, which may be limited by
regulations and debt covenants.
The Trust will depend solely on our payments on the junior subordinated
debentures in paying amounts due on the preferred securities. We are a separate
legal entity from the bank and do not have significant operations of our own.
Therefore, we will depend primarily on any dividends we receive from the bank to
pay interest on the junior subordinated debentures to the Trust. In addition,
the dividends we receive from the bank will also continue to be used to pay
interest on our subordinated debt and dividends on our preferred stock. The
payment of dividends by the bank may be limited by regulations and debt
covenants. For a more complete discussion, see the immediately following risk
information and information under "Description of the Preferred Securities" on
page ___ and "Description of Junior Subordinated Debentures -- Subordination" on
page ___.
We may defer interest payments under the junior subordinated debentures, which
could have adverse tax consequences for you.
So long as we are not in default, we may defer the payment of interest
on the junior subordinated debentures at any time for up to 20 consecutive
quarters. Any deferral, however, could not extend beyond the stated maturity
date of the junior subordinated debentures. During any period in which we were
deferring interest payments, the Trust would defer quarterly distributions on
the preferred securities. Deferred distributions would accumulate with interest
at the annual rate of __% compounded quarterly from the normal distribution
payment date.
During each period in which we were deferring interest payments, the
United States federal income tax laws would require you to accrue and recognize
income in the form of original issue discount on your pro rata share of the
interest accruing on the junior subordinated debentures held by the Trust. As a
result, you would be subject to United States federal income tax on this income
before you would have received cash distributions on the preferred securities.
In addition, during a deferral period:
o you would not receive the deferred cash distributions if you
sold the preferred securities before the record date for
payment of the deferred distributions, even if you held the
preferred securities on the last day of a quarter, and
o your tax basis in the preferred securities would increase by
the amount of accrued but unpaid distributions. If you sold
the preferred securities during a deferral period, your
increased tax basis would increase the amount of any capital
loss that you might have otherwise realized on the sale. A
capital loss, except in certain limited circumstances, cannot
be applied to offset ordinary income.
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See "Description of Junior Subordinated Debentures -- Option to Extend Interest
Payment Period" on page ___ and "United States Federal Income Tax Consequences
- -- Interest Income and Original Issue Discount" on page ___.
The preferred securities may be redeemed prior to maturity; you may be taxed on
the proceeds at the time of redemption and you may not be able to reinvest the
proceeds at the same or a higher rate of return.
Under the following circumstances, we may redeem the junior
subordinated debentures prior to maturity:
o We may redeem the junior subordinated debentures within 90
days after the occurrence of the events described in
"Description of Preferred Securities -- Redemption" on page
___ at any time during the life of the Trust.
o In addition, we may redeem the junior subordinated debentures
prior to maturity at any time after _______________, 2004, so
long as we have obtained any approvals from regulatory
agencies that are required at that time.
If we redeem the junior subordinated debentures, the Trust will redeem
the preferred securities. Under current United States federal income tax law,
the redemption of the preferred securities would be a taxable event to you. In
addition, you may not be able to reinvest the money you receive in an investment
with a similar or higher expected rate of return. See "Description of Preferred
Securities -- Redemption" on page ___ and "United States Federal Income Tax
Consequences -- Receipt of Junior Subordinated Debentures or Cash Upon
Liquidation of the Trust" on page ___ and "-- Sales of Preferred Securities" on
page ___.
We may require you to exchange your preferred securities for junior subordinated
debentures; this may have adverse tax consequences for you and the junior
subordinated debentures may trade at a lower price than the price you paid for
the preferred securities.
We may dissolve the Trust at any time before its expiration. In such an
event, the trustees will, after paying the creditors of the Trust, distribute
your share of the junior subordinated debentures to you.
We cannot predict the market prices for the junior subordinated
debentures that would be distributed upon the dissolution of the Trust.
Accordingly, the junior subordinated debentures that you receive in a
distribution, or the preferred securities that you hold pending the
distribution, may trade at a lower price than the price you paid to purchase the
preferred securities. Because you may receive junior subordinated debentures,
your decision whether to invest in the preferred securities should also be made
with regard to the junior subordinated debentures. You should carefully review
all of the information regarding the junior subordinated debentures contained in
this prospectus.
Under current United States federal income tax laws, a distribution of
junior subordinated debentures to you upon the dissolution of the Trust would
not be a taxable event for you. If, however,
11
<PAGE>
the Trust were taxable as a corporation at the time of its dissolution, then a
distribution of junior subordinated debentures to you may be a taxable event for
you.
See "Description of Preferred Securities -- Liquidation Distribution
Upon Dissolution" on page ___ and "United States Federal Income Tax Consequences
- -- Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of the
Trust" on page ___.
You will have only limited voting rights, and we can amend the trust agreement
without your consent.
You will have limited voting rights as a holder of the preferred
securities. Your voting rights will relate only to the modification of the
preferred securities and the exercise of the Trust's rights as holder of the
junior subordinated debentures. You will not usually be able to appoint, remove
or replace the property trustee or the Delaware trustee because these rights
generally reside with us as the holder of the common securities. However, if an
event of default under the trust agreement occurs and is continuing the holders
of at least a majority in aggregate liquidation amount of the preferred
securities may remove the trustees. Even if it would adversely affect your
rights, we, together with the property trustee and the administrators may amend
the trust agreement without your consent to ensure that the Trust will be
classified as a grantor trust for United States federal income tax purposes. See
"Description of Preferred Securities -- Voting Rights; Amendment of Trust
Agreement" on page ___.
The market price for the preferred securities may decline after you invest.
There is no current public market for the preferred securities.
Although we have been advised that Hopper Soliday intends to make a market in
the preferred securities, it is not obligated to do so and any market making may
be interrupted or discontinued at any time without any notice at its sole
discretion. There is no guarantee that an active public market will develop for
the preferred securities. Even if an active public market does develop, there is
no guarantee that the market price for the preferred securities will equal or
exceed the price you paid in this offering. See "Market for the Preferred
Securities" on page ___.
The preferred securities may not trade at a price that accurately
reflects the value of accrued but unpaid interest on the underlying junior
subordinated debentures. In addition to other circumstances, our deferral of
interest payments on the junior subordinated debentures may cause the market
price for the preferred securities to decline.
The holders of the preferred securities and the junior subordinated debentures
are not protected by covenants in the indenture and the trust agreement.
Neither the indenture, which sets forth the terms of the junior
subordinated debentures, nor the trust agreement, which sets forth the terms of
the preferred securities and the common securities, protects holders of junior
subordinated debentures or the preferred securities, respectively, in the event
we experience significant adverse changes in our financial condition or results
of operations. In addition, neither the indenture nor the trust agreement limits
our ability or the ability of any subsidiary to incur additional indebtedness.
Therefore, the provisions of these governing instruments should not
12
<PAGE>
be considered a significant factor in evaluating whether we will comply with our
obligations under the junior subordinated debentures or the guarantee.
The preferred securities are not insured.
Neither the Bank Insurance Fund of the Federal Deposit Insurance
Corporation, the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation, nor any other governmental agency has insured the
preferred securities.
Risk Factors Relating to First Star Bancorp
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest
income, which could be negatively affected by changes in interest rates. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such
as mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities,
such as deposits and amounts we borrow.
Most of our mortgage loans have rates of interest which are fixed for
the life of the loan and are generally originated for periods of up to 30 years,
while our deposit accounts have significantly shorter periods to maturity.
Because our interest-earning assets generally have fixed rates of interest and
have longer effective maturities than our interest-bearing liabilities, the
yield on our interest-earning assets generally will adjust more slowly to
changes in interest rates than the cost of our interest-bearing liabilities,
which are primarily time deposits. As a result, our net interest income may be
reduced when interest rates increase significantly for long periods of time. In
addition, rising interest rates may reduce our earnings because there may be a
lack of customer demand for loans. Declining interest rates may also reduce our
net interest income if adjustable rate or fixed rate mortgage loans are
refinanced at reduced rates or paid off earlier than expected, and we reinvest
these funds in assets which earn us a lower rate of interest. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management of Interest Rate Risk and Market Risk" on page ___.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan
losses to provide for loan defaults and non-performance. Our allowance for loan
losses may not be adequate to cover actual loan losses, and future provisions
for loan losses could materially and adversely affect our operating results. Our
allowance for loan losses is based on prior experience, as well as an evaluation
of the risks in the current portfolio, and is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future losses
is susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond our control, and these losses may
exceed current estimates. State and federal regulatory agencies, as an integral
part of their examination
13
<PAGE>
process, review our loans and allowance for loan losses. We believe that our
allowance for loan losses is adequate to cover anticipated losses. There can be
no assurance, however, that we will not further increase the allowance for loan
losses or that regulators will not require us to increase this allowance.
Either of these occurrences could adversely affect our earnings.
Whether or not we make a profit is influenced by the health of our local
economy.
Our success depends to a certain extent upon the general economic
conditions of the local markets that we serve. Unlike larger banks that are more
geographically diversified, we provide banking services primarily to customers
in the markets in which we have branches, so any decline in the economy of
Pennsylvania or the Lehigh Valley in particular could have an adverse impact on
us. Our financial results, the credit quality of our existing loan portfolio,
and the ability to generate new loans with acceptable yield and credit
characteristics may be adversely affected by changes in prevailing economic
conditions, including declines in real estate values and rapid changes in
interest rates. Although economic conditions in our market area are strong,
there can be no assurance that these conditions will continue, or that negative
trends and developments will not adversely affect us. See "Business of First
Star Savings Bank - Market Area and Competition" on page ___.
Changes in general economic conditions and monetary policies may affect the
financial institutions industry as a whole, which will not only impact us
directly, but by affecting the condition of financial institutions whose fixed
income securities we hold in our investment portfolio, could affect us
indirectly as well by reducing the credit quality of these holdings.
Conditions beyond our control may have a significant impact on our
financial condition and results of operations, including:
o the strength of credit demand by customers;
o fiscal and debt management policies of the federal government;
o the monetary policy of the Federal Reserve Board;
o the introduction and growth of new investment instruments by
non-bank financial competitors; and
o changes in rules and regulations governing the payment of
interest on deposit accounts.
We hold approximately $40.9 million in corporate bonds and both rated
and unrated trust preferred securities of financial institutions in our
investment portfolio. To the extent the general economic conditions discussed
above affect our financial condition and results of operations, they may also
have a broader affect on the industry as a whole. As a result, the credit
quality of these investments may deteriorate, which may have an impact on our
financial condition and results of operations as well.
14
<PAGE>
The amount of common stock held by our executive officers and directors gives
them influence over the election of our Board of Directors and other matters
that require stockholder approval.
A total of 334,799 shares of our common stock, or 51.2% of the common
stock outstanding at June 30, 1999, is beneficially owned by our directors and
executive officers. See "Principal Security Holders" on page ___. Therefore, if
they vote together, our directors and executive officers have the ability to
exert significant influence over the election of our Board of Directors and
other corporate actions requiring stockholder approval, including the adoption
of proposals made by stockholders.
Future laws or regulations could hurt our profitability.
We operate in a highly regulated industry. We are regulated by the
Federal Reserve Board, and our bank is regulated by the FDIC and the
Pennsylvania Department of Banking. Federal and state banking laws and
regulations govern matters ranging from the regulation of certain debt
obligations, changes in the control of bank holding companies, and the
maintenance of adequate capital to the general business operations and financial
conditions of our bank, including permissible types, amounts and terms of loans
and investments, the amount of reserves maintained against deposits,
restrictions on dividends, establishment of branch offices and the maximum rate
of interest that may be charged by law. These and other restrictions limit the
manner in which we can conduct our business and obtain financing, and could
reduce our profitability.
If we do not compete successfully against other financial institutions in our
market area, our profitability will be hurt.
We operate in a competitive environment. In the market areas in which
we compete, other savings banks, commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies and brokerage and investment banking firms and other financial
intermediaries offer similar services. Many of these competitors have
substantially greater resources and lending limits and may offer certain
services that we do not currently provide. In addition, some of the non-bank
competitors are not subject to the same extensive regulations that govern our
business. Our profitability depends on our ability to compete successfully in
our market area. See "Business of First Star Savings Bank - Market Area and
Competition" on page ___.
We cannot predict how changes in technology will affect our business
The financial services market, including banking services, is
increasingly affected by advances in technology, including developments in:
o telecommunications;
o data processing;
o automation;
o internet-based banking;
15
<PAGE>
o telebanking; and
o debit cards and so-called "smart cards."
Our ability to compete successfully in the future will depend on
whether we can anticipate and respond to technological changes. To develop these
and other new technologies we will likely have to make additional capital
investments. Although we continually invest in new technology, we cannot assure
you that we will have sufficient resources or access to the necessary
proprietary technology to remain competitive in the future.
If our computer systems do not work properly with the Year 2000 date, we may not
be able to continue running our business properly.
Rapid and accurate data processing is essential to our operations.
Data processing is also essential to most other financial institutions and many
other companies. Many computer programs that can only distinguish the final two
digits of the year entered 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.
Failure to resolve year 2000 issues presents the following risks to us:
(1) we could lose customers to other financial institutions,
resulting in a loss of revenue, if our third party service
bureau is unable to process properly customer transactions;
(2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to us, which
could materially impair our liquidity and affect our ability
to fund loans and deposit withdrawals;
(3) concern on the part of depositors that year 2000 issues could
impair access to their deposit account balances could result
in our experiencing deposit outflows prior to December 31,
1999; and
(4) we could incur increased personnel costs if additional staff
is required to perform functions that inoperative systems
would have otherwise performed.
Most of our material data processing that could be affected by this
problem is provided by a third party service bureau. If our third party service
bureau does not resolve this problem, we would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on our financial condition and
profitability. In addition, if our significant suppliers of utilities are not
adequately prepared for year 2000 they may be unable to provide the necessary
service to drive our data systems or provide sufficient sanitary conditions for
our offices. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Readiness Disclosure" on page ___.
16
<PAGE>
USE OF PROCEEDS
The Trust will use all of the proceeds from the sale of the preferred
securities and common securities to purchase junior subordinated debentures from
us. We intend to use the net proceeds from the sale of the junior subordinated
debentures estimated to be $___ million ($___ million if the over-allotment
option is exercised in full):
o to make a contribution to the bank to fund its operations and
growth, including an investment in back-office systems
technology designed to further increase operating
efficiencies;
o financing growth, which may include expansion of our lending
and investment activities, one or more branch acquisitions,
acquisitions of other financial institutions, or acquisitions
of other financial services companies; and
o for general corporate purposes.
Until opportunities to invest the funds in our core business become
available, we may leverage the capital by employing an investment strategy of
purchasing mortgage-backed and agency securities and funding these purchases
with borrowings, in order to improve our overall return to stockholders and help
offset the cost of this capital.
MARKET FOR THE PREFERRED SECURITIES
Prior to this offering, there has been no market for the preferred
securities. Following the completion of the offering, we anticipate that the
preferred securities will be traded on the Nasdaq National Market. We expect
that Hopper Soliday will make a market in the preferred securities. Making a
market may include the solicitation of potential buyers and sellers in order to
match buy and sell orders. However, Hopper Soliday will not be obligated with
respect to these efforts and any market making may be interrupted or
discontinued at any time without any notice at its sole discretion.
The development of an active trading market depends on the existence of
willing buyers and sellers. There is no guarantee that an active or liquid
public trading market will develop for the preferred securities or whether
continued quotation of the preferred securities on the Nasdaq National Market
will be possible. Due to the small size of the offering, it is highly unlikely
that an active trading market will develop and be maintained. You could have
difficulty disposing of the preferred securities, and you should not view the
preferred securities as a short term investment. You may not be able to sell the
preferred securities at a price equal to or above the price you paid.
17
<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization (1) at
June 30, 1999 and (2) as adjusted to give effect to the consummation of the
offering of preferred securities.
<TABLE>
<CAPTION>
Actual, at June 30, 1999 Pro Forma Consolidated
------------------------ ----------------------
(Dollars in thousands)
<S> <C> <C>
Advances from Federal Home Loan Bank $146,180 $146,180
Convertible subordinated debt .................. 5,480 5,480
Guaranteed preferred beneficial interests in
subordinated debt(1)............................ -- 12,000
------- -------
151,660 163,660
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 2,500,000
shares authorized; 43,592 outstanding........ -- --
Common stock, $1.00 par value, 10,000,000
shares authorized; 375,404 outstanding....... 375 375
Additional paid-in capital...................... 8,465 8,465
Retained earnings............................... 8,300 8,300
Employee stock ownership plan debt............ (200) (200)
Accumulated other comprehensive
income (loss).............................. (1,464) (1,464)
------- -------
Total stockholders' equity...................... 15,476 15,476
-------- -------
Total capitalization............................ $167,136 $179,136
======= =======
FIRST STAR BANCORP CAPITAL
RATIOS:
Tier 1 risk-based capital ratio................. 7.92% 9.99%(2)
Total risk-based capital ratio.................. 10.89% 13.12%(2)
Leverage ratio.................................. 4.72% 6.08%(2)
FIRST STAR SAVINGS BANK CAPITAL
RATIOS:
Tier 1 risk-based capital ratio................. 9.34% 11.79%(2)
Total risk-based capital ratio.................. 10.18% 12.06%(2)
Leverage ratio.................................. 5.54% 7.14%(2)
</TABLE>
- --------------
(1) Preferred securities representing beneficial interests in an aggregate
principal amount of $12,000,000 of the Junior Subordinated Debentures
of First Star Bancorp.
(2) Assumes $12,000,000 from the proceeds of the offering of the preferred
securities are invested in assets with a 100% risk weighting under the
risk-based capital rules.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following is our selected consolidated financial information. This
information is only a summary, and you should read it together with our
consolidated financial statements and notes beginning on page F-1.
Selected Financial Data
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance Sheet
Total Assets.................................... $363,706 $315,802 $270,899
Loans receivable, net........................... 184,264 176,386 149,476
Securities available for sale................... 160,438 123,759 103,271
Cash and cash equivalents....................... 3,078 2,080 3,310
Total Deposits.................................. 190,148 145,096 118,662
FHLB advances................................... 146,180 144,485 129,400
Subordinated debentures......................... 5,480 5,480 5,480
Total Stockholders' equity...................... 15,476 15,113 12,015
Book value per share, fully
diluted(1).................................... $27.90 $27.55 $23.55
Other Data
Number of:
Real estate loans outstanding................... 3,258 2,928 2,812
Deposit accounts................................ 18,616 15,967 14,394
Offices......................................... 6 6 6
</TABLE>
- ------------------------
(1) Adjusted for two 20% stock dividends declared during fiscal year ended June
30, 1998.
19
<PAGE>
Summary of Operations
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income......................................... $25,064 $21,240 $16,193
Interest expense........................................ 17,380 14,610 10,406
------ ------ ------
Net interest income................................... 7,684 6,630 5,787
Provision for loan losses............................... 423 385 220
------- ------- -------
Net interest income after provision
for loan losses..................................... 7,261 6,245 5,567
Non-interest income..................................... 796 1,760 720
Non-interest expenses(1)................................ 3,974 3,582 4,036
------ ------ ------
Income before income taxes.............................. 4,083 4,423 2,251
Provision for income taxes.............................. 1,517 1,607 742
------ ------ -------
Net income(2)......................................... 2,566 2,816 1,509
------ ------ ------
Less preferred dividends................................ (43) (45) (44)
------ ------ ------
Net income applicable to common
stockholders.......................................... $ 2,523 $ 2,771 $ 1,465
====== ====== ======
Earnings per common share -- basic(3)................... $ 6.90 $ 7.68 $ 4.00
Earnings per common share -- diluted(3)................. $ 3.76 $ 4.15 $ 2.53
</TABLE>
- ---------------------
(1) Includes a non-recurring expense of $745,000 for the year ended June 30,
1997 for a one-time deposit insurance premium to recapitalize the SAIF.
(2) Excluding the write-off of $111,000, net of income taxes, related to an
attempted merger/conversion transaction to acquire Nesquehonig Savings Bank
that was abandoned, net income for fiscal 1999 would have been $2,631,000.
(3) Adjusted for two 20% stock dividends declared during fiscal 1998.
20
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or For the Year Ended
June 30,
------------------------------------------------
1999 1998 1997(2)
--------------- --------------- ----------------
<S> <C> <C> <C>
Performance Ratios(1):
Return on average assets (net income
divided by average total assets)......................... 0.75% 0.97% 0.68%
Return on average equity (net income divided by
average equity)......................................... 15.85 19.81 13.37
Net interest rate spread................................... 2.02 2.06 2.43
Net interest margin(3)..................................... 2.26 2.32 2.67
Efficiency ratio........................................... 46.86 42.69 50.58(4)
Asset Quality Ratios:
Non-performing loans to total loans........................ 1.22 1.91 2.72
Allowance for loan losses to total loans................... 0.96 0.84 0.77
Allowance for loan losses to nonperforming loans........... 77.4 43.6 27.8
First Star Bancorp Capital Ratios:
Average stockholders' equity to average assets............. 4.70 4.90 5.12
Tier 1 risk-based capital ratio............................ 7.92 8.88 8.81
Total risk-based capital ratio............................. 10.89 12.85 13.74
Leverage ratio............................................. 4.72 4.93 5.22
</TABLE>
- --------------
(1) Such ratios include the effect of the write-off of $111,000 ($65,000 after
income taxes) related to an attempted merger/conversion transaction with
Nesquehonig Savings Bank that was abandoned in 1999.
(2) For 1997, return on average assets and return on average equity, excluding
the effect of the special assessment to recapitalize the SAIF, were .88%
and 17.21%, respectively.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Does not include the non-recurring expense of $745,000 for a one-time
deposit insurance premium to recapitalize the SAIF.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
General
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 beginning on page F-1.
Our results of operations depend primarily on our 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
non-interest income, including income from loan and deposit account service
charges, gains and losses from the sale of available for sale securities and by
non-interest expense, including, primarily, compensation and employee benefits,
federal deposit insurance premiums, office occupancy cost, and data processing
cost. Our results of operations are also affected significantly by general and
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, all of which
are beyond our control.
Financial Condition
General. Total assets increased to $363.7 million at June 30, 1999,
from $315.8 million at June 30, 1998, an increase of $47.9 million or 15.2%. The
increase in total assets was attributable primarily to an increase in deposits
which increased by $45.1 million, or 31.1%, to $190.2 million from $145.1
million at June 30, 1998. These funds were used to invest primarily in available
for sale securities which increased by $36.6 million, or 30%, to $160.4 million
from $123.8 million at June 30, 1998. Loans receivable increased from $176.4
million to $184.3 million, an increase of $7.9 million, or 4.5%. Total cash and
cash equivalents increased to $3.1 million at June 30, 1999 from $2.1 million at
June 30, 1998, an increase of $1.0 million, or 47.6%.
Securities Available for Sale. All of our investments are classified as
"available for sale." Available for sale securities increased by $36.6 million,
or 30%, to $160.4 million from $123.8 million at June 30, 1998.
22
<PAGE>
The following table sets forth the carrying value of our investments.
See Note 2 to our consolidated financial statements beginning on page F-1.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998 1997
---------------- -------------- ------------------
(In thousands)
<S> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal Agencies............... $ 5,350 $ 15,763 $ 16,996
Mortgage-backed securities ........................ 81,217 76,035 74,736
Corporate debt securities.......................... 27,376 10,379 9,806
Trust preferred securities......................... 41,269 19,826 --
Marketable equity securities....................... 5,226 1,756 1,733
-------- -------- --------
Total securities available for sale................ $160,438 $123,759 $103,271
======== ======== ========
</TABLE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investments at June 30, 1999 by contractual maturity. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
Total Investment
One Year or Less One to Five Years Five to Ten Years More than Ten Years Securities
-------------------------------------- ----------------- --------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal
agencies.................. $ -- --% $ -- --% $ 995 7.09% $ 4,355 8.20% $ 5,350 7.99%
Mortgage-backed securities.. 35 6.71 1,453 6.39 1,632 7.06 78,097 6.03 81,217 6.05
Corporate debt securities... 2,365 6.86 13,523 7.33 9,844 7.99 1,644 8.24 27,376 7.82
Trust preferred securities.. 1,941 5.53 -- 5.35 39,328 6.73 41,269 6.68
Marketable equity securities -- -- -- -- -- -- 5,226 5.35 5,226 5.35
------ ------- ------- -------- --------
Total investments......... $2,400 6.85% $16,917 7.15% $12,471 7.59% $128,650 6.37% $160,438 6.55%
====== ======= ======= ======== ========
</TABLE>
Loans Receivable. Loans receivable increased to $184.3 million at June
30, 1999 from $176.4 million at June 30, 1998, an increase of $7.9 million, or
4.5%.
23
<PAGE>
The following table sets forth information concerning the types of
loans held by us, excluding loans held for sale.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loans:
Real Estate:
1-4 family........... $151,542 80.58% $146,808 81.92% $127,054 83.11% $128,335 87.38% $128,614 80.05%
Construction......... 800 0.43 110 0.06 1,231 0.80 895 0.61 12,208 7.60
Multi-family and
commercial........ 26,891 14.30 21,838 12.18 11,155 7.30 6,000 4.09 5,743 3.57
Commercial leases ... 813 0.43 1,496 0.84 1,897 1.24 1,345 0.92 2,009 1.25
Consumer Loans:
Home equity.......... 7,059 3.75 7,905 4.41 9,349 6.12 9,071 6.18 10,735 6.68
Auto loans........... 301 0.16 329 0.18 218 0.14 220 0.15 323 0.20
Other................ 656 0.35 728 0.41 1,976 1.29 983 0.67 1,042 0.65
-------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total loans............ 188,062 100.00% 179,214 100.00% 152,880 100.00% 146,849 100.00% 160,674 100.00%
-------- ====== ------- ====== -------- ====== --------- ====== -------- ======
Less:
Loans in process..... (605) (66) (927) (446) (4,180)
Deferred loan
origination
fees and costs.... (1,421) (1,273) (1,321) (1,090) (1,215)
Allowance for loan
losses............. (1,772) (1,489) (1,156) (1,014) (859)
-------- -------- -------- -------- --------
Total loans, net....... $184,264 $176,386 $149,476 $144,299 $154,420
======== ======== ======== ======== ========
</TABLE>
The following information contains information concerning changes in
the amount of loans held by us.
<TABLE>
<CAPTION>
For the Years Ended
June 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of period.................. $179,214 $152,880 $146,849 $160,674 $139,296
------- ------- ------- ------- -------
Loans originated:
1 to 4 family residential............ 42,182 32,399 16,241 22,754 36,464
Construction......................... 1,034 385 1,056 767 11,302
Multi-family and commercial
real estate........................ 11,769 21,909 9,564 2,079 2,911
Home equity and second
mortgages.......................... 4,211 2,733 4,522 3,662 4,766
Other consumer....................... 906 878 1,015 785 1,088
-------- -------- -------- --------- --------
Total loans originated............. 60,102 58,304 32,398 30,047 56,531
-------- -------- -------- --------- --------
Loans securitized and repayments:
Total loans securitized.............. 4,028 7,034 -- 10,784 --
Loan principal repayments.......... 47,226 24,936 26,367 33,088 35,153
-------- -------- -------- -------- --------
Total loans securitized and repayments 51,254 31,970 26,367 43,872 35,153
-------- -------- -------- -------- --------
Total gross loans receivable
at end of period................... $188,062 $179,214 $152,880 $146,849 $160,674
======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
Deposits. Deposits increased to $190.1 million at June 30, 1999, from
$145.1 million at June 30, 1998, an increase of $45 million or 31.0%. This
increase in deposits is concentrated primarily in certificates of deposit which
increased by $38.9 million to $143 million from $104.1 million, due to our
matching rate program whereby we matched any competitors published interest
rates on deposit accounts.
Regular savings, money market demand and NOW accounts constituted $47.1
million, or 24.8%, of our deposit portfolio at June 30, 1999. Certificates of
deposit constituted $143.0 million or 75.2% of the deposit portfolio of which
$18.5 million or 9.7% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. Such deposits are offered at negotiated rates. As
of June 30, 1999, we had $1.3 million in brokered deposits.
At June 30, 1999 our deposits were represented by the various types of
deposit programs described below.
<TABLE>
<CAPTION>
Interest Minimum Balance as of Percentage of
Category Term Rate(1) Amount June 30, 1999 Total Deposits
- -------- ---- ------- ------ ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-interest demand accounts......... None --% $ 250 $ 1,871 0.98%
NOW accounts......................... None 2.10 750 14,089 7.41
Passbook and club accounts........... None 2.79 100 11,566 6.08
Money market demand.................. None 2.91 1,000 19,592 10.30
Certificates of Deposit:
Fixed Term, Fixed-rate............ 91 Days 4.40 1,000 1,548 0.81
Fixed Term, Fixed-rate............ 6-12 months 4.50 1,000 76,202 40.06
Fixed Term, Fixed-rate............ 13-30 months 4.93 1,000 37,221 19.56
Fixed Term, Fixed-rate............ 31-48 months 4.74 1,000 5,672 2.98
Fixed Term, Fixed-rate............ 49-60 months 4.88 1,000 11,422 6.03
IRA deposits......................... None -- -- 10,965 5.76
Accrued interest on deposits 68 0.03%
-------- -------
Total $190,216 100.00%
======== =======
</TABLE>
- ------------
(1) Interest rate offerings as of June 30, 1999.
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
At June 30,
-----------------------------
1999 1998 1997
--------- -------- ---------
(In thousands)
Interest Rate
4.00% or less............................ $ 155 $ -- $ --
4.01-6.00%............................... 126,547 67,287 68,215
6.01-8.00%............................... 16,088 36,532 16,167
8.01% or more............................ 240 242 1,057
Accrued interest on certificate accounts.... 56 63 45
-------- ------- -------
Total $143,086 $104,124 $85,484
======== ======== =======
25
<PAGE>
The following table sets forth the amount and maturities of our time
deposits classified by interest rate at June 30, 1999.
Amount Due
---------------------------------------------------
After
Interest Rate June 30, June 30, June 30, June 30,
2000 2001 2002 2003 Total
---- ---- ---- ---- -----
(In thousands)
4.00% or less ........... $ 155 $ -- $ -- $ -- $ 155
4.01-6.00% .............. 98,612 20,242 2,419 5,274 126,547
6.01-8.00% .............. 11,179 1,557 1,020 2,332 16,088
8.01 or more ............ 222 18 -- -- 240
Accrued interest on
certificate accounts .. 43 9 1 3 56
-------- -------- -------- -------- --------
Total ................. $110,211 $ 21,826 $ 3,440 $ 7,609 $143,086
======== ======== ======== ======== ========
The following table indicates the amount of our certificates of
deposits of $100,000 or more by time remaining until maturity as of June 30,
1999.
Certificates
Maturity Period of Deposits
-------------
(In thousands)
Within three months............... $ 8,531
Three through six months.......... 3,571
Six through twelve months......... 3,833
Over twelve months................ 2,549
-------
$18,484
=======
Borrowings. Advances from the Federal Home Loan Bank increased to
$146.2 million at June 30, 1999, from $144.5 million at June 30, 1998, an
increase of $1.7 million or 1.2%. In addition to providing funding for our
lending activities, we utilize advances from the Federal Home Loan Bank to
purchase investment securities, taking advantage of the spread to increase net
interest income.
The following table sets forth the terms of our short-term Federal Home
Loan Bank advances.
During the
Year Ended June 30
--------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in thousands)
Average balance outstanding ................ $15,927 $31,481 $38,214
Maximum balance at end of any month ........ 34,435 45,020 55,567
Balance outstanding end of period .......... 18,325 27,936 55,567
Weighted average rate during period......... 5.77% 5.90% 5.80%
Weighted average rate at end of period...... 5.42% 5.73% 5.56%
26
<PAGE>
Stockholders' Equity. Stockholders' equity increased to $15.5 million
at June 30, 1999, from $15.1 million at June 30, 1998, an increase of
approximately $400,000 or 2.6%. The increase is mainly attributable to net
income from operations which was substantially offset by an increase in the
unrealized loss on securities available for sale, due to an increase in market
rates of interest.
Results of Operations for the Fiscal Years Ended June 30, 1999 and 1998
General. The largest components of our total income and total expenses
are interest items. As a result, our earnings are greatly influenced by our net
interest income, which is determined by the difference between the interest
earned on our interest-earning assets and the rates paid on our 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, our 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 our assets consist of fixed rate loans, increases in
interest costs will result in a decline in our net interest income.
Results of Operations. We recorded net income of $2,566,000 for the
fiscal year ended June 30, 1999, representing an 8.9% decrease from the
$2,816,000 net income recorded for the fiscal year ended June 30, 1998. The
decrease from June 30, 1998, is mainly attributable to a decrease of $995,000 in
the gains realized on the sale of securities and an increase of $392,000 in
other expense which was partially offset by an increase of $1,054,000 in net
interest income.
Our securities available for sale portfolio includes corporate debt
securities issued by Singer Co. Singer Co. is most recognized as a maker of
sewing machines throughout the world. On September 13, 1999, Singer filed for
Chapter 11 bankruptcy protection. As of June 30, 1999, the bonds had an adjusted
cost basis of $304,000 and a fair value of $235,000. The fair market value of
the bonds at September 16, 1999 was estimated at $122,000. We intend to evaluate
the potential impairment of these bonds and expect to write-down the bonds for
the quarter ended September 30, 1999. Such write-down will have a negative
impact on earnings. See "- Other Income."
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 and
securities, and interest we pay on our interest-bearing liabilities, primarily
deposits and borrowings from the Federal Home Loan Bank.
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. Net interest income increased $1.1 million or 15.9% for the fiscal
year ended June 30, 1999. Although the average balances increased during fiscal
1999 and 1998, our net interest rate spread and net interest margin remained
relatively stable, decreasing four and six basis points, respectively.
Total Interest Income. For the fiscal year ended June 30, 1999, total
interest income increased to $25.1 million from $21.2 million for fiscal year
ended June 30, 1998. This increase of $3.9 million or 18.4% is due to an
increase in income on loans receivable to $14.4 million for the
27
<PAGE>
fiscal year ended June 30, 1999 as compared to $13.2 million for the fiscal year
ended June 30, 1998 and to an increase in income on investment securities to
$10.5 million for fiscal 1999 from $7.9 million for fiscal 1998. During the same
time periods the average balance on loans receivable increased by $13.1 million
to $184.1 million for the fiscal year ended June 30, 1999 from $171 million for
the fiscal year ended June 30, 1998, and the average balance on investment
securities increased by $40.9 million to $155.3 million for fiscal 1999 from
$114.4 million for fiscal 1998.
Total Interest Expense. Total interest expense increased to $17.4
million for the fiscal year ended June 30, 1999 from $14.6 million for the
fiscal year ended June 30, 1998. The two components of total interest expense
are interest on deposits, which increased by $1.8 million for the fiscal year
ended June 30, 1999 to $8.4 million from $6.6 million for the fiscal year ended
June 30, 1998 and interest on borrowings, which increased by $1 million for the
fiscal year ended June 30, 1998 to $8.9 million from $7.9 million for the fiscal
year ended June 30, 1998.
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.
The provision for loan losses was $423,000 for the fiscal year ended
June 30, 1999, as compared to $385,000 for the fiscal year ended June 30, 1998.
The amount charged to operations and the related balance in the allowance for
loan losses is based on periodic reviews of the portfolio by management. At its
current level, the allowance for loan losses represents 0.95% of loans
outstanding at June 30, 1999 as compared to 0.84% of loans outstanding at June
30, 1998.
Other Income. Included in other income are loan servicing income, gains
or losses on sales of securities available for sale, and other miscellaneous
sources of operating income.
During the fiscal year ended June 30, 1999, other income decreased to
$796,000 from $1,760,000 for the fiscal year ended June 30, 1998. The decrease
was mainly attributable to a decrease in the amount of gains realized on the
sale of securities which was $156,000 for the fiscal year ended June 30, 1999
and $1,151,000 for the fiscal year ended June 30, 1998. Also included in other
income were gains realized on the sale of real estate owned of $77,000 and
$101,000 for the fiscal years ended June 30, 1999 and 1998, respectively.
We expect to record an impairment loss in our securities available for
sale portfolio during the quarter ending September 30, 1999 due to the
bankruptcy of Singer Co. as previously discussed. See "- Results of Operations."
Operating Expenses. Total operating expenses increased $392,000 or
10.9% to $3,974,000 for the fiscal year ended June 30, 1999, as compared to
$3,582,000 for the fiscal year ended June 30, 1998.
28
<PAGE>
The primary component of operating expenses was salaries and employee
benefits which increased $337,000 or 18.1% to $2,202,000 from $1,865,000 for the
fiscal year ended June 30, 1998. Also included in 1999 was one-time charge off
of $111,000, net of income taxes, relating to the canceled merger/conversion
with Nesquehonig Savings Bank. Management continues to monitor operating
expenses and reduce or eliminate such expenses where possible. The ratio of
operating expense to average assets for fiscal 1999 and fiscal 1998 was 1.13%
and 1.24% respectively. Excluding expenses related to the attempted
merger/conversion with Nesquehonig Savings Bank of $111,000, the ratio of
operating expense to average assets for fiscal 1999 would be 1.12%.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1998 and
1997
Results of Operations. We recorded net income of $2,816,000 for the
fiscal year ended June 30, 1998, representing a 86.6% increase from the
$1,509,000 net income recorded for the fiscal year ended June 30, 1997. The
increase from June 30, 1997, is mainly attributable to an increase of $843,000
in net interest income, an increase in gains realized on the sale of
mortgage-backed securities of $804,000 and a decrease of $454,000 in total
operating expenses as a result of the $745,000 SAIF assessment in 1997.
Net Interest Income. Net interest income increased $843,000 of 14.6%
due to an increase in the average balances, despite decreases in the net
interest rate spread and interest margin of 37 and 35 basis points,
respectively.
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 for the fiscal year
ended June 30, 1998 as compared to $11.9 million for the fiscal year ended June
30, 1997 and to an increase in income on investment securities to $8.0 million
for fiscal 1998 from $4.4 million for fiscal 1997. During the same time periods
the average balance on loans receivable increased by $20.3 million to $171
million for the fiscal year ended June 30, 1998 from $150.7 million for the
fiscal year ended June 30, 1997, and the average balance on investment
securities increased by $48.8 million to $114.4 million for fiscal 1998 from
$65.6 million for fiscal 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 as well as
an increase in the cost of deposits and borrowings due to an increase in market
rates of interest.
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 losses based on periodic reviews of the
portfolio by management. The allowance for loan losses represented 0.84% of
loans outstanding at June 30, 1998 as compared to 0.76% of loans outstanding at
June 30, 1997. This
29
<PAGE>
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, and
other miscellaneous sources of operating income.
During the fiscal year ended June 30, 1998, other income increased to
$1,760,000 from $720,000 for the fiscal year ended June 30, 1997. The increase
is mainly attributable to increases in the amount of gains realized on the sale
of mortgage-backed and investment securities which were $1,151,000 for the
fiscal year ended June 30, 1998 and $283,000 for the fiscal year ended June 30,
1997. Also included in other income were gains realized on the sale of real
estate owned of $101,000 and $73,000 for the fiscal years ended June 30, 1998
and 1997, respectively. Loan servicing income increased by $59,000 to $285,000
for fiscal year ended June 30, 1998 from $226,000 for fiscal year ended June 30,
1997 primarily attributable to an increase in the loan volume serviced.
Operating Expenses. Total operating expenses decreased $454,000 or
11.3% to $3,582,000 for the fiscal year ended June 30, 1998, as compared to
$4,036,000 for the fiscal year ended June 30, 1997.
The primary component of operating expenses was salaries and employee
benefits which increased $276,000 or 17.3% to $1,865,000 from $1,589,000 for the
fiscal year ended June 30, 1997. In addition, total bonuses paid to senior
executive officers increased $67,000 or 137% to $116,000 from $49,000 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 $745,000 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 was 1.24% and 1.83%, respectively.
30
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to our
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. 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,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets (Dollars in thousands)
Interest-earning assets:
Loans receivable(1)............... $184,068 $14,358 7.80% $170,991 $13,234 7.84% $150,727 $11,852 7.84%
Investment and mortgage-backed
securities(2)................... 155,304 10,706 6.89 114,451 8,006 6.78 65,616 4,341 6.75
-------- ------ -------- ------- -------- -------
Total interest-earning assets.... 339,372 25,064 7.39 285,442 21,240 7.44 216,343 16,193 7.48
Non-interest-earning assets........ 5,225 4,162 4,318
-------- -------- ---------
Total assets..................... $344,597 $289,604 $220,661
======== ======= =======
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
NOW accounts . .................... $ 13,744 $ 320 2.32% $ 14,250 $ 311 2.18% $ 13,036 $ 267 2.05%
Passbook and club accounts......... 11,377 306 2.69 10,427 283 2.71 10,029 278 2.78
Money market demand accounts....... 17,402 788 4.53 12,902 572 4.43 9,991 420 4.20
Certificates of deposit............ 128,683 7,028 5.46 96,108 5,472 5.69 81,745 4,504 5.51
Short-term and long-term
borrowings ..................... 152,608 8,938 5.86 137,734 7,972 5.79 91,328 4,937 5.51
-------- ------- -------- ------- -------- ------
Total interest-bearing liabilities. 323,814 17,380 5.37% 271,421 14,610 5.38% 206,129 10,406 5.05%
-------- ------- -------- ------- -------- ------
Non-interest-bearing liabilities... 4,603 4,271 3,239
-------- -------- --------
Total liabilities................ 328,417 275,692 209,368
Stockholders' equity............... 16,180 14,212 11,293
-------- -------- --------
Total liabilities and
stockholders' equity .......... $344,597 $289,604 $220,661
======== ======== ========
Net interest income................ $ 7,684 $ 6,630 $ 5,787
======= ======= =======
Interest rate spread(3)............ 2.02 2.06 2.43
==== ==== ====
Net interest margin(4)............. 2.26 2.32 2.67
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities.............. 104.80 105.28 104.95
====== ====== ======
</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.
31
<PAGE>
Rate/Volume Analysis
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; (ii)
changes in rates; (iii) changes in rate and volume.
Year Ended June 30,
1999 vs. 1998
-----------------------------------
Increase/(Decrease)
Due to
-----------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
Interest-earning assets:
Loans receivable ....................... $1,025 $ (68) $ 167 $1,124
Investment and mortgage-backed
securities ......................... 2,770 126 (196) 2,700
------ ------ ------ ------
Total interest-earning assets ....... 3,795 58 (29) 3,824
------ ------ ------ ------
Interest-bearing liabilities:
NOW and money market deposits .......... 188 33 4 225
Savings and certificate accounts ....... 1,880 (223) (78) 1,579
Short-term and long-term borrowings ... 861 96 9 966
------ ------ ------ ------
Total interest-bearing liabilities .. 2,929 (94) (65) 2,770
------ ------ ------ ------
Increase (decrease) in net interest
income ................................. $ 866 $ 152 $ 36 $1,054
====== ====== ====== ======
Interest Rate Risk
Because the majority of our assets and liabilities are sensitive to
changes in interest rates, our most significant form of market risk is interest
rate risk. Our 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.
We are vulnerable to an increase in interest rates to the extent that
interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. In the current market, we primarily originate
long-term, fixed rate loans secured by single-family residences. Our primary
source of funds has been deposits with substantially shorter maturities. While
having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, this type of an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
32
<PAGE>
Our Board of Directors reviews our asset and liability policy 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.
To manage the interest rate risk on our mortgage loan portfolio, we
emphasize the origination of adjustable-rate loans and sell a portion of our
fixed-rate mortgage loan originations. At June 30, 1999, adjustable-rate
mortgage loans totaled $52.1 million or 28.2% of our total loan portfolio. To
manage interest rate risk, we also maintain a portfolio of liquid assets which
includes investment securities and mortgage-backed securities. Maintaining
liquid assets, however, tends to reduce potential net income because liquid
assets usually provide a lower yield than other interest-earning assets. As an
asset/liability management tool, we may use alternative sources of funding if
deposit pricing in our local market area is not acceptable.
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 changes in market interest rates. We
calculate the NPV quarterly.
The following table presents our NPV at June 30, 1999.
Changes
in Market $ %
Interest Rates NPV Amount Change Change in NPV NPV Ratio(1)
-------------- ---------- ------ ------------- ------------
(basis points) (Dollars in thousands)
+400 964 -22,443 -95.9 0.29%
+300 8,063 -15,374 -65.6 2.38%
+200 13,816 -9,620 -41.0 3.98%
+100 19,008 -4,429 -18.9 5.34%
0 23,437 -- -- 6.44%
-100 26,704 3,267 13.9 7.19%
-200 26,758 3,321 14.2 7.10%
-300 26,134 2,697 11.5 6.84%
-400 26,802 3,365 14.4 6.89%
(1) Calculated as the estimated NPV divided by present value of total assets.
33
<PAGE>
Net Interest Income. The following table presents the effect on our net
interest income as a result of hypothetical 100-400 basis point changes in
market interest rates at June 30, 1999.
Changes
in Market $ Change in % Change in
Interest Rates Net Interest Income Net Interest Income
-------------- ------------------- -------------------
(basis points) (in thousands)
+400 -3,758 -44.0
+300 -2,565 -30.0
+200 -1,445 -16.9
+100 -416 -4.9
0 -- --
-100 -603 -7.1
-200 -1,114 -13.0
-300 -1,444 -16.9
-400 -1,555 -18.2
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.
Non-Performing Assets
We place all loans that are 90 days or more delinquent, or sooner, if
the collection of principal or interest becomes doubtful, on non-accrual status.
At June 30, 1999, our non-performing assets were $3.3 million as compared to
$4.5 million at June 30, 1998, a decrease of $1,200,000 or 26.7%. The ratio of
non-performing assets to total assets was 0.90% at June 30, 1999 compared to
1.44% at June 30, 1998.
34
<PAGE>
The following table sets forth information regarding non-performing
loans and real estate owned, as of the dates indicated. For the year ended June
30, 1999, interest income that would have been recorded on loans accounted for
on a nonaccrual basis under the original terms of such loans was immaterial.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Mortgage loans:
1-4 family residential real estate .... $1,954 $2,645 $3,166 $3,689 $2,206
Construction .......................... -- -- -- 106 106
Multi-family and commercial ........... -- 336 336 -- 33
Commercial loans and leases ............. 302 334 333 333 --
Consumer loans:
Home equity ........................... 28 100 287 174 180
Other consumer ........................ 5 -- 41 90 76
------ ------ ------ ------ ------
Total non-performing loans .............. 2,289 3,415 4,163 4,392 2,601
Real estate owned ....................... 969 1,129 767 259 506
------ ------ ------ ------ ------
Total non-performing assets ............. $3,258 $4,544 $4,930 $4,651 $3,107
====== ====== ====== ====== ======
Total non-performing loans to total loans 1.22% 1.91% 2.72% 2.99% 1.62%
Total non-performing assets to
total assets .......................... 0.90% 1.44% 1.82% 2.56% 1.67%
</TABLE>
Real estate owned consists of properties acquired by foreclosure and is
stated at fair value less cost to sell at the date of acquisition. Real estate
owned decreased to $969,000 at June 30, 1999, from $1,129,000 at June 30, 1998.
At June 30, 1999, real estate owned consisted of ten single-family dwelling
units and one multi-family dwelling unit. Nine of these properties are located
in the Pocono mountains.
Liquidity and Capital Resources
We have 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. The obligations
associated with the preferred securities issued in this offering will add to the
level of liquidity we will need to maintain. Cash for these short-term and
long-term needs is generated through deposits (including the use of brokered
deposits), funds borrowed from the Federal Home Loan Bank, the sale and maturity
of investment securities, cash flows generated from operations, and collections
of principal payments and prepayments of outstanding loans. Loan principal
repayments are a relatively stable source of funds while deposit flows are
influenced significantly by general interest rates and money market conditions.
Borrowings are also used to compensate for reductions in other sources of funds
such as deposits as well as to fund the expansion
35
<PAGE>
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, we may borrow from
the Federal Home Loan Bank of Pittsburgh. At June 30, 1999, we had outstanding
from the Federal Home Loan Bank of Pittsburgh advances equal to $146.2 million
as compared to the $144.5 million in outstanding advances at June 30, 1998. Such
borrowings, as a percentage of our total assets, equaled 40.2% at June 30, 1999
and 45.8% at June 30, 1998. Within certain guidelines, the policies of Federal
Home Loan Bank of Pittsburgh are flexible with respect to the borrowing limits
of a member institution. At June 30, 1999, our maximum borrowing capacity was
approximately $202.2 million.
At June 30, 1999, we had outstanding loan commitments, including
undisbursed lines of credit of approximately $12.8 million. We believe that
normal cash flow from principal and interest payments on our loan portfolio will
be sufficient to meet these loan commitments. No other significant commitments
existed at June 30, 1999.
Regulatory Capital. First Star Savings Bank is subject to regulatory
capital requirements by the Federal Deposit Insurance Corporation ("FDIC"). To
be deemed "adequately capitalized" the FDIC has three minimum regulatory capital
ratios: a leverage capital ratio equal to 4% of adjusted total assets; a Tier 1
risk-based capital ratio equal to 4% of risk-based assets; and total risk-based
capital equal to 8% of risk-based assets.
The following table sets forth the bank's regulatory capital position
at June 30, 1999, as compared to the minimum regulatory capital requirements
imposed on us by the FDIC.
Amount Percentage
------ ----------
(Dollars in thousands)
Leverage Ratio:
Actual capital............................ $19,750 5.54%
Regulatory requirement.................... 14,265 4.00
------- ----
Excess.................................... $ 5,485 1.54%
======= ====
Tier 1 Risk-Based Capital:
Actual Capital............................ $19,750 9.34%
Regulatory requirement.................... 8,457 4.00
------- ----
Excess.................................... $11,293 5.34%
======= ====
Total Risk-Based Capital:
Actual Capital............................ $21,522 10.18%
Regulatory requirement.................... 16,914 8.00
------ ----
Excess.................................... $ 4,608 2.18%
======= ====
For First Star Bancorp's capital ratios, see "Capitalization."
36
<PAGE>
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 our 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 us contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which we plan to
complete the internal year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these statements will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse effect on us.
We place a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although we are 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 us.
Our year 2000 plan was presented to our 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 the mission critical system testing and implementation has
been completed. The Year 2000 Committee is responsible for the plan with the
Board of Directors receiving year 2000 progress reports on a quarterly basis.
Our primary operating software is through our third party service
bureau, Bisys, Inc. We have maintained ongoing contact with this vendor so that
modification of the software for year 2000 readiness is a top priority. The
modification of the software has been accomplished. We have performed
significant testing of the software utilized by Bisys, Inc. with successful
results. Bisys, Inc.
37
<PAGE>
has represented that the software currently being utilized for our current
operations is year 2000 compliant. We have participated in proxy testing of
Bisys, Inc. with another financial institution in our area. Proxy testing is a
cooperative effort of a number of financial institutions that use the same
service for a third party service bureau.
We have contacted all other material vendors and suppliers regarding
their year 2000 readiness. Each of these third parties has delivered written
assurance to us that year 2000 will not be an issue or that the issue will be
satisfactorily resolved prior to the end of 1999. Appropriate testing, if
possible, and any related contingency plans would be performed in the third and
fourth quarters of 1999. We have contacted all significant customers and
non-information technology suppliers (i.e. utility systems, telephone systems,
etc.), regarding their year 2000 state of readiness with significant customers
and non-information technology suppliers. Such parties have indicated that they
have established year 2000 plans and are in various stages of remediation and
testing. We are unable to test the year 2000 readiness of our significant
suppliers of utilities. We are relying on the utility companies' internal
testing and representations to provide the required services that drive our data
systems. We are currently determining what recourse we would have from such
parties if they do not resolve the year 2000 issues. All software that is
considered mission critical has been tested.
We mailed questionnaires to approximately 45 commercial real estate
loan customers, and 40 questionnaires were returned. Such customers represent
35.7% of the total commercial loans outstanding at June 30, 1999. These
questionnaires were based on Appendix A of Guidance Concerning the Year 2000
Impact on Customers, Federal Financial Institutions Examination Council (FFIEC)
Interagency Statement, March 17, 1998. This questionnaire is also used in the
underwriting for new commercial loans. Our 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. We have received favorable questionnaire responses from our
borrowers. Borrowers have established year 2000 plans and are testing software
and contacting vendors and suppliers and plan to be ready for year 2000. Several
borrowers are real estate holding companies that have minimal risk.
Individual mortgage loan and consumer loan customers were not contacted
as a practical matter; it was deemed to be beyond the scope of our testing
parameters, because most of these are individuals with adequate collateral on
the loans.
Costs will be incurred to replace certain non-compliant software and
hardware. We do not anticipate that direct costs for renovating or replacing
non-compliant hardware and software will exceed $25,000 of which approximately
$13,700 had been expended as of June 30, 1999. No assurance can be given that
the year 2000 plan will be completed successfully by the year 2000, in which
event we could incur significant costs. If Bisys, Inc. fails to maintain its
system in a compliant state or incurs other obstacles prior to year 2000, we
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on our financial condition and results of operations.
We are monitoring Bisys, Inc. to evaluate whether its data processing
system will fail and are being provided with periodic updates on the status of
testing and upgrades being made by the service bureau. If Bisys, Inc. fails, we
will attempt to locate an alternative service bureau that is year 2000
38
<PAGE>
compliant. If we are unsuccessful, we will enter deposit and loan transactions
by hand in our general ledger and compute loan payments and deposit balances and
interest in our existing computer system. We are able to do this because of our
relatively small number of loan and deposit accounts and our internal
bookkeeping system. Our computer systems are independently able to generate
labels and mailings for all of our customers. If this labor intensive approach
is necessary, our management and employees will become much less efficient.
However, we believe that we would be able to operate in this manner for a
limited time, until our existing service bureau, or replacement bureau, is able
to provide data processing services. If very few financial institution service
bureaus were operating in the year 2000, their replacement costs, assuming we
could negotiate an agreement, could be material. We are currently determining
what recourse we would have from Bisys, Inc. if it does not resolve the year
2000 issues.
As part of our contingency planning, we will increase our liquidity to
accommodate any possible increase in customer demand for cash during the start
of 2000. To ensure maximum staffing, employees may not take vacation from
December 27, 1999 through January 14, 2000 (other than bank holidays).
The most reasonably likely worst case scenario is that some areas where
we have branch offices located will experience blackouts if utility service
companies are unable to provide necessary service to drive our data systems or
provide sufficient sanitary conditions to our offices. In the event that this
would happen, we would be unable to open the affected branches, and customers
would be directed to other branch locations and business would be transacted
manually.
Successful and timely completion of the year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of Bisys,
Inc., testing plans, and all vendors, suppliers and customer readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with us, 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 our operations.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. In June
1998 the Financial Standards Accounting Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement 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. During July 1999, the FASB issued SFAS No. 137,
which delayed the effective date of this statement for one year, to fiscal years
beginning after June 15, 2001. The adoption of this statement is not expected to
have a significant impact on the financial condition or operations of the bank.
39
<PAGE>
Mortgage Banking Activities. In October 1998, the FASB issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This statement became effective for the Bank July 1, 1999. The
adoption of this statement is not expected to have a significant impact on the
financial condition or results of operations of the Bank.
Business Combinations. In December 1998, the FASB issued an invitation
to comment on a document entitled "Methods of Accounting for Business
Combinations: Recommendations of the G4+1 for Achieving Convergence."
Subsequently, in April 1999, the FASB tentatively agreed to eliminate the
pooling-of-interests method of accounting for business combinations. In reaching
its conclusion, the FASB commented that the use of two methods, purchase and
pooling-of-interests, makes it difficult for users to compare the financial
statements of companies engaged in business combinations, and that the pooling
method is inconsistent with the general concept of fair value associated with
acquisitions. Accordingly, the FASB concluded that there should be a single
method of accounting for all business combinations, and that method is the
purchase method. As a general rule, the purchase method establishes a new
accounting basis for the assets and liabilities acquired based on fair value and
recognizes goodwill (positive or negative). Goodwill, the difference between the
purchase price and total value of the assets and liabilities obtained, is an
intangible asset that must be amortized over future periods. Regarding
transition, the FASB tentatively concluded that all business combinations
reported before final issuance of the new standard, as well as all combinations
in process at the time the new standard is issued should be accounted for under
APB 16 as a pooling, if the pooling criteria within that standard are met. The
FASB expects to issue an Exposure Draft during 1999, but has not yet indicated
when it expects to issue the final standard.
BUSINESS OF FIRST STAR BANCORP, INC.
AND FIRST STAR SAVINGS BANK
General
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
facilitates: (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.
Our office is located at 418 West Broad Street, Bethlehem,
Pennsylvania. Our telephone number is (610) 691-2233.
First Star Savings Bank is a Pennsylvania-chartered stock savings bank
which traces its origins to 1893. Our principal business consists of attracting
deposits from the general public and originating loans secured by residential
properties. Our business is conducted through our main office located in
Bethlehem, Pennsylvania and five branch offices.
In May 1987, we converted from the mutual to the stock form of
ownership. In December of 1989, we issued and sold shares of First Star Savings
Bank Series A Convertible Preferred Stock in a
40
<PAGE>
private offering to nine individuals, all of whom were directors of First Star.
On July 27, 1993, we 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 securities. One- to four-family mortgage loans totaled $151.5 million, or
80.6% of our total loans receivable portfolio at June 30, 1999. 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 offices are located in Bath, Bethlehem, Palmer, Allentown, Nazareth
and Alburtis, which are all located within Lehigh and Northampton Counties. Our
market area includes the counties of Lehigh, Northampton, Carbon, Bucks and,
Monroe in their entireties. Carbon, Lehigh and Northampton Counties make up the
metropolitan area known locally as the Lehigh Valley. The population of this
area in 1990 was 595,000. The largest industry groups, ranked by number of
employees, include service industries, manufacturing, retail trade and
government. Monroe County is relatively sparsely populated, while Bucks County,
considered part of metropolitan Philadelphia, is densely populated, reporting
over 544,000 residents in 1990.
Allentown, Bethlehem and Easton are the principal cities of the Lehigh
Valley (Pennsylvania), which has an aggregate population of approximately
650,000. During the past twenty years, the economy of the Lehigh Valley has
shifted from one principally dominated by manufacturing, especially the steel
industry, to an economy characterized by a diverse group of industries including
service and distribution firms, health care, high technology, manufacturing and
retailing firms. Major employers include Air Products and Chemicals, Lehigh
Valley Hospital Center, Dun & Bradstreet, Prudential Insurance Company, Lucent
Technologies and Lehigh University. As of June 1999, unemployment in Lehigh and
Northampton Counties was 3.9% and 4.0%, respectively. An interstate highway
network through the Lehigh Valley benefits 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.
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 31.3% of our loan portfolio is
comprised of adjustable-rate loans which we retain for our portfolio. The
remainder consists of fixed-rate loans which we originate either to resell in
the secondary market
41
<PAGE>
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.
Our fixed-rate loans generally have terms of 10, 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. At June 30, 1999, we had no
loans specifically identified as held for sale.
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 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
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<PAGE>
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
on one- to four-family residential property to the individuals who will be the
owners and occupants upon completion of construction. Upon completion of
construction, such loans are classified as one- to four-family loans. 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. We invest 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 the 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 40% of the loans to one borrower limit. 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 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.
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<PAGE>
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 60 days of the loan application. Loan commitments in excess of
this period may be issued upon payment of a non-refundable fee or upon agreement
on an interest rate float, allowing us to adjust the interest rate on the loan.
At June 30, 1999, commitments to cover originations of mortgage and commercial
loans totaled $6.7 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 $3.3 million at June 30, 1999. At June
30, 1999, each of our five largest lending relationships had outstanding loan
balances of between $1.3 million and $2.9 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.
Classified Assets. The classification policies of the Pennsylvania
Department of Banking 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
44
<PAGE>
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When we classify problem
assets as loss, we are required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge off
such amount. Our determination as to the classification of our assets and the
amount of its valuation allowances is subject to review by the Pennsylvania
Department of Banking and the FDIC, which may order the establishment of
additional general or specific loss allowances. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining a savings association's
regulatory capital. Specific valuation allowances for loan losses generally do
not qualify as regulatory capital.
At June 30, 1999, we had loans classified as special mention,
substandard, doubtful and loss as follows:
At
June 30,
1999
----
(In thousands)
Special mention............................. $ 216
Substandard................................. 3,039
Doubtful assets............................. 77
Loss assets................................. 181
------
Total.................................. $3,513
======
Allowance 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 Pennsylvania Department of Banking and the FDIC, as part of their
examination process. After a review of the information available, the
Pennsylvania Department of Banking and the FDIC might require the establishment
of an additional allowance.
The following table illustrates the allocation of the allowance for
loan losses for each category of loans. The allocation of the allowance to each
category is not necessarily indicative of future losses in any particular
category and does not restrict our use of the allowance to absorb losses in
other loan categories.
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<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- ---------------- ---------------- ------------------ --------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period allocated to:
One-to four-family......... $1,133 63.94% $ 992 66.62% $ 817 70.67% $ 836 82.45% $650 75.58%
Construction............... -- -- -- -- -- -- 16 1.58 30 3.49
Multi-family and
commercial real estate... 592 33.41 395 26.53 231 19.98 117 11.54 130 15.12
Commercial leases.......... 41 2.31 93 6.25 89 7.70 34 3.35 27 3.14
Consumer................... 6 0.34 9 0.60 19 1.65 11 1.08 23 2.67
------ ------ ------ ------ ------ ------ ------ ------ ---- ------
Total allowance...... $1,772 100.00% $1,489 100.00% $1,156 100.00% $1,014 100.00% $860 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ==== ======
</TABLE>
The following table sets forth information with respect to our
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding .................. $184,264 $176,386 $149,476 $144,299 $154,420
======== ======== ======== ======== ========
Average loans outstanding ................ $184,068 $170,991 $150,727 $155,594 $150,989
======== ======== ======== ======== ========
Allowance balance (at beginning of period) 1,489 1,156 1,014 860 839
Provision for loan losses ................ 423 385 220 244 104
Net charge-offs:
1-4 family residential ................. 98 43 78 79 83
Construction ........................... -- -- -- -- --
Multi-family and commercial real estate 9 -- -- -- --
Commercial leases ...................... 29 -- -- -- --
Consumer ............................... 4 9 -- 11 --
-------- -------- -------- -------- --------
Allowance balance (at end of period) ..... $ 1,772 $ 1,489 $ 1,156 $ 1,014 $ 860
======== ======== ======== ======== ========
Allowance for loan losses as a percent of
total loans outstanding ................ 0.95% 0.84% 0.77% 0.68% 0.53%
Allowance for loan losses as a percent of
non-performing loans ................... 77.4% 43.6% 27.8% 23.1% 33.1%
Net loans charged off as a percent of
average loans outstanding .............. 0.08% 0.03% 0.05% 0.04% 0.06%
</TABLE>
Real Estate Owned. At June 30, 1999, we had 11 properties with an
aggregate book value of $969,000 in real estate owned. The largest real estate
owned property had a book value of $201,529 at June 30, 1999 and consisted of a
single family dwelling located in the Pocono Mountain section of Northeastern
Pennsylvania. Of the total amount of real estate owned, $709,000, or 73% of the
total consisted of nine 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, 1999, all investment securities were classified as available for sale.
At June 30, 1999, our investment portfolio policy permitted investments in
instruments such as: (i) U.S. Treasury obligations, (ii) U.S. federal agency or
federally
46
<PAGE>
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) corporate bonds, commercial paper and mortgage
derivative products. Our Board of Directors may authorize additional
investments.
At June 30, 1999, our investment securities portfolio 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 and a
$2.0 million investment in each of the following issuers' trust preferred
securities: Northern Trust Corp, National Commerce Bank and Mercantile Bancorp,
Inc.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities and collateralized mortgage
obligations. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors such as us. The quasi-governmental agencies guarantee the payment of
principal and interest to investors and include the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA"),
and Federal National Mortgage Association ("FNMA").
At June 30, 1999, 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 passthrough certificates market.
We have not experienced any significant changes in the payment patterns
of our mortgage-backed securities portfolio in the last few years.
Sources of Funds
We use primarily deposits and FHLB borrowings as our major external
sources 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
47
<PAGE>
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.
Borrowings. Advances 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, 1999, we could borrow up to $202.2 million from the
FHLB of Pittsburgh. If the need arises, we may also access the Federal Reserve
Bank discount window to supplement our supply of lendable funds and to meet
deposit withdrawal requirements. At June 30, 1999, borrowings from the FHLB of
Pittsburgh totaled $146.2 million ($18.3 million of which were short-term
borrowings maturing before June 30, 2000).
Subordinated Debentures. During the year ended June 30, 1992, the bank
issued $1,590,000 of Adjustable-Rate Mandatorily Convertible Subordinated
Debentures due in the year 2002 (the "Debentures"). The Debentures were assumed
by First Star Bancorp at the time of its formation. 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 11 to the consolidated financial
statements)) 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 either our option or the option of the holder, unless previously
redeemed, at a conversion price of one share per $9.864 principal amount of
Debenture, subject to adjustment in certain events. Each share of Series A
Preferred Stock is convertible into one share of our common stock, subject to
the limitations of our restated articles of incorporation.
The Debentures are redeemable, in whole or in part, on not less than 30
days' notice at our option at various redemption prices. The Debentures are
subordinated in right of payment to all of our present and future senior
indebtedness.
On December 31, 1996, we sold $4,000,000 of Adjustable-Rate Mandatorily
Convertible Subordinated Debentures due in the year 2008 (the "1996
Debentures"). Interest on the 1996 Debentures is 1% below the prime rate,
adjustable monthly. Interest is payable on the 1996 Debentures on the first day
of each month. The 1996 Debentures will automatically convert into Permanent
Noncumulative Convertible Preferred Stock, Series B ("Series B Preferred Stock")
of First Star Bancorp on December 31, 2008, unless previously converted. The
1996 Debentures may be
48
<PAGE>
converted into Series B Preferred Stock at any time by the holder or by First
Star Bancorp, unless previously redeemed, at a conversion price of one share per
$24.281 principal amount of 1996 Debenture, subject to adjustment in certain
events. The Series B Preferred Stock is convertible into one share of our common
stock, subject to the limitations of our restated articles of incorporation.
The 1996 Debentures are redeemable at par value prior to maturity only
with the proceeds from the sale of common or perpetual preferred stock, unless
otherwise approved by the Board of Governors of the Federal Reserve System. The
1996 Debentures are subordinated in right of payment to all of our present and
future senior indebtedness.
During the year ended June 30, 1992, $110,000 of the 1992 Debentures
were converted into Series A Preferred Stock. At June 30, 1999, $1,480,000 of
the 1992 Debentures and $4,000,000 of the 1996 Debentures remained outstanding.
All Debentures are includable as Tier 2 capital for determining our
compliance with regulatory capital requirements, subject to certain limitations
(see Note 19 to the consolidated financial statements). Upon conversion, the
Debentures become Tier 1 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.
Properties
We own three of our six offices and lease three of them. The net book
value of this real property at June 30, 1999, was $461,000. Our total investment
in office equipment had a net book value of $138,000 at June 30, 1999.
49
<PAGE>
<TABLE>
<CAPTION>
Year Total Book Owned
Address Opened Investment Value or Leased
------- ------ ---------- ----- ---------
MAIN OFFICE:
<S> <C> <C> <C> <C>
418 West Broad Street 1952 1,962,303 274,061 Owned
Bethlehem, PA 18018
BRANCH OFFICES:
358 South Walnut Street 1986 80,446 10,605 Leased(1)
Bath, PA 18014
3590 Northwood Avenue 1987 153,092 -0- Leased(2)
Palmer, PA 18043
14 South Main Street 1989 5,894 2,065 Leased(3)
Nazareth, PA 18064
471-497 Wabash Street 1994 211,132 144,786 Owned
Allentown, PA 18103
11 North Main Street 1997 196,660 167,272 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 2000. Option to renew for an additional one-year term.
Personnel
At June 30, 1999 we had 43 full-time employees and 7 part-time
employees. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Additional Subsidiary Activity
First Star Bancorp has two direct subsidiaries: 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 substantially inactive.
50
<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.
MANAGEMENT OF FIRST STAR BANCORP, INC.
Directors and Executive Officers
Our Board of Directors is composed of six members, each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our 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.
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially
Age at Year First Current Owned at Percent
June 30, Elected Term June 30, of
Name 1999 Director Expires 1999(1) Class(2)
- ---- ---- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Harold J. Suess.................. 78 1964 2000 5,828(3) 1.5%
Stephen M. Szy................... 54 1987 2000 3,864(4) 1.0
Joseph T. Svetik................. 50 1987 2001 101,438(5)(6) 22.1
Paul J. Sebastian................ 56 1986 2001 97,574(6)(7) 21.2
Mark Parseghian, Jr.............. 71 1974 1999 4,190(8) 1.1
Tighe Scott...................... 50 1987 1999 121,905(9) 25.4
</TABLE>
- ------------------------------
(1) Except as otherwise noted below, the named individual effectively
exercises sole voting and investment power over the shares beneficially
owned.
(2) Assumes the full conversion of the 1992 Debentures and the 1996
Debentures into Series A and Series B Preferred Stock, respectively,
and full conversion of Series A and Series B Preferred Stock into
common stock.
(3) Includes 2,027 shares of the Series A Preferred Stock.
(4) Includes 1,013 shares of the Series A Preferred Stock.
(5) Includes 9,792 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 1992 Debentures and 27,799 shares of Series B
Preferred Stock receivable upon conversion of 1996 Debentures.
(6) Excludes 47,429 shares of common stock held by the First Star Bancorp,
Inc. Employee Stock Ownership Plan for which such person serves as plan
trustee and exercises shared voting and investment power. Shares which
are unallocated to participating employees (47,429 shares) and shares
for which no voting direction is received are voted by the plan
trustees as directed by the Board of Directors or the ESOP Committee.
The individuals serving as plan trustees disclaim beneficial ownership
of stock held under the ESOP.
(7) Includes 14,828 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 1992 Debentures and 31,917 shares of Series B
Preferred Stock receivable upon conversion of 1996 Debentures.
51
<PAGE>
(8) Includes 1,267 shares held by Mr. Parseghian's wife and 2,059 shares of
Series B Preferred Stock receivable upon conversion of 1996 Debentures
also held by Mr. Parseghian's wife.
(9) Includes 19,261 shares of the Series A Preferred Stock and 64,880
shares of Series A Preferred Stock receivable upon conversion of 1992
Debentures and 19,548 shares of Series B Preferred Stock receivable
upon conversion of 1996 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:
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 of Operations of Scotty's Fashion, Inc. an apparel manufacturer
located in Pen Argyl, Pennsylvania.
Paul J. Sebastian. Mr. Sebastian became Senior Vice President of the
bank in October 1989 and Chairman of the Board of Directors of First Star
Bancorp in August 1997. From December 1986, through August 1991, Mr. Sebastian
was a principal in Professional Services Group of America, Inc., Allentown,
Pennsylvania, which provides financial services to individuals and businesses.
Prior to that, Mr. Sebastian had been a Registered Representative with Shearson
Lehman Brothers Inc. in Allentown, Pennsylvania, since February 1983. From
November 1981 to February 1983, Mr. Sebastian was Chief Financial Officer of
First Federal Savings Bank, Pottstown, Pennsylvania. From August 1976 to
November 1981, Mr. Sebastian was an Examiner with the Federal Home Loan Bank
Board, Pittsburgh, Pennsylvania. Mr. Sebastian is a certified public accountant.
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.
Joseph T. Svetik. Mr. Svetik became Chairman of the Board of the bank
in August 1997. Upon its formation in 1993, Mr. Svetik became President and
Chief Executive Officer of First Star Bancorp. Mr. Svetik became President and
Chief Executive Officer of the bank in November 1990. Prior to that date, Mr.
Svetik was Executive Vice President and Chief Executive Officer of the bank.
Prior to his employment by the bank, Mr. Svetik was Vice President, Treasurer
and Chief Financial Officer of Third Federal Savings Bank, Newtown,
Pennsylvania. Mr. Svetik is a certified public accountant.
Stephen M. Szy. For more than the past five years, Mr. Szy has been
self-employed as a public accountant in Hellertown, Pennsylvania.
Meetings and Committees of the Board of Directors
First Star Bancorp's Board of Directors holds regular monthly meetings
and special meetings when needed. During the fiscal year ended June 30, 1999,
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, 1999, and the total
number of meetings held by all committees of the Board on which the director
served during such year.
52
<PAGE>
The Board of Directors has a number of standing committees, including
an Executive Committee, an Audit Committee and a Compensation Committee.
The Executive Committee, except as limited by our 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 Sebastian,
Svetik and Szy. The Executive Committee did not meet during the fiscal year
ended June 30, 1999.
The Audit Committee reviews our records and affairs to determine our
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 our 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 our independent auditors. The current members of the Audit
Committee are Directors Parseghian and Szy. During the fiscal year ended June
30, 1999, 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 twice during the fiscal year ended June 30,
1999.
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, 1999.
Director Compensation
Each director is paid monthly. Total aggregate fees paid to the
directors for the year ended June 30, 1999 were $30,675. 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 1999, each
non-employee director received a cash bonus of $2,000.
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 and
senior vice president at June 30, 1999, 1998 and 1997. No other employee earned
in excess of $100,000 during the periods indicated.
53
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------
Stock Based
Fiscal Other Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation(1) # of Options Compensation
- --------------------------- ---- ------ ----- --------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph T. Svetik 1999 $180,961 $41,000 -- -- $25,640(2)
Director, President and CEO 1998 149,581 58,026 -- -- 26,175(2)
1997 133,519 24,450 -- -- 23,370(2)
Paul J. Sebastian 1999 174,213 41,000 -- -- 25,695(3)
Director, Senior Vice President 1998 142,103 58,026 -- -- 25,614(3)
1997 126,843 24,450 -- -- 23,391(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 $1,640, $2,175 and $870 under
the 401(k) Plan and First Star contributions of $24,000, $24,000 and
$22,500 made pursuant to the Employee Stock Ownership Plan during 1999,
1998 and 1997, respectively.
(3) Includes First Star matching contributions of $1,695, $1,614 and $1,652
under the 401(k) Plan and First Star contributions of $24,000, $24,000 and
$21,739 made pursuant to the Employee Stock Ownership Plan during 1999,
1998 and 1997, respectively.
Stock Option Plans. We have established an Employee Stock Compensation
Program pursuant to which stock options may be granted to officers and key
employees. See note 10 to our consolidated financial statements beginning on
page F-1. The following table sets forth information concerning options granted
under this program.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
---------------------------------------------------------------------------------
Value of
Shares Number of Options In-the-money Options
Acquired on Value at Fiscal Year-End(#) at Fiscal Year-End($)
Name Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable(3)
- ---- ------------ -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Joseph T. Svetik 1,584 $94,248(1) 9,792 / 0 $501,112 / 0
Paul J. Sebastian 1,300 78,650(2) 14,828 / 0 766,302 / 0
</TABLE>
- ----------------
(1) Based upon the difference between the option exercise price and the market
price of stock of $68.00 per share as of August 17, 1998.
(2) Based upon the difference between the option exercise price and the market
price of stock of $69.00 per share as of December 17, 1998.
(3) Based upon the difference between the option exercise price and the market
price of stock of $61.00 per share as of June 30, 1999.
Employment Agreements. We have entered into employment agreements with
Joseph T. Svetik and Paul J. Sebastian. Each agreement has a five-year term.
Each agreement is automatically extended each year, provided no notice has been
given by either the bank or that employee to terminate employment, so that the
number of years remaining in each agreement remains at five. The agreements are
terminable by us for "cause" as defined in the agreements. If we terminate the
54
<PAGE>
individual without cause or such person terminates for good reason, he will be
entitled to two times his salary for the remainder of the term of the contract.
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.
Contributions to the ESOP and shares released from the suspense account
are 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 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.
Certain Related Transactions
We grant loans to our officers, directors and employees. These loans
are made in the ordinary course of business and upon the same terms, including
collateral, as those prevailing at the time for comparable transactions and do
not involve more than the normal risk of collectibility or present any other
unfavorable features. Loans to officers and directors and their affiliates
amounted to $3.8 million or 24.6% of our total equity, at June 30, 1999. All of
these loans were current at June 30, 1999.
PRINCIPAL SECURITY HOLDERS
We know of no person or entity other than those set forth below who is
a beneficial owner of more than 5% of our common stock. The following table
assumes the full conversion of the 1992 and 1996 Debentures into Series A
Preferred Stock and Series B Preferred Stock, respectively, and full conversion
of the Series A and B Preferred Stock into common stock. The following table
sets forth, as of June 30, 1999, certain information as to those persons who
were beneficial owners of more than 5% of our outstanding shares of common stock
and as to such stock beneficially owned by all of our officers and directors of
as a group, as calculated from the lists of our stockholders.
55
<PAGE>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
- ---------------- ------------------------ -----
Neil Scott (2)(3)
315 Pennsylvania Avenue
Pen Argyl, Pennsylvania 18072........... 38,411 9.4%
Amelio Scott (2)(4)
205 David Avenue
Pen Argyl, Pennsylvania 18072........... 32,830 8.2%
Tighe Scott (2)(5)
Hemlock Lane Star Route
Saylorsburg, Pennsylvania 18353......... 121,905 25.4%
Paul J. Sebastian (6)(7)
418 West Broad Street
Bethlehem, Pennsylvania 18018........... 97,574 21.2%
Joseph T. Svetik (6)(8)
418 West Broad Street
Bethlehem, Pennsylvania 18018........... 101,438 22.1%
First Star Bancorp, Inc.(9)
Employee Stock Ownership Plan
418 West Broad Street
Bethlehem, Pennsylvania 18018........... 69,050 17.4%
All directors and executive officers as a
group (6 persons) (6)(10)................ 334,799 51.2%
- -----------------
(1) Includes shares of common stock owned by corporations or foundations in
which the stockholder, director or officer is an officer or major
stockholder or by spouses, or as a custodian or trustee for minor children,
over which shares the named individual or all officers and directors as a
group effectively exercise sole voting and investment power, unless
otherwise indicated. Also includes shares of common stock that may be
obtained through the conversion or exercise of other securities. Absent the
conversion or exercise of other securities, all directors and executive
officers as a group held 56,520 shares of common stock at June 30, 1999.
(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 15,206 shares of common stock issuable upon conversion of Series A
Preferred Stock which is issuable upon conversion of Debentures and 19,562
shares of common stock issuable upon conversion of Series B Preferred Stock
which is issuable upon conversion of Debentures.
(4) Includes 24,710 shares of common stock issuable upon conversion of Series B
Preferred Stock which is issuable upon conversion of Debentures.
56
<PAGE>
(5) Includes 84,141 shares of common stock issuable upon conversion of Series A
Preferred Stock (including Debentures that are convertible into Series A
Preferred Stock) and 19,548 shares of common stock issuable upon conversion
of Series B Preferred Stock (including Debentures that are convertible into
Series B Preferred Stock).
(6) Excludes 47,429 shares of common stock held by the First Star Bancorp, Inc.
Employee Stock Ownership Plan for which such person serves as plan trustee
and exercises shared voting and investment power. Shares which are
unallocated to participating employees (47,429 shares) and shares for which
no voting direction is received are voted by the plan trustees as directed
by the Board of Directors or the ESOP Committee. The individuals serving as
plan trustees disclaim beneficial ownership of stock held under the ESOP.
(7) Includes 14,828 shares of common stock which may be acquired through the
exercise of stock options which are immediately exercisable. Also includes
38,016 shares of common stock issuable upon conversion of Series A
Preferred Stock (including Debentures that are convertible into Series A
Preferred Stock) and 31,917 shares of common stock issuable upon conversion
of Series B Preferred Stock which is issuable upon conversion of
Debentures.
(8) Includes 9,792 shares of common stock which may be acquired through the
exercise of stock options which are immediately exercisable. Also includes
47,139 shares of common stock issuable upon conversion of Series A
Preferred Stock (including Debentures that are convertible into Series A
Preferred Stock) and 27,799 shares of common stock issuable upon conversion
of Series B Preferred Stock which is issuable upon conversion of
Debentures.
(9) Includes 21,621 shares of common stock issuable upon conversion of Series B
Preferred Stock which is issuable upon conversion of Debentures.
(10) Includes 24,620 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, 172,336 shares of
common stock issuable upon conversion of Series A Preferred Stock
(including Debentures that are convertible into Series A Preferred Stock)
and 81,323 shares of common stock issuable upon conversion of Series B
Preferred Stock which is issuable upon conversion of Debentures.
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 Bank
General. As a Pennsylvania chartered, SAIF-insured savings bank, the
bank is subject to extensive regulation and examination by the Pennsylvania
Department of Banking, the FDIC, which insures its deposits to the maximum
extent permitted by law, and to a much lesser extent, by the
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Federal Reserve. The federal and state laws and regulations which are applicable
to banks regulate, among other things, the scope of their business, their
investments, the reserves required to be kept against deposits, the timing of
the availability of deposited funds and the nature and amount of and collateral
for certain loans. The laws and regulations governing the bank generally have
been promulgated to protect depositors and not for the purpose of protecting
stockholders. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the FDIC or the United States Congress could
have a material adverse impact on the bank and its operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code ("Banking
Code") contains detailed provisions governing the organization, location of
offices, rights and responsibilities of trustees, officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of
the bank and its affairs. The Banking Code delegates extensive rule-making power
and administrative discretion to the Pennsylvania Department of Banking 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 Pennsylvania Department of Banking. The Federal Deposit
Insurance Act (the "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 Pennsylvania Department of Banking generally examines each savings
bank not less frequently than once every two years. The Banking Code permits the
Pennsylvania Department of Banking to accept the examinations and reports of the
FDIC in lieu of the Pennsylvania Department of Banking's examination. The
present practice is for the Pennsylvania Department of Banking to conduct
individual examinations. The Pennsylvania Department of Banking may order any
savings bank to discontinue any violation of law or unsafe or unsound business
practice and may direct any trustee, officer, attorney or employee of a savings
bank engaged in an objectionable activity, after the Pennsylvania Department of
Banking has ordered the activity to be terminated, to show cause at a hearing
before the Pennsylvania Department of Banking 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
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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 Pennsylvania Department of Banking. Pennsylvania law also
provides for nationwide branching by Pennsylvania-chartered savings banks and
savings and loan associations, subject to the Pennsylvania Department of
Banking'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 allows the acquisition by a bank holding
company of a bank located in another state.
Pennsylvania has enacted legislation authorizing full interstate
branching for state- chartered financial institutions. 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
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 the bank, and has under certain circumstances
authority to initiate enforcement actions against federally insured savings
institutions to safeguard safety and soundness and the deposit insurance fund.
Assessments. As a member of the SAIF, the bank paid an insurance
premium to the FDIC equal to a minimum of 0.23% of its total deposits during
1996 and prior years. In 1996, the annual insurance premium for most BIF members
was lowered to $2,000. The lower insurance premiums for BIF members placed SAIF
members at a competitive disadvantage to BIF members.
Effective December 31, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the bank of approximately
0.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the
deposit insurance assessment for most SAIF members was reduced to 0.064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately 0.013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
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Regulatory Capital Requirements. The FDIC has promulgated regulations
and adopted a statement of policy prescribing the capital adequacy requirements
for state-chartered banks, some of which, like the bank, are not members of the
Federal Reserve. At June 30, 1999, the bank exceeded all regulatory capital
requirements and was classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks;
other banks must maintain a minimum Tier 1 leverage ratio of 4%. The FDIC
defines a highly-rated bank as one that is not anticipating or experiencing
significant growth and has well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and
which the FDIC, in general, considers a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier 1 capital are equivalent to those discussed
above under the 4% 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 1 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.
The bank is also subject to similar Pennsylvania Department of Banking
guidelines. The components and requirements of leverage and risk-based capital
are substantially the same as those defined by the FDIC.
The bank was in compliance in both the FDIC and Pennsylvania capital
requirements at June 30, 1999.
Prompt Corrective Action. Federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized,
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and critically undercapitalized) and to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
The capital levels established for each of the categories are as
follows:
<TABLE>
<CAPTION>
Total
Risk-Based Tier 1 Risk-
Capital Category Tier 1 Capital Capital Based Capital
- ---------------- ---------- ----------- ----------
<S> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more
Adequately
Capitalized 4% or more* 8% or more 4% or more
Undercapitalized less than 4% less than 8% less than 4%
Significantly
Undercapitalized less than 3% less than 6% less than 3%
Critically 2% or less
Undercapitalized tangible equity -- --
</TABLE>
- -----------
* For institutions with the highest CAMEL rating, the required Tier 1 capital
ratio is 3%.
For purposes of the regulation, the term "tangible equity" includes
core capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling holding company to fund a capital restoration plan
is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with the approval of the FDIC.
At June 30, 1999, the bank had the requisite capital levels to qualify
as well capitalized while First Star Bancorp was adequately capitalized under
such measures.
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
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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. The bank received
a "satisfactory" rating in its last CRA examination in August, 1999.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the bank's capital. Affiliates of the bank include
First Star Bancorp and any company which would be under common control with the
bank.
The bank's authority to extend credit to executive officers, trustees
and 10% stockholders, as well as entities such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the bank may make
to such persons based, in part, on the bank's capital position, and require
certain approval procedures to be followed. See, however, "Management of First
Star Bancorp, Inc. - Certain Related Transactions."
Federal Home Loan Bank System. The bank is 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, the bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1999, the bank had $7.9 million in FHLB
stock, which was in compliance with this requirement.
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, 1999, dividends paid by the FHLB of
Pittsburgh to the bank totaled approximately $508,000.
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
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requirements that are imposed by the Pennsylvania Department of Banking. At June
30, 1999, the bank met its reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all sources before borrowing from the Federal Reserve.
The bank had no discount window borrowings at June 30, 1999.
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 Pennsylvania Department of Banking. 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 Pennsylvania Department of Banking.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA"), prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve. In determining whether to authorize a bank
holding company (or a company that will become a bank holding company) to
acquire control of a bank, the Federal Reserve takes into consideration the
financial and managerial resources of the bank holding company, as well as those
of the bank to be acquired, and considers whether the acquisition is likely to
have anti-competitive effects or other adverse effects. 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
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preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications to it under the BHCA. The Federal Reserve capital adequacy
guidelines are similar to those imposed on the bank by the FDIC. See "Regulation
of First Star Savings Bank - Regulatory Capital Requirements."
In addition, at the holding company level, our subordinated debt is
included in Tier 2 capital, subject to certain limitations. If not converted
prior to maturity at the option of either the holder or us, the subordinated
debentures will automatically convert at maturity into permanent noncumulative
preferred stock. Upon that conversion, the debentures would become Tier 1
capital. We have $1,480,000 in subordinated debentures scheduled to mature on
January 1, 2002 and an additional $4,000,000 in subordinated debentures
scheduled to mature on December 31, 2008. If all of our subordinated debt had
been converted into preferred stock at June 30, 1999, our leverage ratio would
have been 6.22%, our Tier 1 risk-based capital ratio would have been 10.55% and
our total risk-based capital ratio would have been 11.38%.
The preferred securities will be, to a certain extent, includable as
Tier 1 capital.
Commitments to Affiliated Depository Institutions. Under Federal
Reserve policy, First Star Bancorp will be expected to act as a source of
financial strength to the bank and to commit resources to support the bank in
circumstances when it might not do so absent such policy. The enforceability and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. However, should the bank require the support of additional capital
resources, it should be anticipated that 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 Pennsylvania Department
of Banking may from time to time prescribe. No holding company regulations have
been issued to date.
FIRST STAR CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law
pursuant to:
o the initial trust agreement, dated as of August 24, 1999,
executed by us, as depositor, and by the Delaware trustee; and
o the Certificate of Trust filed with the Secretary of State of the
State of Delaware on ________, 1999.
The initial trust agreement will be amended and restated in its
entirety substantially in the form filed as an exhibit to the registration
statement of which this prospectus forms a part. The trust
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agreement will be qualified as an indenture under the Trust Indenture Act. The
Trust will issue all of the preferred securities to purchasers in the offering
described in this prospectus. We will acquire all of the common securities
issued by the Trust, which will represent an aggregate liquidation amount equal
to at least 3% of the total capital of the Trust. The common securities will be
equal in right to payments with the preferred securities, except that upon the
occurrence and during the continuance of an event of default under the Trust
Agreement resulting from a debenture event of default, our rights as holder of
the common securities to payment in respect of distributions and payments upon
liquidation, redemption or otherwise will be subordinated to your right to
payments as a holder of the preferred securities. See "Description of the
Preferred Securities -- Subordination of Common Securities."
The Trust exists for the purpose of:
o issuing the preferred securities and common securities
representing undivided beneficial interests in its assets,
o investing the gross proceeds of the preferred securities and the
common securities in the junior subordinated debentures issued by
us, and
o engaging in activities that are incidental to the activities
described above.
The junior subordinated debentures will be the only assets of the Trust
and payments under the junior subordinated debentures will be the only revenue
of the Trust. The Trust has a term of 30 years, but may dissolve earlier as
provided in the trust agreement. The address of the Trust is c/o Bankers Trust
(Delaware), 1101 Centre Road, Suite 200, Trust Department, Wilmington, Delaware
19805, and the telephone number is (302) 636-3301.
The trustees and the administrators will conduct the affairs of the
Trust. We will select two individuals who are our employees, officers or
affiliates to be the administrators of the Trust. The property trustee will be a
financial institution that is not our affiliate and will serve as institutional
trustee under the Trust Agreement and as indenture trustee for purposes of
compliance with the Trust Indenture Act. Bankers Trust Company, a state
chartered trust company organized under the laws of the State of New York, will
be the property trustee until we decide to remove or replace it. For purposes of
compliance with the provisions of the Trust Indenture Act, Bankers Trust Company
will also act as guarantee trustee under the Guarantee and as trustee under the
Indenture. The Delaware trustee will be an entity that maintains its principal
place of business in the State of Delaware. Bankers Trust (Delaware), a Delaware
banking corporation, will act as Delaware trustee.
The property trustee will hold the junior subordinated debentures for
the benefit of the holders of the preferred securities and the common securities
and in such capacity will have the power to exercise all rights, powers and
privileges under the indenture. The property trustee will also maintain
exclusive control of a segregated noninterest-bearing bank account, the property
account, to hold all payments made under the junior subordinated debentures for
the benefit of the holders of the preferred securities and the common
securities. The property trustee will make payments of distributions and
payments on liquidation, redemption and otherwise to the holders of the
preferred securities and the common securities out of funds from the property
account. The guarantee trustee will hold the
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guarantee for the benefit of the holders of the preferred securities. We, as the
holder of all the common securities, will have the right to appoint, remove or
replace any trustee and to increase or decrease the number of trustees. We will
pay all fees and expenses related to the Trust and the offering of the preferred
securities and the common securities.
Your rights as a holder of the preferred securities, including economic
rights, rights to information and voting rights, are set forth in the trust
agreement, the Delaware Business Trust Act and the Trust Indenture Act. See
"Description of the Preferred Securities."
The address of the Delaware trustee is Bankers Trust (Delaware), 1101
Centre Road, Suite 200, Trust Department, Wilmington, Delaware 19805, and the
telephone number is (302) 636-3301.
The address of the property trustee, the guarantee trustee and the
debenture trustee is Bankers Trust Company, Four Albany Street, 4th Floor, New
York, New York 10006, and the telephone number is (212) 250-2500.
ACCOUNTING TREATMENT
For financial reporting purposes, we will treat First Star Capital
Trust as our subsidiary. Accordingly, we will include the accounts of First Star
Capital Trust in our consolidated financial statements. We will present the
preferred securities as a separate category in our consolidated statements of
financial condition under the caption "Guaranteed Preferred Beneficial Interests
in Subordinated Debt," and we will include appropriate disclosures about the
preferred securities, the guarantee and the junior subordinated debentures in
the notes to our consolidated financial statements. For financial reporting
purposes, we will record distributions on the preferred securities as interest
expense in our consolidated statements of income.
DESCRIPTION OF PREFERRED SECURITIES
The Trust will issue the preferred securities and the common securities
under the trust agreement for the Trust. The preferred securities will represent
preferred undivided beneficial interests in the assets of the Trust, and you
will be entitled a preference in certain circumstances with respect to
distributions and amounts payable on redemption or liquidation over the common
securities, as well as other benefits as described in the trust agreement.
This summary describes certain provisions of the preferred securities
and the trust agreement and is not complete. You should read the form of the
trust agreement, which is filed as an exhibit to the registration statement of
which this prospectus is a part. Wherever particular defined terms of the trust
agreement are referred to in this prospectus, such defined terms are
incorporated herein by reference. A copy of the form of the trust agreement is
also available upon request from the trustees.
General
The preferred securities will be limited to $12,000,000 liquidation
amount (as defined in the trust agreement) outstanding (which amount may be
increased by up to $1,800,000 liquidation amount of preferred securities for
exercise of the over-allotment option). See "Underwriting." The preferred
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securities will rank equally, and payments will be made pro rata, with the
common securities except as described under "-- Subordination of Common
Securities." The junior subordinated debentures will be registered in the name
of the Trust and held by the property trustee in trust for your benefit and the
benefit of the holders of the common securities. The guarantee we will execute
for the benefit of the holders of the preferred securities will be subordinated
to most of our other obligations and liabilities. The guarantee will not
guarantee payment of distributions or amounts payable on redemption or
liquidation of the preferred securities if the Trust does not have funds on hand
available to make such payments. See "Description of Guarantee."
Distributions
You will receive distributions on each preferred security at the annual
rate of ____% of the stated liquidation amount of $10, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year, to
record holders at the close of business on the 15th day of March, June,
September and December (whether or not a business day) next preceding the
relevant distribution date. Each date on which distributions will be paid is
referred to as a distribution date in this prospectus. Distributions on the
preferred securities will be cumulative. Distributions will accumulate from
______ __, 1999. The first distribution date for the preferred securities will
be __________ __, 1999. The amount of distributions payable for any period less
than a full distribution period will be computed on the basis of a 360-day year
of twelve 30-day months and the actual days elapsed in a partial month in such
period. Distributions payable for each full distribution period will be computed
by dividing the annual rate by four. If any date on which distributions are
payable is not a business day, then payment will be made on the next succeeding
day that is a business day (without any additional distributions or other
payment because of the delay), except that, if such business day falls in the
next calendar year, the payment will be made on the immediately preceding
business day.
So long as we are not in default, we may defer the payment of interest
on the junior subordinated debentures at any time for one or more extension
periods. No extension period may exceed 20 consecutive quarters. No extension
period may extend beyond the maturity date of the junior subordinated
debentures. As a consequence of any deferral by us, quarterly distributions on
the preferred securities will be deferred by the Trust during the extension
period. Distributions to which you are entitled will accumulate additional
distributions thereon at the annual rate of ____ %, compounded quarterly from
the relevant payment date, computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period.
Additional distributions payable for each full distribution period will be
computed by dividing the annual rate by four.
During any extension period, we may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of our capital stock or (2) make any
payment of principal, interest or premium on or repay, repurchase or redeem any
of our debt securities that rank equally in all respects with or junior in
interest to the junior subordinated debentures, of which there are none as of
the date of this prospectus. These prohibitions, however, do not apply to:
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o repurchases, redemptions or other acquisitions of our capital
stock in connection with any employment contract, benefit plan
or other similar arrangement, a dividend reinvestment or
stockholder stock purchase plan or the issuance of our capital
stock (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction
entered into prior to the applicable extension period;
o a reclassification, exchange or conversion of any class or
series of our capital stock (or any capital stock of our
subsidiaries) for any class or series of our capital stock or
of any class or series of our indebtedness for any class or
series of our capital stock;
o the purchase of fractional interests in shares of our capital
stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or
exchanged;
o any declaration of a dividend in connection with any
stockholders' rights plan, or the issuance of rights, stock or
other property under any stockholders' rights plan, or the
redemption or repurchase of rights pursuant thereto; or
o any dividend in the form of stock, warrants, options or other
rights where the dividend stock or the stock issuable upon
exercise of such warrants, options or other rights is the same
stock as that on which the dividend is being paid or ranks
equally with or junior to such stock.
Before the end of an extension period, we may further defer the payment
of interest. Upon the termination of an extension period and the payment of all
amounts then due, we may elect to begin a new extension period. We must give the
trustees notice of our election of an extension period at least one business day
prior to the earlier of (1) the date the distributions on the preferred
securities would have been payable but for the election to begin the extension
period and (2) the date the property trustee is required to give you notice of
the record date or the date the distributions are payable, but in any event not
less than one business day prior to the record date. The property trustee will
give you notice of our election to begin a new extension period. Subject to the
foregoing, there is no limitation on the number of times that we may elect to
begin an extension period. See "Description of Junior Subordinated Debentures --
Option To Extend Interest Payment Period" and "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
We currently do not intend to exercise our right to defer payments of
interest by extending the interest payment period on the junior subordinated
debentures.
The revenue of the Trust available for distribution to you will be
limited to payments under the junior subordinated debentures, which the Trust
will purchase with the proceeds of this offering of preferred securities. See
"Description of Junior Subordinated Debentures." If we do not make payments on
the junior subordinated debentures, the Trust will not have funds available to
pay distributions or other amounts payable on the preferred securities. The
payment of distributions and other amounts payable on the preferred securities
(if and to the extent the Trust has funds legally available for and cash
sufficient to make such payments) is guaranteed by us on a limited basis as
described in this prospectus under "Description of Guarantee."
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Redemption
If we redeem the junior subordinated debentures, the Trust will redeem
a proportionate amount of the preferred and common securities. We may redeem the
junior subordinated debentures (1) on or after _________, 2004 in whole at any
time or in part from time to time, or (2) in whole, but not in part, at any time
within 90 days following the occurrence and during the continuation of a Tax
Event, Investment Company Event or Capital Treatment Event (each as defined
below), in each case subject to possible regulatory approval. See "--
Liquidation Distribution Upon Dissolution."
"Tax Event" means the receipt by the Trust of an opinion of our counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including an announced prospective change) in, the laws (or any
regulations thereunder) of the United States or a political subdivision or
taxing authority thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance of
the preferred securities, there is more than an insubstantial risk that:
o the Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with
respect to income received or accrued on the junior
subordinated debentures;
o interest payable by us on the junior subordinated debentures
is not, or within 90 days of the delivery of such opinion will
not be, deductible by us, in whole or in part, for United
States federal income tax purposes; or
o the Trust is, or will be within 90 days of the delivery of
such opinion, subject to more than an insignificant amount of
other taxes, duties or other governmental charges.
See "United States Federal Income Tax Consequences -- Pending Tax
Litigation Affecting the Preferred Securities" for discussion of pending United
States Tax Court litigation that, if decided adversely to the taxpayer, could
give rise to a Tax Event, which would permit us to redeem the junior
subordinated debentures prior to ________________, 2004.
If a Tax Event described in the first or third circumstances above has
occurred and is continuing and the Trust holds of all the junior subordinated
debentures, we will pay on the junior subordinated debentures any additional
amounts as may be necessary so that the amount of distributions then due and
payable by the Trust on the outstanding preferred securities and common
securities of the Trust will not be reduced as a result of any additional taxes,
duties and other governmental charges to which the Trust has become subject as a
result of a Tax Event.
"Investment Company Event" means the receipt by the Trust of an opinion
of our counsel experienced in such matters to the effect that, as a result of
the occurrence of a change in law or regulation or a written change (including
any announced prospective change) in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the Trust is, or will
be, considered an
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"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act").
"Capital Treatment Event" means the reasonable determination by us
that, as a result of the occurrence of any amendment to, or change (including
any announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
there is more than an insubstantial risk that we will not be entitled to treat
an amount equal to the liquidation amount of the preferred securities as Tier 1
Capital (or the then equivalent thereof), except as otherwise restricted by the
Federal Reserve, for purposes of the risk-based capital adequacy guidelines of
the Federal Reserve, as then in effect and applicable to us. The Federal Reserve
has determined that the proceeds of certain qualifying securities like the
preferred securities will qualify as Tier 1 capital for us only up to an amount
not to exceed, when taken together with all of our cumulative preferred stock,
if any, 25% of our Tier 1 capital.
Redemption Procedures
The Trust will only redeem preferred securities if we have redeemed
junior subordinated debentures. The Trust may redeem preferred securities only
in an amount equal to the funds it has on hand and legally available to pay the
redemption price. The redemption price for each security will equal $10 plus
accumulated but unpaid distributions as of the redemption date and the related
amount of the premium, if any, paid by us upon the concurrent redemption of some
or all of the junior subordinated debentures.
Unless payment of the redemption price is withheld or refused and not
paid either by the Trust or us pursuant to the guarantee, additional interest
will stop accruing on those preferred securities called for redemption on the
date they are called for redemption.
Notice of any redemption will be mailed to you at your address as it
appears on the securities register maintained by the property trustee at least
30 days but not more than 60 days before the redemption date. If notice of
redemption has been given, then, by 12:00 noon, Eastern time, on the redemption
date, to the extent funds are available for payment, the property trustee will,
for preferred securities held in book-entry form:
o deposit irrevocably with The Depository Trust Company ("DTC")
funds sufficient to pay the applicable redemption price; and
o give DTC irrevocable instructions and authority to pay the
redemption price to you.
For preferred securities not held in book-entry form, the property
trustee will, to the extent funds are available for payment:
o irrevocably deposit with the paying agent for the preferred
securities funds sufficient to pay the applicable redemption
price; and
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o give the paying agent irrevocable instructions and authority to
pay the redemption price to you once you surrender your
certificates evidencing the preferred securities.
Notwithstanding the foregoing, distributions payable on or prior to the
redemption date for any preferred securities called for redemption will be
payable to the holders on the relevant record dates for those distributions.
Once notice of redemption is given and funds are deposited as required,
then all of your rights with respect to the preferred securities called for
redemption will cease, except for your right to receive the redemption price,
but without interest after the date of redemption.
If any date fixed for redemption of preferred securities is not a
business day, then payment of the redemption price payable on such date will be
made on the next day that is a business day (without any interest or other
payment for the delay), except that, if the next business day falls in the next
calendar year, payment will be made on the immediately preceding business day.
In payment of the redemption price for the preferred securities called
for redemption is improperly withheld or refused and not paid, either by the
Trust or by us pursuant to the guarantee, interest on those preferred securities
will continue to accumulate at the then applicable rate, from the redemption
date originally established to the date the payment is actually made. In this
case, the actual payment date will be the redemption date for purposes of
calculating the redemption price.
If less than all the junior subordinated debentures are going to be
redeemed, then the aggregate liquidation amount of the preferred and common
securities to be redeemed shall be allocated based upon the respective
liquidation amounts of each class, with 97% being allocated to the preferred
securities and 3% being allocated to the common securities, except in the case
of an event of default. See "-- Subordination of Common Securities." The
property trustee will select the particular preferred securities to be redeemed
not more than 60 days before the redemption date by any method the property
trustee deems fair and appropriate, or if the preferred securities are then held
in book-entry form, in accordance with DTC's customary procedures.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, and the
liquidation distribution in respect of, the preferred securities and common
securities will be made on a proportionate basis, based on the aggregate
liquidation amount of each class of securities. However, if a debenture event of
default has occurred and is continuing as a result of any failure by us to make
an interest or principal payment on the junior subordinated debentures, then no
payment of any distribution on, or redemption price of, or liquidation
distribution in respect of, the common securities may be made, unless all unpaid
amounts due on the preferred securities have been paid in full or provided for,
as appropriate.
If there is an event of default under the trust agreement that results
from an event of default on the junior subordinated debentures, we, as the
holders of the common securities, will have no right to act with respect to the
event of default under the trust agreement until the effects of all events of
default under the trust agreement regarding the preferred securities have been
cured, waived or otherwise eliminated. Until that time, the property trustee
will act solely on your behalf and not on behalf of the
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holders of the common securities. See "-- Events of Default; Notice" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
Liquidation Distribution Upon Dissolution
We will have the right to dissolve the Trust at any time, and, after
paying all the expenses and liabilities of the Trust, distribute the junior
subordinated debentures to you. However, because the proceeds from the preferred
securities offering may be counted as up to 25% of our Tier 1 capital and
dissolution of the Trust could impact our overall capital structure, we may only
dissolve the Trust if we have received prior approval of the Federal Reserve, if
then required.
Pursuant to the trust agreement, the Trust will dissolve upon
expiration of its term, on _____________, 2034. Early dissolution will occur
upon the occurrence of any of the following:
o the bankruptcy of First Star Bancorp;
o the filing of a certificate of dissolution, or its equivalent, of
First Star Bancorp;
o our delivery of a written direction to the property trustee to
dissolve the Trust, which we may do in our discretion;
o the entry of a court order for the dissolution of the Trust; or
o the redemption of all the preferred securities in connection with
the redemption of all the preferred and common securities as
described under "- Redemption."
In the event of a dissolution, after the Trust pays all amounts owed to
its creditors, the holders of the preferred and common securities will be
entitled to receive:
o junior subordinated debentures, if the dissolution does not arise
from redemption of the junior subordinated debentures, in an
aggregate principal amount equal to the aggregate liquidation
amount of the preferred and common securities; or
o cash, if distribution of junior subordinated debentures is not
practical or if the dissolution arises from the redemption of the
junior subordinated debentures.
In the event of a cash payment, you will receive an amount equal to the
liquidation amount of the preferred securities, plus accumulated and unpaid
distributions to the date of the liquidation distribution. If the liquidation
distribution can be paid only in part because the Trust has insufficient assets
available for payment, then the holders of the preferred and common securities
will be paid on a proportionate basis. However, if an event of default under the
junior subordinated debentures has occurred and is continuing as a result of our
failure to make interest or principal payments to the Trust when due, you will
receive a liquidation distribution on your preferred securities before we
receive a liquidation distribution on our common securities. See
"--Subordination of Common Securities."
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Events of Default; Notice
Any one of the following events constitutes an event of default under
the trust agreement with respect to the preferred and common securities.
o the occurrence of a event of default with respect to the junior
subordinated debentures (see "Description of Junior Subordinated
Debentures -- Debenture Events of Default");
o default by the Trust in the payment of any distribution when it
becomes due and payable, and the continuation of such default for
a period of 30 days;
o default by the Trust in the payment of any redemption price of
any preferred security or common security when it becomes due and
payable;
o default in the performance, or breach, in any material respect,
of any covenant or warranty given by the Trust in the trust
agreement (other than a default or breach in the performance of a
covenant or warranty which is addressed by either the second or
third events of default listed above), and the continuation of
such default or breach for a period of 60 days after the holders
of at least 25% in aggregate liquidation amount of the
outstanding preferred securities have given to the property
trustee, the Delaware trustee and us a written notice specifying
such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the trust
agreement; or
o the occurrence of bankruptcy or insolvency with respect to the
property trustee if a successor property trustee has not been
appointed within 90 days of the bankruptcy or insolvency.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to you, to us, and to the administrators, unless
the event of default has been cured or waived. Along with the administrators, we
are required to file annual certificates with the property trustee declaring
whether or not we and they are in compliance with all the conditions and
covenants applicable to us and to them under the trust agreement.
Removal of Trustees; Appointment of Successors
The holders of at least a majority in aggregate liquidation amount of
the outstanding preferred securities may remove the property trustee or the
Delaware trustee for cause or, if an event of default with respect to the junior
subordinated debentures has occurred and is continuing, with or without cause.
If a trustee is removed by the holders of the outstanding preferred securities,
the successor may be appointed by the holders of at least 25% in aggregate
liquidation amount of preferred securities. If a trustee resigns, such trustee
will appoint its successor. If a trustee fails to appoint a successor, the
holders of at least 25% in aggregate liquidation amount of the outstanding
preferred securities may appoint a successor. If a successor has not been
appointed, we, any holder of preferred securities, or
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the other trustee may petition a court in the State of Delaware to appoint a
successor. Any successor Delaware trustee must meet the applicable requirements
of Delaware law. Any successor property trustee must be a national or
state-chartered bank that at the time of appointment has:
o securities rated in one of the three highest rating categories by
a nationally recognized statistical rating organization; and
o capital and surplus of at least $50,000,000.
No resignation or removal of a trustee and no appointment of a
successor trustee will be effective until the successor trustee delivers its
written acceptance of the appointment.
Merger or Consolidation of Trustees
Any entity into which the property trustee or the Delaware trustee may
be merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which the trustee is a
party, or any entity succeeding to all or substantially all of the corporate
trust business of the trustee, will be the successor of that trustee under the
trust agreement, provided that entity is otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may, at our request and with the consent of the holders of at
least a majority in aggregate liquidation amount of the outstanding preferred
securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any state, so long as:
o the successor entity (1) expressly assumes all the obligations of
the Trust with respect to the preferred securities or (2)
substitutes for the preferred securities other securities having
substantially the same terms as the preferred securities so long
as the substitute preferred securities have the same priority as
the preferred securities with respect to distributions and
payments upon liquidation, redemption and otherwise;
o a trustee of the successor entity, possessing the same powers and
duties as the property trustee, is appointed to hold the junior
subordinated debentures;
o the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the preferred securities
(including any substitute preferred securities) to be downgraded
by any nationally recognized statistical rating organization, if
then rated;
o the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the preferred
securities (including any substitute preferred securities) in any
material respect;
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o the successor entity has a purpose substantially identical to
that of the Trust;
o prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Trust has received an opinion
from independent counsel experienced in these matters to the
effect that (1) the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely
affect your rights, preference and privileges as a holder of
preferred securities (including any substitute preferred
securities) in any material respect, and (2) following the
merger, consolidation, amalgamation, replacement, conveyance
transfer or lease, neither the Trust nor the successor entity
will be required to register as an investment company under the
Investment Company Act; and
o we or any permitted successor or assignee own all the common
securities of the successor entity and guarantee the obligations
of the successor entity under the successor securities at least
to the extent provided by the guarantee.
Notwithstanding the foregoing, the Trust may not, except with the
consent of all holders of the preferred securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to, any other entity or
permit any other entity to consolidate, amalgamate, merge with or into or
replace it if such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease would cause the Trust or the successor entity to be taxable as
a corporation for United States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under "--Removal of Trustees; Appointment
of Successors" and "Description of Guarantee -- Amendments and Assignment" and
as otherwise required by law and the trust agreement, you will have no voting
rights.
We, the property trustee and the administrators, may amend the trust
agreement without your consent in order to:
o cure any ambiguity, correct or supplement any provisions in the
trust agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to
matters or questions arising under the trust agreement, provided
that any such amendment does not adversely affect in any material
respect your interests; or
o modify, eliminate or add to any provisions of the trust agreement
as may be necessary to ensure that the Trust will not be taxable
as a corporation for United States federal income tax purposes at
any time that any preferred or common securities are outstanding
or to ensure that the Trust will not be required to register as
an "investment company" under the Investment Company Act.
With the consent of holders of not less than a majority in aggregate
liquidation amount of the preferred securities, we, the property trustee and the
administrators may amend any provision of the
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trust agreement so long as the trustees have received an opinion of counsel that
the amendment or the exercise of any power granted to the trustees by the
amendment will not:
o affect the Trust's status as a grantor trust exempt from taxation
for United States federal income tax purposes; or
o the Trust's exemption from status as an "investment company"
under the Investment Company Act.
However, without the consent of each holder of preferred securities or
common securities affected thereby, the trust agreement may not be amended to:
o change the amount or timing of any distribution on the preferred
and common securities or otherwise adversely affect the amount of
any distribution required to be made in respect of the preferred
and common securities as of a specified date; or
o restrict your right or our right as the holders of common
securities to institute suit for the enforcement of any payment
on or after such date.
So long as any junior subordinated debentures are held by the Trust,
the property trustee will not:
o direct the time, method and place of conducting any proceeding
for any remedy available to the debenture trustee, or execute any
trust or power conferred on the property trustee with respect to
the junior subordinated debentures;
o waive any past default that is waivable under the indenture;
o exercise any right to rescind or annul a declaration that the
principal of all the junior subordinated debentures shall be due
and payable; or
o consent to any amendment, modification or termination of the
indenture or the junior subordinated debentures, where such
consent shall be required, without, in each case, obtaining the
prior approval of the holders of at least a majority in aggregate
liquidation amount of the outstanding preferred securities, or,
if a consent under the indenture would require the consent of
each holder of junior subordinated debentures affected thereby,
no such consent will be given by the property trustee without the
prior consent of each holder of the preferred securities.
The property trustee may not revoke any action previously authorized or
approved by a vote of the holders of the preferred securities except by
subsequent vote of the holders of the preferred securities. The property trustee
will notify you of any notice of default with respect to the junior subordinated
debentures. In addition to obtaining your approval as described above, before
taking any of the actions listed above, the property trustee will obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
not be taxable as a corporation for United States federal income tax purposes on
account of such action.
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Any required approval of holders of preferred securities may be given
at a meeting of holders of preferred securities convened for such purpose or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which you are entitled to vote, or of any matter upon which action by
your written consent is to be taken, to be given to you in the manner set forth
in the trust agreement.
Your vote or consent will not be required to redeem and cancel
preferred securities.
If we or any of our affiliates or the trustees or any of their
affiliates own any preferred securities, those preferred securities will not be
treated as outstanding for purposes of the votes or consents described above.
Expenses and Taxes
In the indenture, we have agreed to pay:
o all debts and obligations of the Trust (other than distributions
on the preferred and common securities);
o any and all taxes and all costs and expenses with respect thereto
(other than United States withholding taxes) to which the Trust
might become subject; and
o all costs and expenses of the Trust, including the costs and
expenses of:
1) the trustees, and
2) the organization and operation of the Trust.
Our payment obligations under the indenture are for the benefit of, and
shall be enforceable by, any creditor of the Trust to whom any of these debts,
obligations, costs, expenses and taxes are owed. Any creditor may enforce these
obligations directly against us, and we have irrevocably waived any right or
remedy to require that any creditor take any action against the Trust or any
other person before proceeding against us. We have also agreed in the indenture
to execute any additional agreements as may be necessary or desirable to give
full effect to the foregoing.
Book Entry, Delivery and Form
DTC will act as securities depository for the preferred securities. The
Trust will issue one or more fully registered global preferred securities
certificates in the name of Cede & Co. (DTC's nominee). These certificates will
represent the total aggregate number of preferred securities. The Trust will
deposit these certificates with DTC or a custodian appointed by DTC. The Trust
will not issue certificates to you for the preferred securities that you
purchase, unless DTC's services are discontinued.
Ownership of beneficial interests in a global security deposited with
DTC is limited to participants that have accounts with DTC. Access to the DTC
system is also available to indirect
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participants, such as securities brokers and dealers, banks and trust companies,
that may hold interests through a direct participant. Upon the issuance of the
global security, DTC will credit the accounts of direct participants with their
respective amounts of preferred securities represented by the global security by
its book-entry system. If you purchase preferred securities within the DTC
system, the purchase must be made by or through a direct participant. You, as
the actual owner of the preferred securities, are the "beneficial owner." Your
beneficial ownership interest will be recorded on the direct or indirect
participant's records, and DTC will have no knowledge of your individual
ownership.
You will not receive written confirmation from DTC of your purchases.
The direct or indirect participant through whom you purchased the preferred
securities should send you written confirmations providing details of your
transactions, as well as periodic statements of your holdings. The participants
are responsible for keeping accurate account of the holdings of their customers
like you.
Transfers of ownership interests in the preferred securities will be
accomplished by entries made on the books of participants acting on your behalf.
The laws of some states may require that specified purchasers of
securities take physical delivery of the securities in definitive form. These
laws may impair the ability to transfer beneficial interests in the global
certificate representing the preferred securities.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants and by direct
participants and indirect participants to you will be governed by arrangements
among them, and any statutory or regulatory requirements that may be in effect
from time to time.
Redemption notices will be sent to DTC. If less than all of the
preferred securities are being redeemed, DTC will reduce each direct
participant's holdings of preferred securities in accordance with its
procedures.
In those cases where a vote by the holders of the preferred securities
is required, neither DTC nor Cede & Co. will itself consent or vote. Under its
usual procedures, DTC would mail an omnibus proxy to the Trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
preferred securities are credited on the record date, which are identified in a
listing attached to the omnibus proxy.
The Trust will make distribution payments on the preferred securities
directly to DTC. DTC's practice is to credit direct participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records, unless DTC has reason to believe that it will not receive payment
on such payment date.
Payments by participants (whether direct participants or indirect
participants) to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name." These payments will be
the responsibility of the participant and not of DTC, the Trust or First Star
Bancorp.
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As the beneficial owner in a global preferred securities certificate,
you will not be entitled to receive physical delivery of preferred securities.
You will not be considered an owner or a holder under the trust agreement.
Instead, DTC will be considered the sole owner or holder of the preferred
securities. Accordingly, you must rely on the procedures of DTC and, if you are
not a direct participant, on the procedures of the indirect participant through
which you own your interest, to exercise any of your rights under the preferred
securities.
DTC may discontinue providing its services as securities depositary
with respect to the preferred securities at any time by giving written notice to
the property trustee, the Delaware trustee and us that it is no longer willing,
or no longer able, to provide its services. In the event that we are not able to
obtain a successor securities depositary within 90 days, we will print and
deliver preferred securities certificates. In addition, we may, at our
discretion, decide to discontinue the book-entry system with respect to the
preferred securities. In that event, we will print and deliver certificates for
the preferred securities to you.
DTC has advised the Trust and us as follows:
o DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve, a
"clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act;
o DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities
transactions between participants through electronic book entry
changes to accounts of its participants, thereby eliminating the
need for physical movement of certificates;
o participants include securities brokers and dealers (such as
Hopper Soliday), banks, trust companies and clearing corporations
and may include certain other organizations;
o certain participants (or their representatives), together with
other entities, own DTC; and
o indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a participant, either
directly or indirectly.
Same-Day Settlement and Payment
Settlement for the preferred securities will be made by Hopper Soliday
in immediately available funds.
Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the preferred
securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the preferred securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as
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to the effect, if any, of settlement in immediately available funds on trading
activity in the preferred securities.
Payment and Paying Agency
Payments in respect of the preferred securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable distribution
dates or, if the preferred securities are not held by DTC, such payments will be
made by check mailed to the holder entitled thereto at such address as appears
on the securities register for the preferred and common securities. The paying
agent will initially be the property trustee and any co-paying agent chosen by
the property trustee and acceptable to the administrators. The paying agent will
be permitted to resign as paying agent upon 30 days' written notice to the
property trustee and the administrators. If the property trustee is no longer
the paying agent, the property trustee will appoint a successor (which must be a
bank or trust company reasonably acceptable to the administrators) to act as
paying agent.
Registrar and Transfer Agent
The property trustee will act as registrar and transfer agent for the
preferred securities.
Registration of transfers of preferred securities will be effected
without charge by or on behalf of the Trust, but only upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer of the preferred securities after the preferred
securities have been called for redemption.
Obligations and Duties of the Property Trustee
The property trustee, other than during the occurrence and continuance
of an event of default, undertakes to perform only such duties as are
specifically set forth in the trust agreement and, after such event of default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the property trustee is under no obligation to exercise any of the
powers vested in it by the trust agreement at your request unless it is offered
reasonable indemnity against the costs, expenses and liabilities that it might
incur.
For information concerning the relationships between the property
trustee and us, see "Description of Junior Subordinated Debentures --
Information Concerning the Debenture Trustee."
Miscellaneous
The administrators and the property trustee are authorized and directed
to conduct the affairs of and to operate the Trust in such a way that:
o the junior subordinated debentures will be treated as our
indebtedness for United States federal income tax purposes, and
o the Trust will not be;
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a) required to register as an "investment company" under the
Investment Company Act; or
b) taxable as a corporation for United States federal income
tax purposes.
To achieve these purposes, the administrators, the property trustee,
and we, as holders of the common securities, are authorized to take any action
that they and we determine to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect your interests and is
not inconsistent with applicable law, the certificate of trust or the trust
agreement.
You will not have preemptive or similar rights.
The Trust may not borrow money, issue debt or mortgage or pledge any of
its assets.
Subject to applicable law (including, without limitation, United States
federal securities laws), we or our affiliates may at any time and from time to
time purchase outstanding preferred securities by tender, in the open market or
by private agreement, and may resell such securities.
Governing Law
The trust agreement will be governed by and construed in accordance
with the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures will be issued under the indenture
between Bankers Trust Company, the debenture trustee, and us. The following
summary of the terms and provisions of the junior subordinated debentures and
the indenture is not complete. You should read the form of the indenture that is
filed as an exhibit to the registration statement of which this prospectus is a
part. Whenever particular defined terms of the indenture (as amended or
supplemented from time to time) are referred to in this prospectus, those
defined terms are incorporated into this prospectus by reference. A copy of the
form of indenture is available from the debenture trustee upon request.
General
The Trust will invest the proceeds of the issuance of the preferred
securities, together with the consideration paid by us for the common
securities, in the junior subordinated debentures issued by us. The junior
subordinated debentures are subordinated, unsecured debt under the indenture and
will bear interest, accruing from ___________ __, 1999, at the annual rate of
______% of the principal amount thereof, payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing ___________
__, 1999, to the person in whose name each junior subordinated debenture is
registered at the close of business on the 15th day of March, June, September or
December (whether or not a business day) next preceding such interest payment
date. It is anticipated that, until the liquidation, (if any), of the Trust,
each junior subordinated debenture will be registered
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in the name of the Trust and held by the property trustee in trust for you and
us, as the holders of the common securities.
The amount of interest payable for any period less than a full interest
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. The amount of
interest payable for any full interest period will be computed by dividing the
annual rate by four. If any date on which interest is payable to the junior
subordinated debentures is not a business day, then payment of the interest
payable on such date will be made on the next business day (without any interest
or other payment in respect of any such delay), or, if the next business day
falls in the next calendar year, such payment will be made on the immediately
preceding business day.
Accrued interest that is not paid on the applicable interest payment
date will bear additional interest on the amount thereof (to the extent
permitted by law) at the annual rate of ______ %, compounded quarterly and
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. The amount of additional
interest payable for any full interest period will be computed by dividing the
annual rate by four.
The term "interest" as used herein includes quarterly interest
payments, interest on quarterly interest payments not paid on the applicable
interest payment date and, if applicable, any additional sums we pay on the
junior subordinated debentures following a Tax Event (as defined under
"Description of Preferred Securities -- Redemption") that may be required so
that distributions payable by the Trust will not be reduced by any additional
taxes, duties or other governmental changes resulting from such Tax Event.
The junior subordinated debentures will mature on _____________, 2029,
subject to our right to shorten the maturity date at any time to any date not
earlier than ___________, 2004, if we have received prior approval of the
Federal Reserve, if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event we elect to shorten the maturity
of the junior subordinated debentures, we will give notice to the registered
holders of the junior subordinated debentures, the debenture trustee and the
Trust at least 90 days before the new maturity date. The property trustee will
give you notice of the shortening of the stated maturity of the junior
subordinated debentures at least 30 but not more than 60 days before the new
maturity date.
The junior subordinated debentures will be unsecured and will rank
junior and be subordinate in right of payment to all of our senior indebtedness,
including the outstanding subordinated debentures. The junior subordinated
debentures will not be subject to a sinking fund. The indenture does not limit
our ability to incur or issue other secured or unsecured debt, including senior
indebtedness, whether under the junior subordinated debentures or any existing
or other indenture that we may enter into in the future or otherwise. See "--
Subordination."
Option to Extend Interest Payment Period
So long as we are not in default, we may defer the payment of interest
on the junior subordinated debentures at any time for one or more "extension
periods." No extension period may exceed 20 consecutive quarters. No extension
period may extend beyond the maturity date of the
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junior subordinated debentures. During any extension period we have the right to
make partial payments of interest on any interest payment date. At the end of an
extension period, we will pay all interest then accrued and unpaid, together
with interest on that amount, compounded quarterly, at the annual rate of
______%. During an extension period, interest will continue to accrue and
holders of junior subordinated debentures (or holders of preferred securities)
will be required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
During any extension period, we may not:
o make any payment of principal of or interest or premium, if
any, on or repay, repurchase or redeem any of our debt
securities that rank equally in all respects with or junior in
interest to the junior subordinated debentures, or
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect
to, any of our capital stock, except that we may:
(a) repurchase, redeem or make other acquisitions of shares
of our capital stock in connection with any employment
contract, benefit plan or other similar arrangement
with or for the benefit of any one or more employees,
officers directors or consultants, in connection with a
dividend reinvestment or stockholder stock purchase
plan or in connection with the issuance of our capital
stock (or securities convertible into or exercisable
for such capital stock) as consideration in an
acquisition transaction entered into prior to the
applicable extension period;
(b) take any necessary action in connection with any
reclassification, exchange or conversion of any class
or series of our capital stock (or any capital stock of
a subsidiary of ours) or of any class or series of our
indebtedness for any class or series of our capital
stock;
(c) purchase fractional interests in shares of our capital
stock pursuant to the conversion or exchange provisions
of such capital stock or the security being converted
or exchanged;
(d) declare a dividend in connection with any stockholders'
rights plan, or issue rights, stock or other property
under any stockholders' rights plan, or redeem or
repurchase rights pursuant thereto; and
(e) declare a dividend in the form of stock warrants,
options or other rights where the dividend stock or the
stock issuable upon exercise of such warrants, options
or other rights is the same stock as that on which the
dividend is being paid or ranks equally with or junior
to such stock.
Before the termination of any extension period, we may further defer
the payment of interest, provided that no extension period may exceed 20
consecutive quarters or extend beyond the stated
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maturity of the junior subordinated debentures. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period subject to the above conditions. No interest will be due
and payable during an extension period, except at its end. As long as the junior
subordinated debentures are held by the Trust, we will give the property trustee
notice of an extension period at least one business day prior to the earlier of
(1) the date a distribution on the preferred securities would have been payable
but for our election to begin an extension period and (2) the date the property
trustee is required to give you notice of the record date or the date such
distribution is payable, but in any event not less than one business day prior
to such record date. The property trustee will give you notice of our election
to begin a new extension period. There is no limitation on the number of times
that we may elect to begin an extension period.
Redemption
We have the right, after receipt of prior approval of the Federal
Reserve, if approval is then required, to redeem the junior subordinated
debentures prior to maturity at our option:
o on or after _________________, 2004, in whole at any time or in
part from time to time, or
o in whole, but not in part, at any time within 90 days following
the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as
defined under "Description of Preferred Securities --
Redemption").
In either case, the redemption price will equal 100% of the principal
amount of the junior subordinated debentures to be redeemed, plus accrued and
unpaid interest, to the date of redemption (including any additional interest on
any additional sums we pay following a Tax Event as described below under
"--Additional Sums"). The proceeds of any redemption will be used by the Trust
to redeem a proportionate amount of the preferred securities.
Additional Sums
We have covenanted in the indenture that, if and for so long as the
Trust is the holder of all junior subordinated debentures and the Trust is
required to pay any additional taxes, duties or other governmental charges as a
result of a Tax Event, we will pay as additional sums on the junior subordinated
debentures such amounts as may be required so that the distributions payable by
the Trust will not be reduced as a result of any such additional taxes, duties
or other governmental charges. See "Description of Preferred Securities --
Redemption."
Registration, Denomination and Transfer
The junior subordinated debentures will initially be registered in the
name of the Trust. If the junior subordinated debentures are distributed to you
in connection with the involuntary or voluntary dissolution or liquidation of
the Trust, they will be issued in the form of one or more global certificates.
In that event, we expect that the depositary arrangements for and payment on the
junior
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subordinated debentures will be substantially identical to those in effect for
the preferred securities. See "Description of Preferred Securities -- Book
Entry, Delivery and Form."
If DTC is at any time unwilling or unable to continue as depositary and
we do not appoint a successor depositary within 90 days of receipt of notice
from DTC to such effect, we will cause the junior subordinated debentures to be
issued in definitive form to you. In that event, principal and interest will be
payable, the transfer of the junior subordinated debentures will be registerable
without service charge upon payment of any taxes and other governmental charges,
and the junior subordinated debentures will be exchangeable for junior
subordinated debentures of other authorized denominations of a like aggregate
principal amount, at the corporate trust office of the debenture trustee in New
York, New York, or at the offices of any paying agent or transfer agent we
appoint. We may also, at our option, make payment of interest by check mailed to
the address of the persons entitled to payment under the junior subordinated
debentures. A holder of $1 million or more in aggregate principal amount of
junior subordinated debentures, however, may receive payments of interest (other
than interest payable at the stated maturity) by wire transfer of immediately
available funds upon written request to the debenture trustee not later than 15
calendar days prior to the date on which the interest is payable.
In the event of any redemption, neither we, nor the debenture trustee,
will be required to:
o issue, register the transfer of or exchange junior
subordinated debentures during a period beginning at the
opening of business 15 days before the day of selection for
redemption of the junior subordinated debentures to be
redeemed and ending at the close of business on the day of
mailing of the relevant notice of redemption; or
o transfer or exchange any junior subordinated debentures so
selected for redemption, except, in the case of any junior
subordinated debentures being redeemed in part, any portion of
the debenture not to be redeemed.
Any monies deposited with the debenture trustee or any paying agent, or
then held by us in trust, for the payment of the principal of (and premium, if
any) or interest on any junior subordinated debenture and remaining unclaimed
for two years after this principal (and premium, if any) or interest has become
due and payable shall, at our request, be repaid to us and the holder of such
junior subordinated debenture shall thereafter look, as a general unsecured
creditor, only to us for payment thereof.
Restrictions on Certain Payments; Certain Covenants of the Company
We have covenanted that if at any time:
o we have actual knowledge of any event of default under the junior
subordinated debentures that we have not taken reasonable steps to cure;
o we are in default with respect to our payment of any obligations under the
guarantee, if the junior subordinated debentures are then held by the
Trust, or
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o we have given notice of our election of an extension period and have not
rescinded such notice, or the extension period, or any extension thereof,
is continuing,
then we will not:
o make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any of our debt securities that rank
equally in all respects with, or junior in interest to, the junior
subordinated debentures; or
o declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect
to, any of our capital stock, except that we may:
(a) repurchase, redeem or make other acquisitions of shares
of our capital stock in connection with any employment
contract, benefit plan or other similar arrangement
with or for the benefit of any one or more employees,
officers, directors or consultants, in connection with
a dividend reinvestment or stockholder stock purchase
plan or in connection with the issuance of our capital
stock (or securities convertible into or exercisable
for such capital stock) as consideration in an
acquisition transaction entered into prior to the
applicable extension period or other event referred to
below;
(b) take any necessary action in connection with any
reclassification, exchange or conversion of any class
or series of our capital stock (or any capital stock
of any subsidiary of ours) for any class or series of
our capital stock or of any class or series of our
indebtedness for any class or series of our capital
stock;
(c) purchase fractional interests in shares of our
capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security
being converted or exchanged;
(d) declare a dividend in connection with any
stockholders' rights plan, or issue rights, stock or
other property under any stockholders' rights plan,
or redeem or repurchase rights pursuant thereto; or
(e) declare a dividend in the form of stock, warrants,
options or other rights where the dividend stock or
the stock issuable upon exercise of such warrants,
options or other rights is the same stock as that on
which the dividend is being paid or ranks equally
with or junior to such stock.
We have covenanted in the indenture:
o to continue to hold, directly or indirectly, 100% of the common
securities, provided that certain successors may succeed to our
ownership of the common securities;
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o as holder of the common securities, not to voluntarily terminate,
windup or liquidate the Trust, other than:
(a) in connection with a distribution of junior subordinated
debentures to the holders of the preferred securities in
liquidation of the Trust; or
(b) in connection with certain mergers, consolidations or
amalgamations permitted by the trust agreement; and
o to use reasonable efforts, consistent with the terms and
provisions of the trust agreement, to cause the Trust to continue
not to be taxable as a corporation for United States federal
income tax purposes.
Modification of Indenture
From time to time, we and the debenture trustee may, without the
consent of any of the holders of the outstanding junior subordinated debentures,
amend, waive or supplement the provisions of the indenture to:
o evidence our succession to another corporation or association and
the assumption by that corporation or association of our
obligations under the junior subordinated debentures;
o add further covenants, restrictions or conditions for the
protection of holders of the junior subordinated debentures;
o cure ambiguities or correct the junior subordinated debentures in
the case of defects or inconsistencies in the provisions thereof,
so long as any cure or correction does not adversely affect the
interest of the holders of the junior subordinated debentures in
any material respect;
o change the terms of the junior subordinated debentures to
facilitate the issuance of the junior subordinated debentures in
certificated or other definitive form;
o evidence or provide for the appointment of a successor debenture
trustee; or
o qualify, or maintain the qualification of, the indenture under
the Trust Indenture Act.
We and the debenture trustee, with the consent of the holders of not
less than a majority in principal amount of the junior subordinated debentures,
may modify the indenture in a manner affecting the rights of the holders of the
junior subordinated debentures. However, the consent of all holders of junior
subordinated debenture is required to:
o change the stated maturity of, or any installment of interest on,
the junior subordinated debentures, or reduce the principal
amount thereof, the rate of interest thereon or any premium
payable upon the redemption thereof, or change the place of
payment where,
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or the currency in which, any such amount is payable, or impair
the right to institute suit for the enforcement of any payment on
junior subordinated debentures; or
o reduce the percentage of principal amount of junior subordinated
debentures which would be required to consent to any modification
of, or waiver of rights under, the indenture.
Furthermore, so long as any of the preferred securities remain
outstanding, no modification may be made that adversely affects you in any
material respect, and no termination of the indenture may occur, and no waiver
of any event of default or compliance with any covenant under the indenture may
be effective, without the prior consent of the holders of at least a majority of
the aggregate liquidation amount of the outstanding preferred securities unless
and until the principal of (and premium, if any, on) the junior subordinated
debentures and all accrued and unpaid interest thereon have been paid in full
and certain other conditions are satisfied.
Debenture Events of Default
Any one or more of the following described events with respect to the
junior subordinated debentures that has occurred and is continuing is an "event
of default" with respect to the junior subordinated debentures:
o failure to pay any interest on the junior subordinated debentures
when due and continuance of this default for a period of 30 days
(subject to the deferral of any due date in the case of an
extension period); or
o failure to pay any principal of or premium, if any, on the junior
subordinated debentures when due; or
o failure to observe or perform certain other covenants contained
in the indenture for 90 days after written notice of such failure
to us from the debenture trustee or the holders of at least 25%
in aggregate outstanding principal amount of the outstanding
junior subordinated debentures; or
o the occurrence of the appointment of a receiver or other similar
official in any liquidation, insolvency or similar proceeding
with respect to us or all or substantially all of our property;
or a court or other governmental agency shall enter a decree or
order appointing a receiver or similar official and such decree
or order shall remain unstayed and undischarged for a period of
60 days.
As described in "Description of Preferred Securities -- Events of
Default; Notice," the occurrence of an event of default in respect of the junior
subordinated debentures will also constitute an event of default in respect of
the preferred securities.
The holders of at least a majority in aggregate principal amount of
outstanding junior subordinated debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
debenture trustee. The debenture trustee or the holders of
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not less than 25% in aggregate principal amount of outstanding junior
subordinated debentures may declare the principal due and payable immediately
upon a event of default, and, should the debenture trustee or such holders of
junior subordinated debentures fail to make such declaration, the holders of at
least 25% in aggregate liquidation amount of the outstanding preferred
securities shall have such right. The holders of a majority in aggregate
principal amount of outstanding junior subordinated debentures may annul such
declaration and waive the default if all defaults (other than the non-payment of
the principal of junior subordinated debentures which has become due solely by
such acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the debenture trustee. Should the holders of junior
subordinated debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate liquidation amount of the outstanding
preferred securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding junior subordinated debentures affected thereby may, on behalf of
the holders of all the junior subordinated debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless this default has been cured and a sum sufficient to pay all matured
installments of interest and principal (and premium on, if any) due otherwise
than by acceleration has been deposited with the debenture trustee) or a default
in respect of a covenant or provision which under the indenture cannot be
modified or amended without the consent of the holder of each outstanding junior
subordinated debenture affected by the default. See "-- Modification of Junior
Subordinated Indenture." We are required to give an annual certificate to the
debenture trustee declaring whether or not we are in compliance with all the
conditions and covenants applicable to us under the indenture.
If an event of default occurs and is continuing, the property trustee
will have the right to declare the principal of and the interest on the junior
subordinated debentures, and any other amounts payable under the indenture, to
be due and payable and to enforce its other rights as a creditor with respect to
the junior subordinated debentures.
Enforcement Rights by Holders of Preferred Securities
If an event of default on the junior subordinated debentures has
occurred and is continuing because of our failure to pay interest or principal
on the junior subordinated debentures when due, you may institute a legal action
against us for enforcement of payment to you of the principal of or interest on
the junior subordinated debentures in an amount equal to the aggregate
liquidation amount of the preferred securities you hold. We may not amend the
indenture to remove your right to bring this direct legal action without your
prior written consent. We will have the right under the indenture to set-off any
payment we make to you in connection with such a legal action.
You will not be able to exercise directly any remedies available to the
holders of the junior subordinated debentures except as described in the
preceding paragraph. See "Description of Preferred Securities -- Events of
Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
We may not consolidate with or merge into any other entity or convey,
transfer or lease our properties and assets substantially as an entirety to any
entity, and no entity may consolidate with or
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merge into us or convey, transfer or lease its properties and assets
substantially as an entirety to us, unless:
o the successor entity is organized under the laws of the United
States or any state or the District of Columbia, and such
successor entity expressly assumes our obligations in respect of
the junior subordinated debentures; provided, however, that
nothing in the indenture shall be deemed to restrict or prohibit,
and no supplemental indenture shall be required in the case of
the merger of a bank (as defined below) with and into a bank or
us, the consolidation of banks into a bank or us, or the sale or
other disposition of all or substantially all of the assets of
any bank to another bank or us, if, in any such case in which we
are not the surviving, resulting or acquiring entity, we would
own, directly or indirectly, at least 80% of the voting
securities of the bank (and of any other bank any voting
securities of which are owned, directly indirectly, by such bank)
surviving such merger, resulting from such consolidation or
acquiring such assets;
o immediately after giving effect thereto, no event of default with
respect to the junior subordinated debentures, and no event
which, after notice or lapse of time or both, would constitute an
event of default with respect to the junior subordinated
debentures, has occurred and is continuing; and
o certain other conditions as prescribed in the indenture are
satisfied.
For purposes of the first bullet point above, the term "bank" means
each of:
o any banking subsidiary of ours the consolidated assets of which
constitute 20% or more of our consolidated assets and our
consolidated subsidiaries;
o any other banking subsidiary designated as a bank pursuant to a
board resolution and set forth in an officers' certificate
delivered to the trustee; and
o any subsidiary of ours that owns, directly or indirectly, any
voting securities, or options, warrants or rights to subscribe
for or purchase voting securities, of any bank under the first
and second bullet points above and in the case of all three
bullet points their respective successors (whether by
consolidation, merger, conversion, transfer of substantially all
their assets and business or otherwise) so long as any such
successor is a banking subsidiary (in the case of the first and
second bullet point) or a subsidiary (in the case of the third
bullet point) of ours.
The provisions of the indenture do not give holders of the junior
subordinated debentures protection if we are involved in a highly leveraged or
other transaction that may adversely affect holders of the junior subordinated
debentures.
Satisfaction and Discharge
The indenture will cease to be of further effect and we will deemed to
have satisfied and discharged the indenture when:
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o all junior subordinated debentures not previously delivered to
the debenture trustee for cancellation (1) have become due and
payable, or (2) will become due and payable at the stated
maturity within one year;
o we deposit or cause to be deposited with the debenture trustee
funds, in trust, for the purpose and in an amount sufficient to
pay and discharge the entire indebtedness on the junior
subordinated debentures not previously delivered to the debenture
trustee for cancellation, for the principal (and premium, if any)
and interest to the date of the deposit or to the stated maturity
or redemption date; and
o we have paid all other sums payable by us under the indenture and
we have delivered applicable certificates and opinions affirming
our compliance with all of our obligations.
Subordination
The junior subordinated debentures will be subordinate and junior in
right of payment, to the extent set forth in the indenture, to all of our senior
indebtedness (as defined below). We may not make payment of principal, including
redemption payments, or interest on the junior subordinated debentures if:
o any amount due on our senior indebtedness is not paid when due
and the default has not been cured or waived; or
o the maturity of any of our senior indebtedness has been
accelerated because of a default and the acceleration has not
been rescinded.
As used herein, "senior indebtedness" means, whether recourse is to all
or a portion of our assets and whether or not contingent:
o every obligation of ours for money borrowed;
o every obligation of ours evidenced by bonds, debentures, notes or
other similar instrument, including obligations incurred in
connection with the acquisition of property, assets or
businesses;
o every reimbursement obligation of ours with respect to letters of
credit, bankers' acceptance or similar facilities issued for our
account;
o every obligation of ours issued or assumed as the deferred
purchase price of property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary
course of business);
o every capital lease obligation of ours;
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o every obligation of ours for claims (as defined in Section 101(4)
of the United States Bankruptcy Code of 1978, as amended) in
respect of derivative products such as interest foreign exchange
rate contracts, commodity contracts and similar arrangements; and
o every obligation of the type referred to above of another person
and all dividends of another person the payment of which, in
either case, we have guaranteed or are responsible or liable,
directly or indirectly, as obligor or otherwise.
However, senior indebtedness shall not include any of the following:
o any obligations which, by their terms, are expressly stated to
rank equally in right of payment with, to not be superior in
right of payment to, the junior subordinated debentures;
o any of our senior indebtedness which when incurred and without
respect to any election under Section 1111(b) of the United
States Bankruptcy Code of 1978, as amended, was without recourse
to us;
o any indebtedness of ours to any of our subsidiaries;
o indebtedness to executive officers or directors, or
o any indebtedness in respect of debt securities issued to any
trust, or a trustee of such trust, partnership or other entity
affiliated with us that is a financing entity of ours in
connection with the issuance by such financing entity of
securities that are similar to the preferred securities.
As of June 30, 1999, the senior indebtedness was approximately $151.7
million, excluding $190 million of deposits. All senior indebtedness (including
any interest thereon accruing after the commencement of any such proceedings)
must first be paid in full before any payment or distribution, whether in cash,
securities or other property, can be made on the junior subordinated debentures
in the event of:
o certain events of bankruptcy, dissolution or liquidation of us or
another holder of the common securities;
o any proceeding for our liquidation, dissolution or other winding
up, voluntary or involuntary, whether or not involving insolvency
or bankrupt proceedings;
o any assignment by us for the benefit of creditors; or
o any other marshaling of our assets.
In that event, any payment or distribution on account of the junior
subordinated debentures, whether in cash, securities or other property, that
would otherwise (but for the subordination
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provisions) be payable or deliverable in respect of the junior subordinated
debentures will be paid directly to the holders of senior indebtedness in
accordance with the priorities then existing until all senior indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) has been paid in full.
In the event of any proceeding described above, after payment in full
of all sums owed on our senior indebtedness, the holders of junior subordinated
debentures, together with the holders of our obligations that rank equal with
the junior subordinated debentures, will be entitled to be paid from our
remaining assets. This payment will be made before any payment or other
distribution, whether in cash, property or otherwise, will be made on account of
any capital stock or obligations ranking junior to the junior subordinated
debentures and such other obligations. If payment or distribution on account of
the junior subordinated debentures of any character or security, whether in
cash, securities or other property, is received by any holder of any junior
subordinated debentures in contravention of the procedures described above, such
payment or distribution or security will be received in trust for the benefit
of, and must be paid over or delivered and transferred to, the holders of our
senior indebtedness to the extent necessary to pay all such senior indebtedness
in full.
The subordination of the junior subordinated debentures will not
prevent the occurrence of any event of default on the junior subordinated
debentures.
The indenture places no limitation on the amount of additional senior
indebtedness that we may incur. We expect from time to time to incur additional
senior indebtedness.
Information Concerning the Debenture Trustee
The debenture trustee, outside of the occurrence and continuation of a
default in the performance of our obligations under the junior subordinated
debentures, is under no obligation to exercise any of the powers vested in it at
the request of any holder of junior subordinated debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that it might incur. The debenture trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if the debenture trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
Bankers Trust Company, the debenture trustee, may serve from time to
time as trustee under other indentures or trust agreements with us or our
subsidiaries relating to other issues of our securities. In addition, we as well
as certain of our affiliates may have other banking relationships with Bankers
Trust Company and its affiliates.
Governing Law
The indenture and the junior subordinated debentures will be governed
by and construed in accordance with the laws of the State of New York.
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DESCRIPTION OF GUARANTEE
We will execute and deliver the guarantee in connection with the
issuance of preferred securities by the Trust for your benefit. Bankers Trust
Company will act as guarantee trustee under the guarantee. The following summary
of certain provisions of the guarantee is not complete. You should read the form
of the guarantee, which is filed as an exhibit to the registration statement of
which this prospectus is a part. A copy of the form of guarantee is available
upon request from the guarantee trustee.
General
We will irrevocably agree to pay in full on a subordinated basis, to
the extent set forth in the guarantee, the guarantee payments, as described
below, to you, as and when due, regardless of any defense, right of set-off or
counterclaim that the Trust may have or assert other than the defense of
payment. The following payments with respect to the preferred securities, to the
extent not paid by or on behalf of the Trust, will be subject to the guarantee:
o any accrued and unpaid distributions required to be paid on
such preferred securities, to the extent that the Trust has
funds on hand available therefor at such time;
o the redemption price with respect to any preferred securities
called for redemption, to the extent that the Trust has funds
on hand available for its payment at such time; and
o upon a voluntary or involuntary dissolution, termination,
winding up or liquidation of the Trust (unless the junior
subordinated debentures are distributed to you), the lessor
of:
(a) the aggregate of the liquidation amount and all
accumulated and unpaid distributions to the date of
payment, to the extent that the Trust has funds on
hand available for their payment; and
(b) the amount of assets of the Trust remaining available
for distribution to you on liquidation of the Trust.
Our obligation to make a guarantee payment may be satisfied by our
direct payment to you or by causing the Trust to pay these amounts to you.
The guarantee will be an irrevocable guarantee of payment on a
subordinated basis of the Trust's obligations under the preferred securities,
but will apply only to the extent that the Trust has funds sufficient to make
such payments, and is not a guarantee of collection.
If we do not make payments on the junior subordinated debentures held
by the Trust, the Trust will not be able to pay any amounts payable in respect
of the preferred securities and will not have funds legally available for these
payments. The guarantee will rank subordinate and junior in right of payment to
all of our senior indebtedness. See " -- Status of the Guarantee." The guarantee
does not
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limit our ability to incur or issue other secured or unsecured debt, including
senior indebtedness, whether under the indenture or any other indenture that we
may enter into in the future or otherwise.
Status of the Guarantee
The guarantee will constitute our unsecured obligation and will rank
subordinate and junior in right of payment to all of our senior indebtedness in
the same manner as the junior subordinated debentures.
The guarantee will constitute a guarantee of payment and not of
collection. This means that the guarantee trustee may institute a legal
proceeding directly against us as the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity. The guarantee will not be discharged except by payment of the
guarantee payments in full to the extent not paid by the Trust or distribution
of the junior subordinated debentures to the holders of the preferred
securities.
Amendments and Assignment
Except for changes which do not materially adversely affect your rights
(in which case no consent will be required), the guarantee may not be amended
without the prior approval of the holders of a majority of the aggregate
liquidation amount of the outstanding preferred securities. The manner of
obtaining any such approval is set forth under "Description of Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the guarantee shall bind our successors, assigns,
receivers, trustees and representatives and shall inure to your benefit.
Events of Default
An event of default under the guarantee will occur if we fail to
perform any of our payment or other obligations under the guarantee, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
liquidation amount of the outstanding preferred securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee in respect of the guarantee or to direct the
exercise of any trust or power conferred upon the guarantee trustee under the
guarantee.
You may institute a legal proceeding directly against us to enforce
your rights under the guarantee without first instituting a legal proceeding
against the Trust, the guarantee trustee or any other person or entity.
We are required, as guarantor, to give an annual certificate to the
guarantee trustee declaring whether or not we are in compliance with all the
conditions and covenants applicable to us under the guarantee.
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Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance
of a default by us in performance of the guarantee, undertakes to perform only
such duties as are specifically set forth in the guarantee and, after the
occurrence of an event of default with respect to the guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the guarantee
trustee is under no obligation to exercise any of the powers vested in it at
your request, unless it is offered reasonable indemnity by such holder against
the costs, expenses and liabilities that it might incur. For information
concerning our relationship with Bankers Trust Company, as guarantee trustee,
see "Description of Junior Subordinated Debentures -- Information Concerning the
Debenture Trustee.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the preferred securities, upon full
payment of the amounts payable with respect to the preferred securities upon
liquidation of the Trust, or upon distribution of junior subordinated debentures
to you and the other holders of the preferred securities in exchange for all of
the preferred securities. The guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time you must restore payment of any
sums paid to you under the preferred securities or the guarantee.
Governing Law
The guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES, AND THE GUARANTEE
Full and Unconditional Guarantee
We have irrevocably guaranteed, on a subordinate basis all of the
Trust's obligations under the preferred securities to the extent set forth under
"Description of Guarantee." Taken together, our obligations under the junior
subordinated debentures, the indenture, the trust agreement and the guarantee
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the preferred securities. No
single document standing alone or operating in conjunction with fewer than all
the other documents constitutes the guarantee. Only the combined operation of
these documents has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations in respect of the preferred
securities.
If and to the extent that we do not make payments on the junior
subordinated debentures, the Trust will not have sufficient funds to pay
distributions or other amounts due on the preferred securities. The guarantee
does not cover payment of amounts payable with respect to the preferred
securities when the Trust does not have sufficient funds to pay such amounts. In
that event, your remedy is to institute a legal proceeding directly against us
for enforcement of our payment obligations
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under the junior subordinated debentures having a principal amount equal to the
liquidation amount of the preferred securities you hold. See "Description of
Junior Subordinated Debenture -- Enforcement Rights by Holders of Preferred
Securities."
Our obligations under the junior subordinated debentures and the
guarantee are subordinate and junior in right of payment to all senior
indebtedness.
Sufficiency of Payments
As long as we make the payments on the junior subordinated debentures
when they are due, the Trust should have funds sufficient to cover distributions
and other payments distributable on the preferred securities, primarily because:
o the aggregate principal amount of the junior subordinated
debentures will be equal to the sum of the aggregate stated
liquidation amount of the preferred securities and common
securities;
o the interest rate and interest and other payment dates on the
junior subordinated debentures will match the distribution rate,
distribution dates and other payment dates for the preferred
securities;
o we will pay any and all costs, expenses and liabilities of the
Trust except the Trust's obligations to you and the holders of
the common securities; and
o the trust agreement further provides that the Trust will not
engage in any activity that is not consistent with the limited
purposes of the Trust.
Notwithstanding anything to the contrary in the indenture, we have the
right to set-off any payment we are otherwise required to make thereunder
against and to the extent we have previously made, or are concurrently on the
date of such payment making, a payment under the guarantee.
Enforcement Rights of Holders of Preferred Securities
You may institute a legal proceeding directly against us to enforce
your rights under the guarantee without first instituting a legal proceeding
against the guarantee trustee, the Trust or any other person or entity. See
"Description of Guarantee."
A default or event of default under any of our senior indebtedness
would not constitute a default or event of default in respect of the preferred
securities. However, in the event of payment defaults under, or acceleration of
our senior indebtedness, the subordination provisions of the indenture provide
that no payments may be made in respect of the junior subordinated debentures
until such senior indebtedness has been paid in full or any payment default on
senior indebtedness has been cured or waived. See "Description of Junior
Subordinated Debentures -- Subordination."
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Limited Purpose of Trust
The preferred securities represent preferred undivided beneficial
interests in the assets of the Trust, and the Trust exists for the sole purpose
of issuing the preferred securities and common securities and investing the
proceeds from their issuance in the junior subordinated debentures. A principal
difference between your rights as a holder of preferred securities and a holder
of a junior subordinated debenture is that a holder of a junior subordinated
debenture is entitled to receive from us payments on junior subordinated
debentures held, while you are entitled to receive distributions or other
amounts distributable with respect to the preferred securities from the Trust
(or from us under the Guarantee) only if and to the extent the Trust has funds
available for the payment of such distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Trust, other than
any such dissolution involving the distribution of the junior subordinated
debentures, after satisfaction of liabilities to creditors of the Trust as
required by applicable law, you will be entitled to receive, out of assets held
by the Trust, the liquidation distribution in cash. See "Description of
Preferred Securities -- Liquidation Distribution Upon Dissolution." If we are
voluntarily or involuntarily liquidated or declare bankruptcy, the Trust, as
registered holder of the junior subordinated debentures, will be our
subordinated creditor, subordinated and junior in right of payment to all our
senior indebtedness as set forth in the indenture, but entitled to receive
payment in full of all amounts payable with respect to the junior subordinated
debentures before any of our stockholders receive payments or distributions.
Since we are the guarantor under the guarantee and have agreed under the
indenture to pay all costs, expenses and liabilities of the Trust (other than
the Trust's obligations to you and the holders of the common securities), your
position as a holder of the preferred securities and the position of a holder of
such junior subordinated debentures relative to other creditors and to our
stockholders in the event of our liquidation or bankruptcy are expected to be
substantially the same.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The preferred securities and payments on the preferred securities
generally are subject to taxation. Therefore, you should consider the tax
consequences of owning and receiving payments on the preferred securities as
they specifically relate to you before acquiring them.
We have engaged Malizia Spidi & Fisch, PC, Washington, D.C., as special
tax counsel ("Tax Counsel") to review the following discussion. In the opinion
of Tax Counsel, the following discussion summarizes the principal aspects of the
U.S. federal income tax treatment of beneficial owners ("Owners") of preferred
securities.
The following discussion is general and may not apply to your
particular circumstances for any of the following (or other) reasons:
o This summary is based on federal tax laws in effect as of the
date of this prospectus which are all subject to change at any
time. Changes to any of these laws may be
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applied retroactively which may cause the tax consequences to
become substantially different from the consequences described
below.
o This summary discusses only preferred securities you acquire at
original issuance at the original offering price and hold as
capital assets (within the meaning of federal tax law). It does
not discuss all of the tax consequences that may be relevant to
Owners who are subject to special rules, such as banks, thrift
institutions, real estate investment trusts, regulated investment
companies, insurance companies, brokers and dealers in securities
or currencies, certain securities traders, tax-exempt
organizations and certain other financial institutions. This
discussion also does not discuss tax consequences that may be
relevant to an Owner in light of the Owner's particular
circumstances, such as an Owner holding a preferred security as a
position in a straddle, hedging, conversion or other integrated
investment.
o This summary does not address:
(a) The income tax consequences to stockholders in, partners of,
or beneficiaries of, a holder of preferred securities;
(b) the United States alternative minimum tax consequences of
purchasing, owning and disposing of preferred securities; or
(c) any state, local or foreign tax consequences of purchasing,
owning, holding or disposing of preferred securities.
The authorities on which this summary is based are subject to various
interpretations, and the opinions of Tax Counsel are not binding on the Internal
Revenue Service (the "IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the IRS with
respect to the transaction described herein. Accordingly, we cannot assure you
that the IRS will not challenge the opinion expressed herein or that a court
would not rule in favor of the IRS.
You must consult your own tax advisors regarding the tax consequences
of purchasing, owning, holding, or disposing of the preferred securities because
the following discussion may not apply to you.
U.S. Holders
In General. For purposes of the following discussion, a "U.S. Holder"
means:
o a citizen or individual resident of the United States;
o a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof;
o an estate the income of which is includible in its gross income
for U.S. federal income tax purposes without regard to its
source; or
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o a trust if a court within the United States is able to
exercise primary supervision over its administration and at
least one United States person has the authority to control
all substantial decisions of the trust.
Characterization of the Trust. Under current law and assuming
compliance with the terms of the trust agreement, the Trust will be
characterized for United States federal income tax purposes as a grantor trust.
Accordingly, for United States federal income tax purposes, if you, as a U.S.
Holder, purchase a preferred security you will be considered the owner of an
undivided interest in the junior subordinated debentures owned by the Trust, and
you will be required to include all income or gain recognized for United States
federal income tax purposes with respect to your share of the junior
subordinated debentures on your income tax return.
Characterization of the Junior Subordinated Debentures. We intend to
take the position that, under current law, the junior subordinated debentures
are our debt for United States federal income tax purposes. We, along with the
Trust and you (by acceptance of a beneficial interest in a preferred security)
agree to treat the junior subordinated debentures as debt of First Star Bancorp
and the preferred securities as evidence of a beneficial ownership interest in
the Trust. We cannot assure you, however, that our position will not be
challenged by the IRS or, if challenged, that a challenge will not be
successful. Tax Counsel has not given us an opinion as to whether the junior
subordinated debentures will be classified as our debt for U.S. federal income
tax purposes. The remainder of this discussion assumes that the junior
subordinated debentures will be classified as our debt for United States federal
income tax purposes.
Interest Income and Original Issue Discount. Under the terms of the
junior subordinated debentures, we have the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 20 consecutive quarterly periods, but not beyond the maturity of
the junior subordinated debentures. Treasury Regulations provide that debt
instruments like the junior subordinated debentures will not be considered
issued with original issue discount ("OID") even if their issuer can defer
payments of interest if the likelihood of any deferral is "remote."
We have concluded, and this discussion assumes, that, as of the date of
this prospectus, the likelihood of our deferring payments of interest is
"remote" within the meaning of the applicable Treasury regulations. Our
conclusion is based in part on the fact that exercising that option would
prevent us from declaring dividends on our preferred and common stock and would
prevent us from making any payments with respect to debt securities that rank
equally with or junior to the junior subordinated debentures. Therefore, the
junior subordinated debentures should not be treated as issued with OID by
reason of our deferral option. Rather, you will be taxed on stated interest on
the junior subordinated debentures when it is paid or accrued in accordance with
your method of accounting for income tax purposes. You should note, however,
that no published rulings or any other published authorities of the IRS have
addressed this issue and that Tax Counsel has not given us an opinion as to
whether the junior subordinated debentures will be treated as issued with OID.
Accordingly, it is possible that the IRS could take a position contrary to our
interpretation described herein.
If we exercise our option to defer payments of interest, the junior
subordinated debentures would be treated as redeemed and reissued for OID
purposes. The sum of the remaining interest
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payments (and any insignificant OID) on the junior subordinated debentures would
thereafter be treated as OID. The OID would accrue, and be includible in your
taxable income, on an economic accrual basis (regardless of your method of
accounting for income tax purposes) over the remaining term of the junior
subordinated debentures (including any period of interest deferral), without
regard to the timing of payments under the junior subordinated debentures.
Subsequent distributions of interest on the junior subordinated debentures
generally would not be taxable. The amount of OID that would accrue in any
period would generally equal the amount of interest that accrued on the junior
subordinated debentures in that period at the stated interest rate.
Consequently, during any period of interest deferral, you will include OID in
gross income in advance of the receipt of cash, and if you dispose of a
preferred security prior to the record date for payment of distributions on the
junior subordinated debentures following that period, you will be subject to
income tax on OID accrued through the date of disposition (and not previously
included in income), but you will not receive cash from the Trust with respect
to the OID.
Characterization of Income. Because the income underlying the preferred
securities will not be characterized as dividends for income tax purposes, if
you are a corporate holder of the preferred securities you will not be entitled
to a dividends-received deduction for any income you recognize with respect to
the preferred securities.
Market Discount and Bond Premium. Under certain circumstances, you may
be considered to have acquired your undivided interests in the junior
subordinated debentures with market discount or bond premium (as each phrase is
defined for United States federal income tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
the Trust. Under certain circumstances described above (See "Description of the
Preferred Securities -- Liquidation Distribution Upon Dissolution"), the Trust
may distribute the junior subordinated debentures to you in exchange for your
preferred securities and in liquidation of the Trust. Except as discussed below,
such a distribution would not be a taxable event for United States federal
income tax purposes, and you would have an aggregate adjusted basis in the
junior subordinated debentures you receive for United States federal income tax
purposes equal to your aggregate adjusted basis in your preferred securities.
For United States federal income tax purposes, your holding period in the junior
subordinated debentures you receive in such a liquidation of the Trust would
include the period during which you held the preferred securities. If, however,
the relevant event is a Tax Event that results in the Trust being treated as an
association taxable as a corporation, the distribution would likely constitute a
taxable event to you for United States federal income tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), we may redeem junior subordinated debentures for cash
and distribute the proceeds of such redemption to you in redemption of your
preferred securities. Such a redemption would be taxable for United States
federal income tax purposes, and you would recognize gain or loss as if you had
sold the preferred securities for cash. See "-- Sales of Preferred Securities"
below.
Sales of Preferred Securities. If you sell preferred securities, you
will generally recognize gain or loss equal to the difference between your
adjusted basis in the preferred securities and the amount realized on the sale
of such preferred securities. Your adjusted basis in the preferred securities
generally will be the initial purchase price, increased by OID previously
included (or currently
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includible) in your gross income to the date of disposition, and decreased by
payments received on the preferred securities (other than any interest received
with respect to the period prior to the effective date we first exercise our
option to defer payments of interest). Any such gain or loss generally will be
capital gain or loss, and generally will be a long-term capital gain or loss if
you have held the preferred securities as a capital asset for more than one year
prior to the date of disposition.
If you dispose of your preferred securities between record dates for
payments of distributions thereon, you will be required to include accrued but
unpaid interest (or OID) on the junior subordinated debentures through the date
of disposition in your taxable income for United States federal income tax
purposes (notwithstanding that you may receive a separate payment from the
purchaser with respect to accrued interest). You may deduct that amount from the
sales proceeds received (including the separate payment, if any, with respect to
accrued interest) for the preferred securities (or as to OID only, to add such
amount to your adjusted tax basis in the preferred securities). To the extent
the selling price is less than your adjusted tax basis (which will include
accrued but unpaid OID if any), you will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
Pending Tax Litigation Affecting the Preferred Securities
In 1998, a taxpayer filed a petition in the United States Tax Court
contesting the IRS's disallowance of interest deductions that taxpayer claimed
in respect of securities issued in 1993 and 1994 that are, in some respects,
similar to the preferred securities. (Enron Corp. v. Commissioner, Docket No.
6149-98, filed April 1, 1998). An adverse decision by the Tax Court concerning
the deductibility of such interest may cause a Tax Event. Such a Tax Event would
give us the right to redeem the junior subordinated debentures. See "Description
of Junior Subordinated Debentures -- Redemption" and "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
Non-U.S. Holders
The following discussion applies to you if you are not a U.S. Holder as
described above.
Payments to you, as a non-U.S. Holder, on a preferred security will
generally not be subject to withholding of income tax, provided that:
o you did not (directly or indirectly, actually or constructively)
own 10% or more of the total combined voting power of all classes
of our stock entitled to vote;
o you are not a controlled foreign corporation that is related to
us through stock ownership; and
o either (a) you certify to the Trust or its agent under penalties
of perjury, that you are not a U.S. Holder and provide your name
and address, or (b) a securities clearing organization, bank or
other financial institution that holds customers' securities in
the ordinary course of its trade or business, and holds the
preferred security in such capacity, certifies to the Trust or
its agent, under penalties of perjury, that it requires and has
received such a statement from you or another financial
institution between it
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and you in the chain of ownership, and furnishes the Trust or its
agent with a copy of the statement.
As discussed above, it is possible that changes in the law affecting
the federal income tax consequences of the junior subordinated debentures could
adversely affect our ability to deduct interest payable on the junior
subordinated debentures. Changes in the law could also cause the junior
subordinated debentures to be classified as our equity (rather than our debt)
for United States federal income tax purposes. This might cause the income
derived from the junior subordinated debentures to be characterized as
dividends, generally subject to a 30% income tax (on a withholding basis) when
paid to you if you are not a U.S. Holder, rather than as interest which, as
discussed above, generally is exempt from income tax in the hands of a person
who is not a U.S. Holder. However, according to new Treasury Regulations that
become effective January 1, 2001, the 30% income tax withholding may not be
required if certain requirements are met.
A non-U.S. Holder will generally not be subject to withholding of
income tax on any gain realized upon the sale or other disposition of a
preferred security.
If you hold the preferred securities in connection with the active
conduct of a United States trade or business, you will generally be subject to
income tax on all income and gains recognized with respect to your proportionate
share of the junior subordinated debentures.
Information Reporting
In general, information reporting requirements will apply to payments
made on, and proceeds from the sale of, the preferred securities held by a
noncorporate U.S. Holder within the United States. In addition, payments made
on, and payments of the proceeds from the sale of, the preferred securities to
or through the United States office of a broker are subject to information
reporting unless you certify as to your non-U.S. Holder status or otherwise
establish an exemption from information reporting and backup withholding. See
"--Backup Withholding." Taxable income on the preferred securities for a
calendar year should be reported to U.S. Holders on the appropriate forms by the
following January 31st.
Backup Withholding
Payments made on, and proceeds from the sale of, the preferred
securities may be subject to a "backup" withholding tax of 31% unless you comply
with certain identification or exemption requirements. Any amounts withheld will
generally be allowed as a credit against your income tax liability, or refunded,
provided the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to particular person of the purchase, ownership and disposition of
the preferred securities. You must contact your own tax advisor to determine
your particular tax consequences.
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ERISA CONSIDERATIONS
We and certain of our affiliates may each be considered a "party in
interest" within the meaning of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or a "disqualified person" within the meaning of
Section 4975 of the Code with respect to many employee benefit plans that are
subject to ERISA and individual retirement accounts ("IRAs"). The purchase of
the preferred securities by an employee benefit plan or IRA that is subject to
the fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions under Section 4975(e)(1) of the Code and with respect to which we, or
any affiliate of ours is a service provider (or otherwise is a party in interest
or a disqualified person), may constitute or result in a prohibited transaction
under ERISA or Section 4975 of the Code, unless the preferred securities are
acquired pursuant to and in accordance with an applicable exemption. Any pension
or other employee benefit plan, fiduciary or IRA holder, proposing to acquire
any preferred securities for such a plan or IRA should consult with legal
counsel.
UNDERWRITING
Subject to the terms and conditions stated in the underwriting
agreement dated ____________, 1999 among us, the Trust, and Hopper Soliday, a
division of Tucker Anthony Incorporated, as the representative of the
underwriters named below, the underwriters have agreed to purchase, and the
Trust has agreed to sell to the underwriters, the following respective aggregate
liquidation amount of the preferred securities at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus. If one underwriter is not able to sell all of the preferred
securities that it has agreed to buy from us, no other underwriter is
responsible for those unsold preferred securities.
Underwriter: Liquidation Amount of
Preferred Securities:
Hopper Soliday, A Division of Tucker Anthony
Incorporated...................................... $
----------
Total $12,000,000
The underwriting agreement provides that the obligations of the
underwriters to purchase the preferred securities that are being offered are
subject to approval of legal matters by counsel and to other conditions.
Hopper Soliday proposes to offer some of the preferred securities
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the preferred securities to certain dealers at
the public offering price less a concession not in excess of $____ per preferred
security. Hopper Soliday may allow, and the dealers may reallow, a concession
not in excess of $____ per preferred security on sales to other dealers. After
the public offering, the offering price and other selling terms may be changed
by Hopper Soliday. We have also agreed to pay a financial advisory fee of
$25,000 to Hopper Soliday.
104
<PAGE>
We have granted to Hopper Soliday an option, exercisable for up to 30
days after the date of the underwriting agreement, to purchase up to an
additional $1,800,000 aggregate liquidation amount of the preferred securities
at the public offering price set forth on the cover page less underwriting
discounts and commissions. To the extent that Hopper Soliday exercises this
option, we will be obligated to sell that aggregate liquidation amount of
preferred securities to Hopper Soliday. Hopper Soliday may exercise this option
only to cover over-allotments made in connection with this offering. If
purchased, Hopper Soliday will offer the additional preferred securities on the
same terms as those on which the $12,000,000 aggregate liquidation amount of the
preferred securities is being offered.
In connection with the offering the underwriters may purchase and sell
shares of the preferred securities in the open market. These transactions may
include over-allotment, syndicate covering transactions and stabilizing
transactions. Over-allotment involves syndicate sales of the preferred
securities in excess of the aggregate liquidation amount of preferred securities
to be purchased by the underwriters in the offering, which creates a syndicate
short position. Syndicate covering transaction involve purchases of the
preferred securities in the open market after the distribution has been
completed in order to cover syndicate short positions. Stabilizing transactions
consist of bids or purchases of the preferred securities made for the purpose of
preventing or retarding a decline in the market price of the preferred
securities while the offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
preferred securities originally sold by that syndicate member are purchased in a
stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. The imposition of a penalty bid may have an effective on the
price of the preferred securities to the extent that it may discourage resales
of the preferred securities.
Any of these transactions may cause the price of the preferred
securities to be higher than it would otherwise be in the absence of the
transactions. These transactions, if commenced, may be discontinued at any time
without notice.
In view of the fact that the proceeds from the sale of the preferred
securities will be used to purchase our junior subordinated debentures, the
underwriting agreement provides that we will pay as compensation to the
underwriters for arranging the investment of such proceeds an amount of $_____
per preferred security (or $_____ in the aggregate, $_______ if the
over-allotment option is exercised in full).
Because the National Association of Securities Dealers, Inc. is
expected to view the preferred securities as interests in a direct participation
program, this offering is being made in compliance with the applicable
provisions of Rule 2810 of the NASD's Conduct Rules.
The preferred securities are a new issue of securities with no
established trading market. We have applied to have the preferred securities
approved for quotation on the Nasdaq National Market. Hopper Soliday has advised
the Trust and us that it intends to make a market in the preferred securities.
However, it is not obligated to do so and such market making may be interrupted
or discontinued at any time without notice at its sole discretion. See "Market
for the Preferred Securities."
105
<PAGE>
We have agreed to indemnify Hopper Soliday against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Hopper Soliday may in the future perform various services for us,
including investment banking services, for which it may receive customary fees.
LEGAL AND TAX MATTERS
The validity of the Guarantee and the Junior Subordinated Debentures
and certain tax matters will passed upon by Malizia Spidi & Fisch, PC,
Washington, D.C., counsel to First Star Bancorp. Certain legal matters for
Hopper Soliday, a division of Tucker Anthony Incorporated, will be passed upon
by Stevens & Lee, PC, Reading, Pennsylvania. Certain matters of Delaware law
relating to the validity of the preferred securities, the enforceability of the
Trust Agreement and the creation of the Trust will be passed upon by Richards,
Layton & Finger, special Delaware counsel to First Star Bancorp and the Trust.
Malizia Spidi & Fisch, PC and Stevens & Lee, PC will rely as to certain matters
of Delaware law on the opinion of Richards, Layton & Finger.
EXPERTS
The consolidated financial statements of First Star Bancorp, Inc. and
subsidiaries as of June 30, 1999 and 1998 and for each of the two years in the
period ended June 30, 1999, appearing in this prospectus have been audited by
Beard & Company, Inc., independent auditors, as set forth in their report
thereon which appears elsewhere, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
^CHANGE IN INDEPENDENT AUDITORS
On March 23, 1999, our Board of Directors unanimously determined that
it would discontinue the engagement of Deloitte & Touche, LLP as our independent
auditors and determined that we would engage Beard & Company, Inc., Certified
Public Accountants, Allentown, Pennsylvania, as our auditors for the fiscal year
ending June 30, 1999. Beard & Company, Inc. was also engaged to audit
our financial statements for the fiscal year ended June 30, 1998.
^For the fiscal years ended June 30, 1998 and 1997 through March 23,
1999, there were no disagreements ^or reportable events with Deloitte & Touche,
LLP as to any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The report of Deloitte & Touche, LLP
on the financial statements for the fiscal ^years ended June 30, 1998 ^and 1997,
the last ^two fiscal ^years audited by Deloitte & Touche, LLP did not contain an
adverse opinion or disclaimer and was not modified as to uncertainty, audit
scope or accounting principles. ^By letter dated September 27, 1999, we were
advised by Deloitte & Touche, LLP that they had withdrawn their report on our
1998 financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the preferred securities
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 address for this Web site is "http://www.sec.gov". The
statements contained in this document as to the contents of any contract or
106
<PAGE>
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.
A copy 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 Ruth Doncsecz, Secretary, First Star Bancorp, Inc., 418
West Broad Street, Bethlehem, Pennsylvania 18018 at (610) 691-2333.
107
<PAGE>
First Star Bancorp, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report................................................. F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998..................... F-2
Consolidated Statements of Income for the Years Ended June 30, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999 and 1998 .................................... F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999
and 1998 ........................................................... F-5
Notes to Consolidated Financial Statements................................... F-7
</TABLE>
All schedules are omitted because the required information is either
not applicable or is included in the consolidated financial statements or
related notes.
108
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
First Star Bancorp, Inc.
Bethlehem, Pennsylvania
We have audited the accompanying consolidated balance sheets of
First Star Bancorp, Inc. and its subsidiaries as of June 30, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of First
Star Bancorp, Inc. and its subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/BEARD & COMPANY, INC.
Allentown, Pennsylvania
August 4, 1999
F-1
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,352 $ 1,222
Interest-bearing demand deposits 1,726 858
------------------------------------
Cash and cash equivalents 3,078 2,080
Securities available for sale 160,438 123,759
Loans receivable, net of allowance for loan losses
1999 $ 1,772; 1998 $ 1,489 184,264 176,386
Bank premises and equipment, net 599 687
Foreclosed real estate 969 1,129
Accrued interest receivable 2,567 2,404
Federal Home Loan Bank stock, at cost 7,935 7,378
Deferred income taxes 1,625 23
Cash surrender value of life insurance 1,710 1,583
Prepaid expenses and other assets 521 373
------------------------------------
Total assets $ 363,706 $ 315,802
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 190,148 $ 145,096
Advances from Federal Home Loan Bank 146,180 144,485
Convertible subordinated debentures 5,480 5,480
Other borrowed funds 594 647
Advances by borrowers for taxes and insurance 3,418 3,168
Accrued interest payable 801 785
Accrued expenses and other liabilities 1,609 1,028
------------------------------------
Total liabilities 348,230 300,689
------------------------------------
Stockholders' equity:
Convertible preferred stock, no par value; authorized 2,500,000
shares; issued and outstanding 43,592 shares - -
Common stock, par value $ 1 per share; authorized 10,000,000
shares; issued and outstanding 1999 375,404 shares; 1998
372,084 shares 375 372
Surplus 8,465 8,451
Retained earnings 8,300 5,777
Employee Stock Ownership Plan debt (200) (300)
Accumulated other comprehensive income (loss) (1,464) 813
------------------------------------
Total stockholders' equity 15,476 15,113
------------------------------------
Total liabilities and stockholders' equity $ 363,706 $ 315,802
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C>
Interest income:
Loans receivable, including fees $ 14,358 $ 13,234
Securities 10,535 7,881
Other 171 125
------------------------------------
Total interest income 25,064 21,240
------------------------------------
Interest expense:
Deposits 8,442 6,638
Short-term borrowings 46 37
Long-term borrowings 8,892 7,935
------------------------------------
Total interest expense 17,380 14,610
------------------------------------
Net interest income 7,684 6,630
Provision for loan losses 423 385
------------------------------------
Net interest income after provision for loan losses 7,261 6,245
------------------------------------
Other income:
Service fees 316 285
Realized gain on sale of:
Securities 156 1,151
Foreclosed real estate 77 101
Other 247 223
------------------------------------
Total other income 796 1,760
------------------------------------
Other expenses:
Salaries and employee benefits 2,202 1,865
Occupancy and equipment 424 470
Federal deposit insurance premium 89 78
Data processing costs 173 144
Professional fees 204 216
Terminated merger costs 111 -
Advertising 103 121
Other 668 688
------------------------------------
Total other expenses 3,974 3,582
------------------------------------
Income before income taxes 4,083 4,423
Income taxes 1,517 1,607
------------------------------------
Net income 2,566 2,816
Dividends on preferred stock (43) (45)
------------------------------------
Net income applicable to common stockholders $ 2,523 $ 2,771
====================================
Basic earnings per share $ 6.90 $ 7.68
====================================
Diluted earnings per share $ 3.76 $ 4.15
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 and 1998 (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Employee Accumulated
Stock Other
Preferred Common Retained Ownership Comprehensive
Stock Stock Surplus Earnings Plan Debt Income (Loss) Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $ - $ 258 $ 3,061 $ 8,541 $ (400) $ 555 $ 12,015
-------------
Comprehensive income:
Net income - - - 2,816 - - 2,816
Change in net unrealized
gains (losses) on
securities available
for sale - - - - - 258 258
-------------
Total comprehensive
income 3,074
-------------
Stock dividends - 114 5,390 (5,504) - - -
Repayment of ESOP debt - - - - 100 - 100
Cash dividends paid:
Preferred stock - - - (45) - - (45)
Common stock - - - (31) - - (31)
----------------------------------------------------------------------------------------------------
Balance, June 30, 1998 - 372 8,451 5,777 (300) 813 15,113
-------------
Comprehensive income:
Net income - - - 2,566 - - 2,566
Change in net unrealized
gains (losses) on
securities available
for sale - - - - - (2,277) (2,277)
-------------
Total comprehensive
income 289
-------------
Exercise of stock options - 3 14 - - - 17
Repayment of ESOP debt - - - - 100 - 100
Cash dividends paid on
preferred stock - - - (43) - - (43)
----------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ - $ 375 $ 8,465 $ 8,300 $ (200) $ (1,464) $ 15,476
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,566 $ 2,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 423 385
Provision for depreciation and amortization 130 110
Net gain on foreclosed real estate (77) (101)
Net realized gains on sales of securities (156) (1,151)
Net accretion of securities premiums and discounts (865) (696)
Deferred income taxes (189) 35
Change in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (163) 272
Prepaid expenses and other assets (148) (122)
Increase in:
Accrued expenses and other liabilities 581 68
Accrued interest payable 16 125
--------------------------------
Net cash provided by operating activities 2,118 1,741
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (84,872) (84,680)
Proceeds from sale of securities available for sale 12,034 37,271
Proceeds from maturities of and principal repayments on
securities available for sale 37,518 36,204
Net increase in Federal Home Loan Bank stock (557) (408)
Proceeds from the sale of foreclosed real estate 942 1,236
Net (increase) in loans (13,034) (34,758)
Purchases of bank premises and equipment (42) (69)
(Increase) decrease in cash surrender value of life insurance policies (127) 197
--------------------------------
Net cash used in investing activities (48,138) (45,007)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 45,052 26,434
Repayment of ESOP debt 100 100
Proceeds from Federal Home Loan Bank advances 63,654 159,788
Repayment of Federal Home Loan Bank advances (61,959) (144,703)
Repayment of other borrowed money (53) (25)
Increase in advances from borrowers for taxes and insurance 250 518
Proceeds from the exercise of stock options 17 -
Dividends paid (43) (76)
--------------------------------
Net cash provided by financing activities 47,018 42,036
--------------------------------
Net increase (decrease) in cash and cash equivalents 998 (1,230)
Cash and cash equivalents:
Beginning 2,080 3,310
--------------------------------
Ending $ 3,078 $ 2,080
================================
</TABLE>
F-5
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits, advances and other borrowed money $ 17,364 $ 14,485
=============================
Income taxes $ 1,079 $ 1,721
=============================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans swapped for mortgage-backed securities $ 4,028 $ 7,034
=============================
Transfer of loans to foreclosed real estate $ 705 $ 1,497
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of operations:
First Star Bancorp, Inc. (the "Company") 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.
Principles of consolidation:
The consolidated financial statements of the Company include the
accounts of the Bank and Integrated Financial Corporation,
wholly-owned subsidiaries of the Company, and Integrated Abstract
Incorporated, a wholly-owned subsidiary of Integrated Financial
Corporation. All intercompany transactions and balances have been
eliminated in consolidation.
Estimates:
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 the disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and interest bearing
demand deposits.
Securities:
Securities classified as available for sale are those securities
that the Company intends to hold for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movement in interest rates, changes
in maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar
factors. Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases
in other comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of the
cost of the specific securities sold, are included in earnings.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
F-7
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities (continued):
Management determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such
designation as of each balance sheet date.
Federal law requires a member institution of the Federal Home Loan
Bank System to hold stock of its district Federal Home Loan Bank
according to a predetermined formula. The stock is carried at
cost.
Loans receivable:
Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are
stated at their outstanding unpaid principal balances, net of an
allowance for loan losses and any deferred fees. Interest income
is accrued on the unpaid principal balance. Loan origination fees
are deferred and recognized as an adjustment of the yield
(interest income) of the related loans. The Company is generally
amortizing these amounts over the contractual life of the loan.
A loan is generally considered impaired when it is probable the
Company will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan
agreement. Loans which are deemed to be impaired are reported at
the present value of expected future cash flows using the loans
effective interest rate, or as a practical expedient, at the fair
value of the collateral if the loan is collateral dependent.
The accrual of interest is generally discontinued when the
contractual payment of principal or interest has become 90 days
past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is
in the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and
unpaid interest accrued in prior years is charged against the
allowance for loan losses. Interest received on nonaccrual loans
generally is either applied against principal or reported as
interest income, according to management's judgment as to the
collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
F-8
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for loan losses:
The allowance for loan losses is established through provisions
for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated.
Management's periodic evaluation of the adequacy of the allowance
is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current
economic conditions and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may
be susceptible to significant change.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the assets' estimated useful lives.
Cash surrender value of life insurance:
The Bank is the beneficiary of insurance policies on the lives of
certain officers of the Bank.
Foreclosed real estate:
Foreclosed real estate is comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure. Foreclosed assets initially are recorded at fair
value, net of estimated selling costs, at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the assets are carried at
the lower of cost or fair value minus estimated costs to sell.
Revenues and expenses from operations and changes in the valuation
allowance are included in other expenses.
Advertising costs:
The Company follows the policy of charging the costs of
advertising to expense as incurred.
F-9
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes:
Deferred income taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Off-balance sheet financial instruments:
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments
to extend credit and letters of credit. Such financial instruments
are recorded in the balance sheet when they are funded.
Earnings per common share:
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period, excluding unearned ESOP
shares. Diluted earnings per share reflects additional common
shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate to convertible
subordinated debentures, convertible preferred stock and
outstanding stock options. Potential common shares that may be
issued related to stock options are determined using the treasury
stock method. Per share amounts have been adjusted to give
retroactive effect to stock dividends declared in the year ended
June 30, 1998.
Segment reporting:
The Company acts as an independent community financial services
provider, and offers traditional banking and related financial
services to individual, business and government customers. Through
its branch and automated teller machine network, the Bank offers a
full array of commercial and retail financial services, including
the taking of time, savings and demand deposits; the making of
commercial, consumer and mortgage loans; and the providing of
other financial services.
Management does not separately allocate expenses, including the
cost of funding loan demand, between the commercial and retail
operations of the Company. As such, discrete financial information
is not available and segment reporting would not be meaningful.
Reclassifications:
Certain amounts in prior period financial statements have been
reclassified to conform with the presentation used in the 1999
financial statements. These reclassifications had no effect on net
income.
F-10
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting standard:
The Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging
Activities", in June 1998. The Company is required to adopt the
Statement on July 1, 2001, as amended by Statement No. 137. The
adoption of the Statement is not expected to have a significant
impact on the financial condition or results of operations of the
Company.
2
- --------------------------------------------------------------------------------
SECURITIES
The amortized cost and approximate fair value of securities available
for sale as of June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
June 30, 1999:
U.S. Government
corporations and
agencies securities $ 5,530 $ 17 $ (197) $ 5,350
State and municipal
securities 936 - (12) 924
Mortgage-backed securities 81,816 440 (1,039) 81,217
Corporate securities 27,345 81 (974) 26,452
Trust preferred securities 42,075 172 (978) 41,269
Marketable equity securities 5,217 138 (129) 5,226
-----------------------------------------------------------------
$ 162,919 $ 848 $ (3,329) $ 160,438
=================================================================
</TABLE>
F-11
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
- --------------------------------------------------------------------------------
SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
June 30, 1998:
U.S. Government
corporations and
agencies securities $ 15,710 $ 137 $ (84) $ 15,763
State and municipal
securities 15 - - 15
Mortgage-backed securities 75,067 980 (12) 76,035
Corporate securities 10,427 161 (224) 10,364
Trust preferred securities 19,826 - - 19,826
Marketable equity securities 1,505 251 - 1,756
-----------------------------------------------------------------
$ 122,550 $ 1,529 $ (320) $ 123,759
=================================================================
</TABLE>
The amortized cost and fair value of securities as of June 30, 1999, by
contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because the securities may be called or
prepaid with or without any penalties.
<TABLE>
<CAPTION>
Available For Sale
----------------------------------
Amortized Fair
Cost Value
----------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 2,368 $ 2,365
Due after one year through five years 16,049 15,464
Due after five years through ten years 11,196 10,839
Due after ten years 46,273 45,327
----------------------------------
75,886 73,995
Mortgage-backed securities 81,816 81,217
Marketable equity securities 5,217 5,226
----------------------------------
$ 162,919 $ 160,438
==================================
</TABLE>
F-12
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
- --------------------------------------------------------------------------------
SECURITIES (CONTINUED)
Gross gains of $ 156,000 and gross losses of $ -0- were realized on
sales of securities in the year ended June 30, 1999. Gross gains of $
1,151,000 and gross losses of $ -0- were realized on sales of
securities in the year ended June 30, 1998.
Securities with a carrying value of $ 33,633,000 at June 30, 1999 were
pledged to secure advances from the Federal Home Loan Bank.
3
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
The composition of net loans receivable at June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
First mortgage residential loans $ 153,089 $ 149,286
Construction loans 800 110
Commercial leases purchased 813 1,496
Consumer loans 656 728
Home equity loans 7,059 7,905
Automobile loans 301 329
Commercial real estate loans 25,344 19,360
------------------------------------
Total loans 188,062 179,214
------------------------------------
Less:
Loans in process (605) (66)
Unearned net loan fees and origination costs (1,421) (1,273)
Allowance for loan losses (1,772) (1,489)
------------------------------------
(3,798) (2,828)
------------------------------------
Net loans $ 184,264 $ 176,386
====================================
</TABLE>
F-13
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
- --------------------------------------------------------------------------------
LOANS RECEIVABLE (CONTINUED)
The following table presents changes in the allowance for loan losses
for the years ended June 30:
1999 1998
-----------------------------
(In Thousands)
Balance, beginning $ 1,489 $ 1,156
Provision for loan losses 423 385
Charge-offs (143) (57)
Recoveries 3 5
-----------------------------
Balance, ending $ 1,772 $ 1,489
=============================
At June 30, 1999 and 1998, as a result of loan sales and swaps, the
Bank was servicing loans for others amounting to approximately $
31,584,000 and $ 33,802,000 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. Custodial escrow balances
maintained in connection with the foregoing loan servicing and included
in advances by borrowers for taxes and insurance were approximately $
578,000 and $ 602,000 at June 30, 1999 and 1998 respectively.
Nonperforming loans (which include loans in excess of 90 days
delinquent) at June 30, 1999 and 1998 amounted to approximately $
2,289,000 and $ 3,415,000 respectively. The reserve for delinquent
interest on loans totaled $ 217,000 and $ 320,000 at June 30, 1999 and
1998 respectively. Revenue that would have been earned if nonperforming
loans were accruing interest approximated $ 116,000 and $ 217,000 for
the years ended June 30, 1999 and 1998 respectively. None of these
loans at June 30, 1999 and 1998 are considered impaired.
F-14
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
- --------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment at June 30, 1999 and 1998
are as follows:
1999 1998
---------------------------
(In Thousands)
Land and buildings $ 963 $ 961
Furniture, fixtures and equipment 1,379 1,339
Leasehold improvements 241 241
---------------------------
2,583 2,541
Less accumulated depreciation 1,984 1,854
---------------------------
$ 599 $ 687
===========================
5
- --------------------------------------------------------------------------------
DEPOSITS
Deposits and their respective effective rate of interest at June 30,
1999 and 1998 consist of the following major classifications:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------
Effective Effective
Rate Of Rate Of
Amount Percent Interest Amount Percent Interest
----------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking $ 1,871 1.0 % - % $ 1,524 1.0 % - %
NOW accounts 14,089 7.4 2.37 12,691 8.8 2.12
Money market accounts 19,592 10.3 4.41 15,352 10.6 4.22
Passbook and club accounts 11,566 6.1 2.73 11,468 7.9 2.72
Certificates of deposit 143,030 75.2 5.34 104,061 71.7 5.83
------------------------------- -----------------------------
Total deposits $ 190,148 100.0 % $ 145,096 100.0 %
=============================== =============================
Weighted average cost 4.81 % 5.05 %
================== ================
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $ 100,000 was approximately $ 18,484,000 and $
15,840,000 at June 30, 1999 and 1998 respectively.
At June 30, 1999 and 1998, the Bank had included in certificates of
deposit approximately $ 1,318,000 and $ 689,000 respectively, in
brokered deposits.
F-15
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
- --------------------------------------------------------------------------------
DEPOSITS (CONTINUED)
The scheduled maturities of certificates of deposit for fiscal years
subsequent to June 30, 1999 are as follows (in thousands):
Amount Percent
-----------------------------------
2000 $ 110,168 77.0 %
2001 21,818 15.3
2002 3,439 2.4
2003 - 2004 6,791 4.7
Thereafter 814 0.6
---------------------------------
$ 143,030 100.0 %
=================================
A summary of interest expense on deposits is as follows:
Years Ended June 30,
1999 1998
-------------------------------
(In Thousands)
NOW $ 320 $ 311
Money market demand 788 572
Passbook and club 306 283
Certificates of deposit 7,028 5,472
-------------------------------
$ 8,442 $ 6,638
===============================
F-16
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
- --------------------------------------------------------------------------------
OTHER BORROWED FUNDS AND LONG-TERM DEBT
Federal Home Loan Bank advances at June 30, 1999 and 1998 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------
Maturity Amount Rate Amount Rate
------------------------------ ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0-12 months $ 18,325 5.42 % $ 27,936 5.73 %
13-24 months 6,000 5.93 7,328 5.90
25-36 months 42,500 5.79 6,000 5.93
37-48 months 45,000 5.70 42,500 5.79
49-60 months 12,000 5.19 45,000 5.68
Over 60 months 22,355 6.03 15,721 6.44
-------------------- --------------------
Total $ 146,180 5.71 % $ 144,485 5.83 %
=====================================================================
</TABLE>
Included in above are three convertible notes which total $ 42,500,000
where the Federal Home Loan Bank has the option to convert the notes at
a rate equal to the three month libor plus .03 on a quarterly basis.
Also, included is a $ 30,000,000 convertible note where the Federal
Home Loan Bank has the option to convert to a three-month libor rate
plus .03 if the three-month libor exceeds 6.5%. If converted, the Bank
may prepay these notes without penalty.
The advances are secured by qualifying assets of the Bank which
includes the Federal Home Loan Bank stock, mortgage-backed securities
and first mortgage loans. The Bank has a maximum borrowing capacity
with the Federal Home Loan Bank of approximately $ 202,200,000, of
which $ 146,180,000 was outstanding at June 30, 1999.
F-17
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
- --------------------------------------------------------------------------------
SUBORDINATED DEBENTURES
During the year ended June 30, 1992, the Bank issued $ 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 Company. 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 11)) of the Company on January 1, 2002, unless previously
converted. The Debentures may be converted into Series A Preferred
Stock at any time, at the option of either the Company or the holder of
the Debenture, unless previously redeemed, at a conversion price of one
share per $ 9.864 principal amount of Debenture subject to adjustment
in certain events. During the year ended June 30, 1992, $ 110,000 of
the Debentures were converted to the Series A Preferred Stock.
The Debentures are redeemable in whole or in part, on not less than 30
days' notice at the option of the Company at par. The Debentures are
subordinated in right of payment to all present and future Senior
Indebtedness of the Company.
On December 31, 1996, the Company sold $ 4,000,000 of Adjustable-Rate
Mandatorily Convertible Subordinated Debentures due in the year 2008
(the "1996 Debentures"). Interest on the 1996 Debentures is 1% under
the prime rate, adjustable monthly. Interest is payable on the 1996
Debentures on the first day of each month. The 1996 Debentures will
automatically convert into Permanent Noncumulative Convertible
Preferred Stock, Series B ("Series B Preferred Stock") of the Company
on December 31, 2008, unless previously converted. The 1996 Debentures
may be converted into Series B Preferred Stock at any time by the
holder or after two years by the Company, unless previously redeemed,
at a conversion price of one share per $ 24.281 principal amount of
1996 Debenture subject to adjustment in certain events.
The 1996 Debentures are redeemable at par value prior to maturity by
the Company only with the proceeds from the sale of common or perpetual
preferred stock, unless otherwise approved by the Board of Governors of
the Federal Reserve System. The 1996 Debentures are subordinated in
right of payment to all present and future Senior Indebtedness of the
Company.
F-18
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
- --------------------------------------------------------------------------------
SUBORDINATED DEBENTURES (CONTINUED)
At June 30, 1999 and 1998, $ 1,480,000 of the 1992 Debentures and $
4,000,000 of the 1996 Debentures remain outstanding. Substantially all
of the subordinated debentures are held by related parties which
includes directors, executive officers, principal stockholders, their
immediate families and affiliated companies.
All debentures are includable as Tier 2 capital for determining the
Company's compliance with regulatory capital requirements (see Note
19). Upon conversion, the Debentures become Tier 1 capital.
8
- --------------------------------------------------------------------------------
OTHER BORROWED MONEY
On December 31, 1987, the Bank entered into an agreement to transfer $
2,016,000 of loans with a weighted average interest rate of 8.07% to
another institution subject to certain recourse provisions. At June 30,
1999 and 1998, these loans had outstanding balances of $ 594,000 and $
647,000 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.
9
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income", as of
July 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income. The adoption
of SFAS No. 130 had no effect on the Bank's net income or stockholders'
equity.
F-19
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
The components of other comprehensive income (loss) and related tax
effects for the years ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------
(In Thousands)
<S> <C> <C>
Unrealized holding gains (losses) on available for sale securities $ (3,534) $ 1,541
Less reclassification adjustment for gains included in net income 156 1,151
----------------------------------
Net unrealized gains (losses) (3,690) 390
Tax effect 1,413 132
----------------------------------
Net of tax amount $ (2,277) $ 258
==================================
</TABLE>
10
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
The Company 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 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 Company.
A summary of options activity, adjusted for stock dividends, for the
years ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Exercise Price
----------------------------------------------
$ 9.47 $ 5.37 Total
----------------------------------------------
<S> <C> <C> <C>
Options outstanding, June 30, 1997 and 1998 3,744 25,146 28,890
Options exercised - (3,319) (3,319)
----------------------------------------------
Options outstanding, June 30, 1999 3,744 21,827 25,571
==============================================
</TABLE>
All options were exercisable at June 30, 1999 and 1998. The weighted
average contractual life of stock options outstanding as of June 30,
1999 is 2.3 years. The weighted average exercise price as of June 30,
1999 is $ 5.97.
F-20
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
- --------------------------------------------------------------------------------
ISSUANCE OF PREFERRED STOCK
In December 1989, the Company issued 32,440 shares, of Permanent
Noncumulative Preferred Stock, Series A, for $ 9.864 per share pursuant
to the restated articles of incorporation of the Company, as adjusted
for stock dividends. During the year ended June 30, 1992, an additional
11,152 shares, as adjusted for stock dividends, of Series A Preferred
Stock were issued upon the conversion of subordinated debentures. Each
share of Preferred Stock is convertible into 1 share of common stock of
the Company subject to the limitations of the Company's restated
articles of incorporation. The dividend pay rate for Series A Preferred
Stock is 2% over the prime rate adjusted monthly. The dividend pay rate
for Series B Preferred Stock is 1% under the prime rate, adjusted
monthly.
12
- --------------------------------------------------------------------------------
LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Bank leases office space for certain branch offices. Future minimum
lease payments by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more,
consisted of the following at June 30, 1999 (in thousands):
2000 $ 72
2001 66
2002 48
2003 48
2004 48
Thereafter 192
-----------
$ 474
===========
The total rental expense included in the statements of income for the
years ended June 30, 1999 and 1998 is $ 72,000 and $ 71,000
respectively.
F-21
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
The Bank has an Employee Stock Ownership Plan ("ESOP") which covers all
employees who have met certain eligibility requirements. The Plan
requires the Bank to make a 15% contribution annually based on eligible
participants' compensation. The Bank's contribution to the ESOP was $
172,000 and $ 152,000 for the years ended June 30, 1999 and 1998
respectively.
The ESOP borrowed $ 400,000 on December 31, 1996 from the Company. The
debt, which has a balance of $ 200,000 and $ 300,000 at June 30, 1999
and 1998 respectively, accrues interest at prime plus 1% and is due on
July 1, 2000. As of June 30, 1999 and 1998, the ESOP held 47,429 and
47,417 shares of the Company's common stock and $ 525,000 of the
Company's subordinated debentures due December 31, 2008 as described in
Note 7. In the event a terminated Plan participant desires to sell
their shares of the Bank's stock, or for certain employees who elect to
diversify their account balances, the Company may be required to
purchase the shares from the participant at their fair market value.
The loan obligation of the ESOP is considered unearned employee benefit
expense and, as such, is recorded as a reduction of the Company's
stockholders' equity. The Bank's contribution to the ESOP is used to
repay the loan principal and interest.
The Bank has a 401(k) savings plan (the "401(k) Plan") for all
qualified employees. Employees can contribute up to 5% of their
compensation and the Company provides discretionary matching
contributions. The Company's contribution to the 401(k) Plan was $
9,000 and $ 12,000 for the years ended June 30, 1999 and 1998
respectively.
F-22
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
- --------------------------------------------------------------------------------
INCOME TAXES
The components of income tax expense for the years ended June 30, 1999
and 1998 are as follows:
1999 1998
-----------------------------
(In Thousands)
Federal:
Current $ 1,429 $ 1,240
Deferred (189) 35
-----------------------------
1,240 1,275
State, current 277 332
-----------------------------
$ 1,517 $ 1,607
=============================
The provision for income taxes includes $ 64,000 and $ 472,000 in 1999
and 1998 respectively, of income taxes related to gains on sales of
securities.
A reconciliation of the statutory income tax at a rate of 34% to the
income tax expense included in the statements of income is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998
-------------------------------------------------------
% Of % Of
Pretax Pretax
Amount Income Amount Income
-------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Tax at statutory rate $ 1,388 34.0 % $ 1,504 34.0 %
State income taxes (net of federal tax
benefit) 183 4.5 219 5.0
Other (54) (1.3) (116) (2.7)
-------------------------------------------------------
$ 1,517 37.2 % $ 1,607 36.3 %
=======================================================
</TABLE>
F-23
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
- --------------------------------------------------------------------------------
INCOME TAXES (CONTINUED)
The net deferred tax asset consisted of the following components as of
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Bank premises and equipment $ 57 $ 54
Deferred loan fees 160 216
Deferred compensation 104 79
Allowance for loan losses 357 210
Unrealized losses on securities available for sale 1,017 -
-----------------------------
1,695 559
-----------------------------
Deferred tax liabilities:
Unrealized gains on securities available for sale - (396)
Other (70) (140)
-----------------------------
(70) (536)
-----------------------------
Net deferred tax asset $ 1,625 $ 23
=============================
</TABLE>
Retained earnings include $ 636,000 at June 30, 1999 and 1998, for
which no provision for federal income tax has been made. These amounts
represent deductions for bad debt reserves for tax purposes which were
only allowed to savings institutions which met certain definitional
tests prescribed by the Internal Revenue Code of 1986, as amended. The
Small Business Job Protection Act of 1996 eliminates the special bad
debt deduction granted solely to thrifts. Under the terms of the Act,
there would be no recapture of the pre-1988 (base year) reserves.
However, these pre-1988 reserves would be subject to recapture under
the rules of the Internal Revenue Code if the Bank itself pays a cash
dividend in excess of earnings and profits, or liquidates. The Act also
provides for the recapture of deductions arising from "applicable
excess reserve" defined as the total amount of reserve over the base
year reserve. The Bank's total reserve exceeds the base year reserve
and deferred taxes have been provided for this excess.
F-24
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended June 30, 1999
----------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common
stockholders $ 2,523 365,904 $ 6.90
===============
Effect of dilutive securities:
Stock options - 24,282
Convertible preferred stock 43 43,592
Convertible subordinated debentures 252 314,772
--------------------------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 2,818 748,550 $ 3.76
====================================================
</TABLE>
F-25
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
- --------------------------------------------------------------------------------
EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended June 30, 1998
----------------------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common
stockholders $ 2,771 360,656 $ 7.68
===============
Effect of dilutive securities:
Stock options - 24,733
Convertible preferred stock 45 43,592
Convertible subordinated debentures 268 314,772
--------------------------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 3,084 743,753 $ 4.15
====================================================
</TABLE>
16
- --------------------------------------------------------------------------------
TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers, principal stockholders, their immediate families
and affiliated companies (commonly referred to as related parties), on
the same terms including interest rates and collateral, as those
prevailing at the time for comparable transactions with others. At June
30, 1999 and 1998, these persons were indebted to the Bank for loans
totaling $ 3,506,000 and $ 2,767,000 respectively. During the year
ended June 30, 1999, $ 1,298,000 of new loans were made and repayments
totaled $ 559,000.
F-26
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and letters of credit is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of the Bank's financial instrument commitments at June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
(In Thousands)
<S> <C> <C>
Commitments to grant loans $ 6,743 $ 3,546
Unfunded commitments under lines of credit 5,357 5,671
Outstanding letters of credit 733 497
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a fee. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but includes
principally residential or commercial real estate.
Outstanding letters of credit written are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan
commitments.
F-27
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The Bank grants loans to customers primarily located in the eastern
part of the State of Pennsylvania. The concentration of credit by type
of loan is set forth in Note 3. Although the Bank has a diversified
loan portfolio, its debtors' ability to honor their contracts is
influenced by the region's economy. The Bank also has a concentration
in corporate bonds and both rated and unrated trust preferred
securities of financial institutions in their investment portfolio in
Note 2. To the extent general economic conditions effect financial
institutions, they may impact the credit quality of these investments.
19
- --------------------------------------------------------------------------------
REGULATORY MATTERS
The Company and the Bank are 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 Company's
consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company
must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Company'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 Company to maintain minimum amounts and ratios
(set forth below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of June 30, 1999, that the Company
meets all capital adequacy requirements to which it is subject.
As of June 30, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are
no conditions or events since that notification that management
believes have changed the Bank's category.
F-28
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
- --------------------------------------------------------------------------------
REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios at June 30, 1999 and 1998
and the minimum amounts and ratios required for capital adequacy
purposes and to be well capitalized under the prompt corrective action
provisions are as follows:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(Dollar Amounts In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total capital (to risk weighted assets) $ 21,522 10.18 % $ =>16,914 =>8.0 % $ =>21,143 =>10.0%
Tier I capital (to risk weighted assets) 19,750 9.34 => 8,457 =>4.0 =>12,686 => 6.0
Tier I capital (to average assets) 19,750 5.54 =>14,265 =>4.0 =>17,831 => 5.0
As of June 30, 1998:
Total capital (to risk weighted assets) $ 18,943 12.05 % $ =>12,577 =>8.0 % $ =>15,721 =>10.0%
Tier I capital (to risk weighted assets) 17,454 11.10 => 6,288 =>4.0 => 9,432 => 6.0
Tier I capital (to average assets) 17,454 5.95 =>11,740 =>4.0 =>14,675 => 5.0
</TABLE>
The Company's total risk-based capital, Tier 1 risk-based capital and
leverage capital ratios are 10.89%, 7.92% and 4.72% respectively at
June 30, 1999 and 12.85%, 8.88% and 4.93% respectively at June 30,
1998.
Under Pennsylvania banking law, the Bank is subject to certain
restrictions on the amount of dividends that it may declare without
prior regulatory approval. At June 30, 1999, $ 14,992,000 of retained
earnings were available for dividends without prior regulatory
approval, subject to the regulatory capital requirements discussed
above.
F-29
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses
in any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates herein are not necessarily
indicative of the amounts the Company could have realized in a sales
transaction on the dates indicated. The estimated fair value amounts
have been measured as of their respective year ends, and have not been
reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective
reporting dates may be different than the amounts reported at each year
end.
The following information should not be interpreted as an estimate of
the fair value of the entire Company since a fair value calculation is
only provided for a limited portion of the Company's assets. Due to a
wide range of valuation techniques and the degree of subjectivity used
in making the estimates, comparisons between the Company's disclosures
and those of other companies may not be meaningful. The following
methods and assumptions were used to estimate the fair values of the
Company's financial instruments at June 30, 1999 and 1998:
Cash and cash equivalents:
The carrying amounts of cash and cash equivalents approximate
their fair value.
Securities:
Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
securities.
Loans receivable:
For variable-rate loans that reprice frequently and which
entail no significant changes in credit risk, fair values are
based on carrying values. The fair value of fixed rate loans
are estimated using discounted cash flow analyses, at interest
rates currently offered for loans with similar terms to
borrowers of similar credit quality.
Accrued interest receivable:
The carrying amount of accrued interest receivable
approximates fair value.
Deposit liabilities:
Fair values for demand deposits, savings accounts and certain
money market deposits are, by definition, equal to the amount
payable on demand at the reporting date. Fair values of
fixed-maturity certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on similar instruments with similar
maturities.
F-30
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Advances from Federal Home Loan Bank, subordinated debentures and
other borrowed funds:
Fair values for these borrowings are estimated by discounting
future cash flows using interest rates currently offered on
borrowings with similar remaining maturities.
Accrued interest payable:
The carrying amount of accrued interest payable approximates
fair value.
Off-balance sheet instruments:
Fair value of commitments to extend credit and letters of
credit are estimated using the fees currently charged to enter
into similar agreements, taking into account market interest
rates, the remaining terms and present credit worthiness of
the counterparties.
The estimated fair values of the Company's financial instruments at
June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,078 $ 3,078 $ 2,080 $ 2,080
Securities available for sale 160,438 160,438 123,759 123,759
Loans receivable 184,264 178,212 176,386 181,977
Federal Home Loan Bank stock 7,935 7,935 7,378 7,378
Accrued interest receivable 2,567 2,567 2,404 2,404
Liabilities:
Non-interest bearing checking 1,871 1,871 1,524 1,524
NOW accounts 14,089 14,089 12,691 12,691
Money market demand accounts 19,592 19,592 15,352 15,352
Passbook and club accounts 11,566 11,566 11,468 11,468
Certificates of deposit 143,030 144,337 104,061 104,741
Advances from Federal Home Loan Bank 146,180 142,616 144,485 145,412
Subordinated debentures 5,480 5,480 5,480 5,480
Other borrowed funds 594 594 647 647
Accrued interest payable 801 801 785 785
Off-balance sheet financial instruments - - - -
</TABLE>
F-31
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
FIRST STAR BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
Balance Sheets
June 30,
1999 1998
-----------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash on deposit in bank subsidiary $ 140 $ 14
Interest bearing deposit with another institution 23 97
Securities available for sale 1,932 1,572
Loans receivable, net 358 379
Investment in subsidiaries 18,474 18,349
Other assets 324 300
-----------------------------------
$ 21,251 $ 20,711
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 38 $ 37
Intercompany payables 257 81
Subordinated debentures 5,480 5,480
-----------------------------------
Total liabilities 5,775 5,598
STOCKHOLDERS' EQUITY 15,476 15,113
-----------------------------------
$ 21,251 $ 20,711
===================================
</TABLE>
F-32
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
FIRST STAR BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Statements of Income
Year Ended June 30,
1999 1998
----------------------------------
(In Thousands)
<S> <C> <C>
Income:
Dividends from bank subsidiary $ 300 $ 300
Interest income 141 169
Rental income, intercompany 88 88
Gain on sale of securities 4 63
----------------------------------
533 620
----------------------------------
Expenses:
Interest 227 455
Other 29 27
----------------------------------
256 482
----------------------------------
Income before income taxes 277 138
Income tax expense 111 55
----------------------------------
166 83
Equity in undistributed earnings of subsidiaries 2,400 2,733
----------------------------------
Net income $ 2,566 $ 2,816
==================================
</TABLE>
F-33
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
FIRST STAR BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended June 30,
1999 1998
----------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,566 $ 2,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (2,400) (2,733)
Net realized gain on sale of securities (4) (63)
Other, net 264 118
----------------------------------
Net cash provided by operating activities 426 138
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale 44 120
Purchase of securities available for sale (513) (1,460)
Net decrease in loans - 1,465
Capital contribution to First Star Savings Bank 21 (400)
----------------------------------
Net cash used in investing activities (448) (275)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised 17 -
Repayment of ESOP debt 100 100
Cash dividends paid (43) (76)
----------------------------------
Net cash provided by financing activities 74 24
----------------------------------
Increase (decrease) in cash and cash equivalents 52 (113)
Cash and cash equivalents:
Beginning 111 224
----------------------------------
Ending $ 163 $ 111
==================================
</TABLE>
F-34
<PAGE>
FIRST STAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
- --------------------------------------------------------------------------------
TERMINATED MERGER
On August 19, 1998, the Company 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. In 1999, the pending merger failed to obtain
regulatory approval and the merger agreement was terminated.
Accordingly, costs incurred related to the merger of $ 111,000 were
expensed in the year ended June 30, 1999.
23
- --------------------------------------------------------------------------------
CONTINGENCIES
The Company is involved in various claims and lawsuits, arising in the
normal course of business. Management believes that any financial
resposibility that may be incurred in settlement of such claims and
lawsuits would not be material to the Company's financial position.
F-35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
================================================================================ ==================================================
You should rely only on the information
contained in this prospectus or that to which we
have referred you. We have not authorized
anyone to provide you with information that is [Logo]
different. This prospectus 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 the offer or
solicitation would be unlawful. You should not
assume that the information provided by this $12,000,000
prospectus is accurate as of any date after the
date of this prospectus.
--------------------
TABLE OF CONTENTS
Page First Star Capital Trust
----
Summary....................................................
The Offering...............................................
Selected Consolidated Financial Data....................... __.__% Preferred Securities
Risk Factors............................................... (Liquidation Amount $10
Use of Proceeds............................................ per Preferred Security)
Market for the Preferred Securities........................
Capitalization.............................................
Selected Consolidated Financial and Other Data............. Guaranteed By
Management's Discussion and Analysis of
Financial Condition and Results of Operation.............
Business of First Star Bancorp, Inc.
and First Star Savings Bank.............................. First Star Bancorp, Inc.
Management of First Star Bancorp, Inc......................
Principal Security Holders.................................
Regulation................................................. ---------------
First Star Capital Trust...................................
Accounting Treatment....................................... PROSPECTUS
Description of Preferred Securities........................
Description of Junior Subordinated Debentures.............. ---------------
Description of Guarantee...................................
Relationship Among the Preferred Securities,
the Junior Subordinated Debentures and the
Guarantee ...............................................
United States Federal Income Tax Consequences..............
ERISA Considerations.......................................
Underwriting............................................... Hopper Soliday
Legal and Tax Matters...................................... A Division of Tucker Anthony
Experts.................................................... Incorporated
Where You Can Find Additional Information..................
Index to Consolidated Financial Statements ................ _______________ ___, 1999
Until the later of ____________________, 1999, or 90 days
after commencement of the offering of preferred securities,
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.
================================================================================ ==================================================
</TABLE>
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1 Form of Underwriting Agreement*
3(i) Articles of Incorporation of First Star Bancorp, Inc.**
3(ii) Bylaws of First Star Bancorp, Inc.**
4.1 Form of Junior Subordinated Indenture***
4.2 Form of Junior Subordinated Debenture Certificate (included in Exhibit 4.1)***
4.3 Trust Agreement***
4.4 Form of Amended and Restated Trust Agreement***
4.5 Form of Preferred Security (included in Exhibit 4.4)***
4.6 Form of Guarantee Agreement***
5.1 Opinion of Richards, Layton & Finger***
5.2 Opinion of Malizia Spidi & Fisch, PC***
8.1 Form of Tax Opinion of Malizia Spidi & Fisch, PC***
10 Form of Employment Agreement of Joseph T. Svetik and Paul J. Sebastian***
16 Letter of Deloitte & Touche, LLP*
23.1 Consent of Beard & Company, Inc.***
23.2 Consent of Richards, Layton & Finger (included in Exhibit 5.1)***
23.3 Consent of Malizia Spidi & Fisch, PC (contained in its opinions filed as Exhibits 5.2
and 8.1)***
24 Power of Attorney (reference is made to the signature page)***
27 Financial Data Schedule****
* To be filed by amendment
** Incorporated by reference to the identically numbered
exhibits to the Registration Statement on Form SB-2 filed
with the Commission on September 28, 1998.
*** Previously filed
**** Electronic filing only
</TABLE>
<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 October 6, 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 October 6, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ Joseph T. Svetik /s/ Paul J. Sebastian
- ----------------------------------------------- -----------------------------------
Joseph T. Svetik Paul J. Sebastian
President, Chief Executive Officer and Director Chairman of the Board and Director
(Principal Executive Officer)
/s/ Mark Parseghian, Jr.* /s/ Tighe J. Scott*
- ----------------------------------------------- -----------------------------------
Mark Parseghian, Jr. Tighe J. Scott
Director Director
/s/ Harold J. Suess* /s/ Stephen M. Szy*
- ----------------------------------------------- -----------------------------------
Harold J. Suess Stephen M. Szy
Director Director
/s/ Michael Styer
- -----------------------------------------------
Michael Styer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
* Signed pursuant to a Power of Attorney.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, First Star
Capital Trust certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Wilmington, Delaware on October 6, 1999.
FIRST STAR CAPITAL TRUST
By: /s/Joseph T. Svetik
--------------------------------
Joseph T. Svetik
(Duly Authorized Representative)
By: /s/Paul J. Sebastian
--------------------------------
Paul J. Sebastian
(Duly Authorized Representative)
