ITEM 1. BUSINESS
Investors Bank Corp. is a savings and loan holding company incorporated under Delaware law and headquartered in Minneapolis, Minnesota. Investors Bank Corp.'s principal asset consists of all the outstanding capital stock of Investors Savings Bank, F.S.B. (the "Bank"), a federally chartered savings bank formed in June 1984. The Bank is the second largest thrift institution in Minnesota based on assets. Unless the context otherwise requires, Investors Bank Corp. together with its consolidated subsidiary, the Bank, are herein referred to as "Investors" or the "Company."
At a special meeting on March 15, 1995, the Company's stockholders approved a merger agreement with Firstar Corporation and Firstar Corporation of Minnesota (Firstar Minnesota) under which the Company will be merged with and into Firstar Minnesota. The merger is expected to be consummated on April 28, 1995. For additional information see Item 7 -- "Management's Discussion and Analysis -- Merger Agreement" and Item 8 -- Notes 2 and 14 of Notes to Consolidated Financial Statements.
The Company currently operates twelve retail banking offices and seven mortgage production offices in the Minneapolis-St. Paul metropolitan area, mortgage production offices in Duluth and Rochester, Minnesota, one mortgage production office in a Milwaukee suburb, and four mortgage production offices in the Chicago region. Since commencement of its operations in 1984, the Company has focused on the retail banking business of attracting deposits from the general public within the communities it serves, and on originating and investing in, or selling and servicing, loans secured by mortgages on residential property primarily in the same communities. The Company's operations, however, are distinguishable from many other thrift and community banking institutions by a proportionately large and active mortgage banking organization. In its primary market, the twin cities of Minneapolis and St. Paul, the Company is one of the largest originators of residential mortgages.
The Company's operations during the year ended December 31, 1994 were negatively affected by increased market interest rates and a low level of mortgage banking activity. Net interest margins, which had increased to a record high level in 1992, declined during 1993 and 1994. The decline in 1993 resulted from asset yields repricing more rapidly than liability cost repricings. In 1994 liabilities repriced upwards as market interest rates increased, but asset repricings were limited by annual caps on the adjustable rate mortgages ("ARMs") in the Company's portfolio. The increased market interest rates contributed to a significant decline in mortgage banking activity and the related income. Because of continuing demand for ARMs, the Company's interest earning assets increased 15% between December 31, 1993 and 1994, and contributed significantly to the increased net interest income. See Item 7 -- "Management's Discussion and Analysis" for a complete discussion of 1994 operating results.
LENDING
GENERAL. As a federally chartered savings bank, the Bank is authorized by Federal law to invest without limitation in loans secured by residential real property and by savings accounts, in government securities, in Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA) securities, in deposits insured by the Federal Deposit Insurance Corporation (FDIC), in securities of states or municipalities, and in various liquid investments. In addition, the Bank may invest in loans secured by commercial real estate to the extent of 400% of its capital; in secured and unsecured commercial, corporate, business and agricultural loans to the extent of 10% of its assets; in secured and unsecured consumer loans to the extent of 35% of its assets; in education loans, nonconforming loans, and unsecured construction loans each to the extent of 5% of its assets; and in service corporations to the extent of 2% of its assets. The Company is in compliance with all the above requirements.
Despite this broad investment authority, the Company, through the Bank, has historically conducted primarily the traditional savings and loan business of originating, purchasing, holding and selling residential real estate loans. During the past few years, the Company has also placed increasing emphasis on consumer loans originated through its retail banking offices.
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The following table sets forth the composition of the Company's loan portfolio at December 31 by type of loan:
Because virtually all of the loans retained by the Company are ARMs or other loans that are prime related, 97.1% of the Company's loan portfolio adjusts periodically in accordance with market interest rates. See Item 7 -- "Management's Discussion and Analysis -- Asset/Liability Management and Interest Rate Risk." Nevertheless, because most of the loans originated by the Company are 15 or 30 year residential loans with principal payments that amortize over the loan period and are relatively young, a majority of the principal payments on the Company's loans are due (or "mature") in more than 10 years. The following table sets forth the contractual principal maturities of the Company's assets at December 31, 1994:
RESIDENTIAL MORTGAGE LENDING. Residential mortgage lending constitutes the vast majority of the Company's lending activities. One to four family residential mortgage loans comprised 85.2% of the Company's loan portfolio at December 31, 1994. Loans secured by residential real estate generally have presented a lower level of credit risk than consumer loans or loans secured by commercial properties.
Substantially all of the residential first mortgage lending activities of the Company are conducted out of the Company's mortgage production offices. The Company originates mortgages on one to four family residential properties for inclusion in the Company's loan portfolio or for sale in the secondary market. Although the Company has authority to make loans secured by real property throughout the United States, because of its desire to
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maintain close control over such activities and because of the relatively stable markets they represent, substantially all of the loans originated by the Company are secured by real property in the metropolitan areas of Minneapolis-St. Paul, Duluth, Rochester, Milwaukee and Chicago.
Most of the Company's loans are originated by loan officers through contacts with local realtors and builders rather than through direct solicitation. Before funding a mortgage loan, employees process applications, perform a credit review (including verification of employment, credit standing and personal assets), obtain an appraisal of the property to be financed and obtain title insurance in the Company's favor. At the time an application is accepted, the Company collects a deposit on loans for appraisal and credit reports. At the loan closing, the Company advances an amount equal to the principal amount of the mortgage less a discount based on its loan pricing policies. In addition, the borrower pays the Company an origination fee for its services, which is normally equal to one percent of the principal amount of the mortgage.
Substantially all mortgage loans secured by one to four family residential properties originated by the Company conform to established Federal Housing Authority (FHA), Veterans Administration (VA), FHLMC and FNMA guidelines and include both fixed rate and adjustable rate loans. Loan size, occupancy/ownership characteristics, appraisal requirements and loan-to-value relationships are determined by internal policy and secondary marketing guidelines. The Company's internal policy requires that a loan that exceeds 80% of the value of the secured property be made only if it is insured by a FNMA or FHLMC qualified insurer. Second mortgage loans are generally made in an amount in excess of unpaid prior mortgages, liens and encumbrances on the property, and do not exceed the lesser of 80% of the fair market value of the property or the purchase price of such property.
The Company retains for its own loan portfolio most of the ARMs it originates. At December 31, 1994, the Company's portfolio consisted of $842.2 million principal amount of first mortgage loans and $11.6 million principal amount of second mortgage loans. The Company offers a variety of ARM plans, including ARMs that reprice every six months and every year. For a portion of the one year ARM loans, the interest rate is fixed for an initial two-year or three-year period. At December 31, 1994, 99.5% of the Company's ARMs were set to reprice based upon a fixed margin over the weekly average yield of treasury securities generally having a maturity equal to the repricing period of the ARMs. All ARMs originated by the Company are subject to a lifetime cap on the maximum interest rate they may bear (currently ranging from 12-5/8% to 13-3/8%) and to caps on the maximum amount that they may adjust during any repricing period (currently 1% for a 6 month ARM and generally 2% for a one year ARM). The Company's ARMs do not contain due on sale clauses but are instead assumable by qualified buyers. The Company's ARMs generally provide for an increase or decrease in loan payments at the end of each repricing period to an amount that will amortize the loan over its remaining term at the adjusted interest rate. Although this avoids negative amortization, during periods of rapidly increasing interest rates it could result in significant increases in a borrower's monthly mortgage payments.
Substantially all long-term fixed-rate mortgages and government insured ARMs originated by the Company are sold in the secondary market or pooled and sold as mortgage-backed securities. Conventional fixed-rate loans may be sold to FHLMC, FNMA or other investors. Most FHA and VA mortgage loans originated by the Company have been placed in mortgage pools backing GNMA mortgage pass-through certificates. The Company also pools conventional mortgages to back FHLMC participation certificates and to back FNMA pass-through securities.
To increase its servicing portfolio, the Company purchases newly originated mortgage loans from correspondents and pools the loans to support mortgage-backed securities. The same underwriting criteria are applied to correspondent loans as loans originated by the Company.
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The following table sets forth the residential real estate lending and loan purchase and sale activities of the Company for the year ended December 31:
A gain or loss may be realized on the sale of a loan in the secondary market depending on whether the mortgage is sold at a principal amount above or below the amount advanced by the Company and, in the case of loans on which the Company has retained the servicing, on whether the servicing fees over the life of the loan exceed a normal servicing fee ("excess servicing fees"). For "covered loans" (loans for which the Bank has obtained a purchase commitment when it executes a pricing commitment), the Company may originate loans above the sales price and incur a marketing loss. The value of the servicing that is retained and the resulting servicing fee income or gain on sale of servicing rights has exceeded such marketing loss to the Company. During periods of high volume loan production and rapidly increasing rates, the Company's ability to match pricing commitments with purchase commitments may be impaired and marketing losses may occur which would reduce gain on sales of mortgage loans.
SERVICING. The Company retains all of the servicing on private investor ARM loan sales, and a portion of the servicing on GNMA securities and other mortgage-backed securities. The Company collects principal and interest payments and remits them, less a servicing fee, to holders of the mortgages or mortgage-backed securities. The Company also deposits property taxes and insurance payments which it receives in escrow accounts until such payments are due. For such servicing, the Company typically collects a servicing fee ranging from 1/4% to 1/2% of the outstanding principal balance of the mortgage per year.
The following table sets forth certain information regarding the Company's servicing for the year ended December 31:
The Company has capitalized as a deferred charge the discounted present value of the amount by which future servicing fees it is entitled to collect exceeds a normal market rate servicing fee. These capitalized fees are
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amortized as fees are collected. The amount that is capitalized is adjusted based on certain prepayment assumptions. If the actual prepayments exceed the Company's assumptions, charge-offs of amounts capitalized may be necessary.
Since 1988, the Company has sold loan servicing rights to offset the cost of originating mortgage loans and provide noninterest income. The Company may deviate from this policy periodically because of market fluctuations in the pricing of loan servicing rights. When it elects to sell servicing rights, the Company normally contracts with a broker and submits a portion of its servicing portfolio for competitive bids. The broker contacts other financial institutions and mortgage banking companies through circulation of a disclosure document describing the servicing to be sold and the minimum sale terms. As part of the Merger Agreement, the Company agreed not to sell any loan servicing rights after the third quarter of 1994.
CONSUMER LENDING. A Federal savings institution such as the Bank is authorized to make secured or unsecured consumer loans in various forms including home equity loans, home improvement loans, loans secured by deposit accounts, car loans, boat loans and personal lines of credit. These loans generally have a higher degree of credit risk than residential mortgage loans and the Company maintains a higher level of general reserves for loan losses. At December 31, 1994, consumer loans totaled $117.2 million or 11.7% of the Company's permanent loan portfolio.
Since 1990 the Company has placed increased emphasis on consumer lending and has located consumer lending officers in most of its retail banking offices. Approximately 89.5% of the Company's consumer loans at December 31, 1994 were home equity loans secured by residential real estate. To expand its home equity loan origination, the Company has periodically offered special programs, such as a low fee home equity loan program in which the Company does not charge for appraisals or origination fees. In addition, during 1993 the Company established a home improvement lending division, and during 1994, an alternative lending division was created to offer 1st and 2nd mortgage loans to individuals with a past credit problem. The Company's policy is to make home equity loans which, when combined with the balance of the first mortgage on the same property, do not exceed 80% of the property's appraised value. Private mortgage insurance is obtained for any loans which exceed such limit.
Consumer loans are also made for other housing related expenditures as well as to finance education, debt consolidation, and major purchases, such as autos, boats, recreational vehicles and vacation homes. Loan products are marketed through the local media, direct mail, point of sale advertising in the retail banking offices, and solicitation of the Company's existing mortgage customer base.
Since commencement of operations, the Company has also had a private banking department through which it makes consumer loans and a limited amount of business purpose loans. A majority of such loans are made to upper income, high net worth individuals on both a secured and unsecured basis. The Company's private banking department generally processes applications for such loans, performs credit checks and monitors delinquencies.
COMMERCIAL REAL ESTATE LENDING. Because of competitive markets and the treatment of commercial real estate loans under risk-based capital regulations, the Company eliminated commercial real estate lending as a separate lending activity in early 1989. The commercial real estate loans originated prior to 1989 consist primarily of loans secured by apartment complexes and small retail shopping malls in the Minneapolis-St. Paul metropolitan area. The Company maintains a higher general loss reserve on commercial real estate loans, which represent a higher credit risk, than residential real estate loans. Most of the Company's commercial real estate loans are adjustable rate loans that reprice annually, mature in ten years and are paid based on a 30-year amortization schedule. At December 31, 1994, the Company's commercial real estate loans totaled approximately $31.4 million, or 3.1% of its permanent loan portfolio.
CONSTRUCTION LENDING. The Company makes a limited amount of construction loans to established home builders in the Minneapolis-St. Paul metropolitan area. There were $219 thousand in outstanding construction loans and an additional $100 thousand in commitments to home builders at December 31, 1994. In addition, the Company occasionally makes construction loans directly to homeowners, which are often secured by collateral in addition to the subject real estate, through its private banking department. At December 31, 1994, the Company had
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$578 thousand outstanding and additional commitments of $602 thousand for such construction loans to homeowners.
DELINQUENT LOANS. When a borrower fails to make a required payment on a mortgage loan, the loan is considered delinquent and, after expiration of the applicable cure period, the borrower is charged a late fee. The Company follows practices customary in the banking industry in attempting to cure delinquencies and in pursuing remedies upon default. Generally, if the borrower does not cure the delinquency within 90 days, the Company initiates foreclosure action. During foreclosure and the statutory redemption period, such property is carried in the "real estate in judgment" account and included in "foreclosed real estate." If the loan is not reinstated, paid in full or refinanced, the collateral is sold. The Company is often the purchaser. In such instances, acquired property is carried in the Company's "real estate owned" account, also part of "foreclosed real estate," until the property is sold.
All residential mortgage loans delinquent for 90 days or more are considered nonaccrual. Commercial real estate loans are considered non accrual when collection of interest is doubtful.
The Company includes in nonperforming assets all nonaccrual loans and foreclosed real estate, both net of specific reserves.
The following table summarizes the Company's nonperforming assets at December 31:
See Item 7 -- "Management's Discussion and Analysis -- Nonperforming Assets" for discussion on these properties and an analysis of the changes in nonperforming assets.
RESERVES FOR LOAN AND REAL ESTATE LOSSES. The reserves for losses provide for potential losses in the Company's loan and real estate portfolios. The reserves are increased by the provision for losses and recoveries and decreased by charge-offs. The adequacy of the reserves is judgmental and is based on continual evaluation of the nature and volume of the loan and real estate portfolios, overall portfolio quality, specific problem loans, collateral values, historical experience and current economic conditions that may affect borrowers' ability to pay. Pursuant to regulations governing the classification of assets, insured institutions such as the Bank are required to classify troubled assets as "substandard," "doubtful," and "loss." Institutions must establish specific loss reserves for assets classified as doubtful and loss and the Office of Thrift Supervision (OTS) through their examinations may require an increase in the institution's reserve for loan and real estate losses if the examiner concludes such reserves are inadequate. In December 1993, the OTS completed a routine examination of the Bank. No additions to loss reserves were required following this examination. At December 31, 1994, the Company had classified $4.5 million, $50
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thousand and $386 thousand of its assets as substandard, doubtful and loss, respectively. For information on interest income excluded on nonaccrual loans see Item 8 -- Note 5 of Notes to Consolidated Financial Statements.
The following table sets forth information regarding the Company's reserve for loan losses for the year ended December 31:
As the foregoing table illustrates, the Company's reserve for loan losses has increased over the periods presented as the Company's loan portfolio has increased. The provision for loan losses over the periods presented reflects both recent experience in charge-offs, and a reevaluation of the methods of establishing the reserve for loan losses in 1990. In 1990, the Company established for the first time an unallocated general reserve for unforeseen loan losses and a general reserve for losses on performing real estate.
The following tables present the separate reserves allocated for each category of loans and those allocated reserves as a percentage of the Company's total loan portfolio at December 31:
As discussed in Item 7 -- "Management's Discussion and Analysis -- Analysis of Reserves for Loan and Real Estate Losses," the Company changed its method of calculating its loan loss in 1994. The most significant
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effects of this change were to reduce the amount of reserve attributable to residential real estate and increase the unallocated portion of the reserve. The Company's portfolio continues to consist primarily of residential real estate loans and the reserve for losses allocated to residential real estate loans reflects the low loss experience associated with these loans. Residential real estate loans are well collateralized and property values have remained stable in the markets the Company lends in. The reserve for losses allocated to commercial real estate loans reflects the higher credit risk associated with commercial real estate lending. The reserve for losses allocated to consumer loans has grown as outstandings have grown.
The following tables present the allocation of the reserve for real estate losses and those allocated reserves as a percentage of the foreclosed real estate as of December 31 for the years indicated:
The reserve for real estate losses reflects the decline in commercial real estate values in 1990. In 1991 and 1992 the reserve was increased for a specific commercial retail property. In 1993 the reserve decreased because of the charge-off related to the disposal of that property. While several other commercial properties were disposed of at minimal loss in 1994, the remaining properties each had certain characteristics reducing their marketability. Accordingly, the increased 1994 reserve reflects this increased risk.
INVESTMENT PORTFOLIO
Although the Company has authority to make investments in a number of government, municipal and corporate debt securities, the Company does not have a large portfolio of investment securities. The portfolio of investment securities the Company maintains are mostly U.S. Government agency securities and investment grade corporate debt securities. The following table sets forth the components of the Company's investment portfolio at December 31:
See Note 4 -- Notes to Consolidated Financial Statements included as Item 8 to this report for information regarding the carrying values and market values of the Company's investment securities.
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The following table presents information regarding the scheduled maturities and yields on investment securities at December 31, 1994:
DEPOSITS AND SOURCES OF FUNDS
The primary sources of funds for the lending and general business activities of the Company are retail deposits and advances from the FHLB. In addition, the Company derives funds from loan sales and principal and interest payments on loans. Scheduled loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments, which are influenced significantly by general interest rate levels, interest rates available on other investments, economic conditions and other factors, are less stable.
DEPOSITS. The following table sets forth the deposit flows of the Company for the years ended December 31:
The Company has built its savings business through retail deposits at its twelve retail banking offices in the Minneapolis-St. Paul metropolitan area. Substantially all of the Bank's depositors are Minnesota residents. The Company does not currently bid on, or actively solicit, deposits from municipalities or governmental agencies and none of the Company's outstanding deposits has been obtained in brokered transactions.
The Company attracts deposits by advertising through newspaper, radio and direct mail advertising and by various special promotions. The Company also offers deposit and withdrawal services for customers at automated teller machines by participating in the CIRRUS -TM- network.
The Company offers a variety of savings plans to its depositors including interest-bearing checking accounts, regular passbook savings accounts, money market deposit accounts, time certificates and Keogh and individual retirement accounts. For a description of the portion of total deposits represented by each type of account and the average rate of interest paid on such accounts as well as the maturities of the Company's certificate accounts, see Item 8 -- Note 10 of Notes to Consolidated Financial Statements.
At December 31, 1994, the Company had $43.9 million of certificate accounts with individual balances of $100,000 or more. For additional information on deposits see Item 7 -- "Management's Discussion and Analysis -- Net Interest Income Yield Analysis Table."
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BORROWINGS. The following table sets forth the Company's borrowings at December 31:
As a depository institution insured by the Savings Association Insurance Fund ("SAIF") of the FDIC, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain mortgages and other assets (principally securities which are obligations of, or guaranteed by, the United States government), provided standards related to creditworthiness are met. See "Federal Home Loan Bank System." FHLB advances are made in accordance with several credit programs of the FHLB, each of which has its own interest rate and range of maturities. The FHLB prescribes the acceptable uses of such advances and the limitations on the amount of advances to each member.
On December 11, 1992, the Company issued $23.0 million of 9.25% Subordinated Notes due 2002. Of the $22.1 million net proceeds, $12.0 million was contributed to the Bank's paid-in capital during 1992 and an additional $5.0 million in 1993 (there was no additional contribution in 1994). The balance of the net proceeds remains at the Company to support future growth of the Bank's operations. For additional information on borrowings, see Item 7 -- "Management's Discussion and Analysis, Net Interest Income, Liquidity and Capital Management" sections and see Item 8 -- Note 11 of Notes to Consolidated Financial Statements.
COMPETITION
The Company faces substantial competition both in its retail banking and its mortgage banking operations. Competition for deposits comes from other savings institutions, banks, credit unions, money market funds and other mutual funds, corporate and government debt securities, insurance companies and pension funds, many of which have greater capital resources than the Company and offer investment alternatives without comparable regulatory restrictions. The Company's most direct deposit competition comes from one large federally-chartered thrift institution and a large number of commercial banks, including two major banks. The Company believes that the primary factors in competing for deposits are interest rates offered, type of products offered and location of banking offices. Competition in residential lending comes primarily from other mortgage companies, banks and savings institutions. The primary factors in competing for mortgage loans are interest rates offered, type of products offered, origination fees charged and range of services offered.
EMPLOYEES
The Company had 428 employees at December 31, 1994, 410 of whom were full-time employees and 18 of whom were part-time employees. Of such employees, 233 were mortgage banking personnel, 135 were retail banking personnel and 60 were corporate and administrative personnel. None of the employees of the Company is a member of a union or subject to a collective bargaining agreement, and the Company believes that its relationship with its employees is satisfactory.
FEDERAL HOME LOAN BANK SYSTEM
The bank is required to invest in FHLB stock in an amount equal to the greater of 1% of the unpaid principal of home mortgage loans or 5% of the Bank's borrowings with the FHLB. Investment in capital stock of the FHLB increased to $20.0 million at December 31, 1994. The increase was the result of additional stock purchases to meet the requirement to maintain stock equal to 5% of the Bank's FHLB borrowings.
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FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, depository institutions are required to maintain reserves against their transaction accounts (primarily checking accounting for the Bank), nonpersonal time deposits and Eurocurrency liabilities. At present, the reserve requirement for transaction accounts is 3% of the first $54.0 million of such accounts and 10% of the amount in excess of $54.0 million. The Federal Reserve Board also has authority to impose supplemental reserves of up to 4% of transaction accounts and emergency reserve requirements upon consultation with committees of Congress.
REGULATION
GENERAL. As a federally-chartered savings bank engaged in mortgage and consumer lending and in the acceptance of deposits, the Bank is subject to extensive federal and state regulation in virtually all areas of its operations, including regulations that govern the type of its investments and liabilities, the form of the instruments used to represent such assets and liabilities, the advertisement and promotion of such assets and liabilities, its efforts to support community reinvestment, its dealings with affiliates, the location and, in some instances configuration of its offices and various other matters. As a federally-chartered savings bank with accounts insured by SAIF of the FDIC, the Bank's primary regulators are the OTS, an office of the Department of Treasury and the FDIC. In addition, the Bank is a member of and may obtain advances from the Federal Home Loan Bank system which provides credit for home finance to savings institutions and other financial institutions that meet certain tests as to the composition of their assets.
INSURANCE OF ACCOUNTS. The FDIC administers both the fund that insures commercial banks (the "Bank Insurance Fund" or "BIF") and the SAIF. FDIC insurance assessments for SAIF members must be not less than .185% of deposits from January 1, 1994 to December 31, 1997 and .15% of deposits after 1997. The FDIC may, in its discretion, increase the rate of assessments to a rate which is adequate to increase the SAIF reserves to a specified percentage of deposits.
The FDIC currently uses a risk-based assessment system for all SAIF and BIF members. Members are assigned an assessment risk classification based on the institution's capitalization as of a date six months prior to the beginning of the assessment period (assigning the institution to one of three categories) and an evaluation by the institution's primary regulator of the risk posed by the institution to the insurance fund (assigning the institution to one of three subgroups). Well capitalized institutions (institutions with risk-based capital exceeding 10%, core capital exceeding 5% and core capital to risk-weighted assets exceeding 6%) are assessed at between .23% and .29% of deposits, depending on their subgroup assignment. Adequately capitalized institutions (institutions with risk-based capital exceeding 8%, core capital exceeding 4% and core capital to risk-weighted assets exceeding 4%) are assessed at between .26% to .30% of deposits. Undercapitalized institutions (institutions that do not meet applicable capital requirements) are assessed at between .28% and .31% of deposits. The Bank qualifies as a well-capitalized institution and its assessment rate was .23% during 1993 and 1994.
Deposits in institutions insured by SAIF are insured to $100,000 per insured depositor and are backed by the full faith and credit of the United States government.
REGULATORY CAPITAL. A federal savings institution such as the Bank is required to satisfy three capital requirements: (i) a requirement that "tangible capital" be not less than 1.5% of adjusted total assets, (ii) a requirement that "core capital" be not less than 3% of adjusted total assets, and (iii) a risk-based capital standard of 8% of "risk-adjusted" assets. The Bank currently meets each such test. See Item 7 -- "Management's Discussion and Analysis -- Capital Management" or Note 12 of Notes to Consolidated Financial Statements included as Item 8 for discussion of capital compliance.
Tangible capital includes stockholder's equity, noncumulative perpetual preferred stock, certain nonwithdrawable accounts, pledged deposits of mutual savings institutions, and minority interests in fully consolidated subsidiaries, less intangible assets and certain investments in subsidiaries that conduct activities not
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permissible for a national bank. Purchased mortgage servicing rights may be included in tangible capital at the lower of 90% of fair market value, 90% of original cost, or 100% of current amortized book value.
Core capital consists of tangible capital plus a percentage of certain marketable intangible assets, and a decreasing portion (through 1994) of qualifying supervisory goodwill. Because the Bank does not have any supervisory goodwill or marketable intangible assets that would be added to tangible capital, its core capital is equivalent to its tangible capital.
Risk-based capital is determined by assigning a risk-weight, ranging from 0% for government securities to 200% for certain equity investments, to each of an institution's assets, including the credit-equivalent amount of off-balance sheet assets. An institution is required to maintain total regulatory capital (consisting of both "core capital" and supplementary capital such as the Bank's subordinated debt) equal to the regulatory mandated percentage (currently 8.0%) of the sum of its assets multiplied by their respective risk-weights. In August 1993, the OTS adopted final regulations effective in January 1994 for all savings institutions (except certain institutions with less than $300 million of assets) that add an interest rate risk component to the risk based capital test. Under these regulations, each institution is required to submit a complex report of its assets and liabilities to the OTS that forms the basis for calculation of the effect a 200 basis point change in market interest rates would have on the institution's "net portfolio value" (a measure based on the cash flows from, and required by, the institution's assets, liabilities and off-balance sheet contracts). If such net portfolio value declines by more than two percent of the estimated value of the institution's assets, one half of the excess is subtracted from the institution's total capital in calculating the risk based capital test. The interest rate risk is calculated based on the assets and liabilities two quarters preceding the calculation date. As of December 31, 1994, the Bank's required regulatory capital was not impacted by the interest rate risk rule.
A savings institution that fails to meet its capital requirements is subject to an increased level of monitoring and must submit a capital restoration plan to the OTS within 45 days of the date its capital falls below the applicable standard. The capital plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it is adequately capitalized for four quarters or the holding company is liable for the deficiency in the institution's capital deficit (up to 5% of the institution's assets). A savings institution not meeting its capital requirements may not, without approval of the OTS, allow assets to increase beyond interest credited to deposits. The OTS may impose a number of conditions on approval of capital plans, including growth restrictions, operating restrictions, and disposition plans, if objectives are not achieved. The OTS may also mandate the replacement of officers or directors, place restrictions on distributions of controlling companies, prohibit interest payments on subordinated debt and prohibit salary increases or bonuses for significantly undercapitalized institutions. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a critically undercapitalized institution with tangible capital of less than 2% of total assets or 65% of the minimum tangible capital requirement is subject to conservatorship or receivership within 90 days unless the OTS makes periodic determinations to forbear such action.
In accordance with the requirements of FDICIA, the four principal banking agencies adopted prompt corrective action rules in September and October 1992. The rules divide depository institutions into five categories: "well capitalized" institutions have a risk-based capital ratio of 10% or greater, a core capital to risk-weighted assets ratio of 6% or greater and a core capital ratio of 5% or better; "adequately capitalized" institutions have a risk-based capital ratio of 8% or greater, a core capital to risk-weighted asset ratio of 4% of greater and a core capital ratio of 4% or greater; "undercapitalized" institutions have a risk-based capital ratio of greater than 6% but less than 8%, a core capital to risk-weighted asset ratio of at least 3% and a core capital of at least 3%; "significantly undercapitalized" institutions have a risk- based capital ratio of less than 6% and core capital ratio of less than 3%; "critically undercapitalized" institutions have a tangible equity to total assets ratio of less than 2%. The greatest amount of operating flexibility is afforded a "well capitalized" institution and the regulations impose increasing operational restrictions on each category of less "well capitalized" institutions. "Critically undercapitalized" institutions must be placed in receivership 90 days after being so determined unless significant progress is made to improve capital. The Bank qualified as a "well capitalized" institution at December 31, 1994.
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RESTRICTIONS ON DIVIDENDS. Under OTS regulations, savings associations are limited in the amount of "capital distributions" that they are permitted to make, including cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders or another entity in a cash out merger and other distributions charged against capital. The regulation also applies to capital distributions that the Bank may make to the Company, thereby affecting the dividends that the Company may pay to its stockholders. The regulation establishes a three tiered system of regulation, with the greatest flexibility being afforded to well capitalized institutions. An institution that has regulatory capital that is at least equal to its fully phased in capital requirement, and has not been notified that it "is in need of more than normal supervision," is a Tier 1 institution. Any institution that has regulatory capital at least equal to its minimum capital requirement, but less than its fully phased in capital requirement, is a Tier 2 institution. An institution having regulatory capital that is less than its minimum capital requirement is a Tier 3 institution. At December 31, 1994, the Bank qualified as a Tier 1 institution.
A Tier 1 institution is permitted, after prior notice to the OTS, to make capital distributions in amounts up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the percentage by which the ratio of its regulatory capital to assets exceeds its fully phased in capital ratio) at the beginning of the calendar year. Any additional amount of capital distributions would require prior regulatory approval. A Tier 2 institution is permitted to make capital distributions in amounts up to 75% of its net income for the most recent four quarters, if it satisfies the risk based capital requirement. In each case, the amount of capital distributions permitted is reduced by the amount of capital distributions that the institution previously has made during the four quarter period. A Tier 3 institution is not authorized to make any capital distributions except with prior OTS approval or pursuant to an OTS approved capital plan. Under FDIC regulation, no institution may make a capital distribution that causes it to fail its minimum capital requirement.
QUALIFIED THRIFT LENDER TEST. Unless a savings institution meets the qualified thrift lender test (QTL), it is classified and subject to regulation as a national bank or becomes subject to a number of limitations on investment, branching, advances, dividends and other activities. In addition, a unitary savings and loan holding company, such as the Company, that owns a thrift failing the QTL test becomes subject to limitations on activities applicable to multiple savings and loan holding companies. The QTL test, generally requires that an insured institution's "qualified thrift investments" equal or exceed 65% of the institutions "portfolio assets." Qualified thrift investments include (i) loans for the purchase, refinance, construction, and improvement of residential housing (including manufactured housing), (ii) home equity loans, (iii) mortgage-backed securities, (iv) obligations of the FDIC, the Resolution Trust Corporation (RTC), or FSLIC Resolution Fund, (v) 50% of loans held for sale less than 90 days after origination, (vi) investments in qualifying service corporations, (vii) subject to certain limitations, 200% of loans to acquire developed or constructed lower income residential properties, (viii) loans for the purchase or construction of churches, schools, nursing homes, and hospitals and (ix) loans for personal, family, household or educational purposes up to 5% of the portfolio assets. Portfolio assets include all of an institution's assets less intangible assets, the value of property used in the business and qualifying liquidity assets (up to 20% of total assets). An institution must satisfy the QTL test on a monthly average basis during 9 out of every 12 months. The Bank has always satisfied such test and had qualifying thrift investments equal to 94% of portfolio assets on December 31, 1994.
LIQUID ASSET REQUIREMENT. FIRREA requires each savings institution to maintain qualifying liquid assets (which include cash, certain time deposits, banker's acceptances and specified United States Government, State or Federal agency obligations, certain money market funds and qualifying assets that would qualify except for maturity) of a percentage designated by the Director of the OTS (currently 5%) of the balance of its withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties will be imposed, unless waived, for failure to meet liquidity requirements. The Bank had liquid assets in excess of the requirements for each month in the year ended December 31, 1994.
LOANS TO ONE BORROWER RESTRICTIONS. Under FIRREA permissible lending limits for loans to one borrower are generally equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable securities, in which case this limit is increased to 25% of unimpaired capital and surplus).
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LIMITATIONS ON CERTAIN INVESTMENTS. As a federally chartered institution, the Bank is generally prohibited from investing directly in equity securities and real estate (other than that used for offices and related facilities or acquired through, or in lieu of, foreclosure or on which a contract purchaser has defaulted). In addition, the Bank's authority to invest directly in service corporations is limited to a maximum of 2% of the Bank's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner city development purposes. In addition, because the Bank meets all of the minimum capital requirements, the Bank is permitted to make additional loans in an amount not exceeding 50% of its regulatory capital to its service corporations.
TRANSACTIONS WITH AFFILIATES. Under FIRREA all transactions involving a savings association and its affiliates are subject to sections 23A and 23B of the Federal Reserve Act (FRA). Generally, these sections restrict "covered transactions" (loans, purchases of assets, guarantees and similar transactions) to 10% of the institution's capital stock and surplus, restrict all transactions with affiliates to 20% of such capital stock and surplus, and require such transactions to be on terms as favorable to the savings association as transactions with nonaffiliates. The affiliates of a savings association include any company whose management is under a common controlling influence with the management of the savings associations (including the savings association's holding company), any company controlled by controlling stockholders of the savings association or with a majority of interlocking directors with the savings association, and any company sponsored and advised on a contractual basis by the savings association or any of its subsidiaries or affiliates. The Bank's subsidiaries are not deemed affiliates; however, transactions between the Bank or any of its subsidiaries and any affiliates are subject to the requirements and limits of sections 23A and 23B of FRA.
FIRREA and FDICIA also subject loans to insiders (officers, directors and 10% stockholders) to Sections 22(g) and (h) of FRA and the regulations promulgated thereunder. The OTS recently amended its regulations governing loans to officers and directors to provide that such transactions will be governed by Regulation O of the Federal Reserve Board. Among other things, such loans must be made on terms substantially the same as loans to non-insiders.
REGULATORY SANCTIONS. Any institution that does not operate in accordance with or conform to OTS or FDIC regulations, policies and directives may be sanctioned for noncompliance. For example, proceedings may be instituted against any insured institution or any director, officer, employee or person participating in the conduct of the affairs of an insured institution who engages in unsafe and unsound practices, including violation of applicable laws, regulations, orders, agreements or similar items. In addition, noncompliance may result in the OTS or FDIC declining to approve various actions by an institution that may be taken only with such approval. FIRREA substantially increases enforcement remedies, including civil monetary damages, that may be assessed against an institution or its officers, directors, employees, agents or independent contractors. For knowing violations and under certain aggravated circumstances, penalties of up to $1,000,000 may be assessed. For lesser violations where there is a pattern of misconduct, or under certain other circumstances, a penalty of up to $25,000 per day may be assessed.
FDIC insurance may be terminated upon a finding that an insured institution is engaging in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable laws, regulation or order of or condition imposed by the FDIC. Upon termination, funds then on deposit continue to be insured for at least six months and up to two years and notice is provided to all depositors.
HOLDING COMPANY REGULATION. By virtue of owning 100% of the outstanding capital stock of the Bank, the Company is a unitary savings and loan holding company under the National Housing Act, as amended by the Savings and Loan Holding Company Amendments of 1967 and FIRREA (the "Holding Company Act").
As a savings and loan holding company, the Company is required to register with, and is subject to direct regulation by, the Director of the OTS under the Holding Company Act. There are very few limitations on unitary holding companies whose insured institution subsidiary complies with the qualified thrift lender test. The Holding Company Act does place certain restrictions on dealings between the holding company and its insured institution subsidiary. Management believes it currently complies with all such regulations.
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ITEM 2.

ITEM 2. PROPERTIES
The Company owns a 48,800 square foot, three story building in Wayzata, Minnesota that was constructed in 1990 to its specifications and that serves as its corporate and mortgage banking headquarters as well as a retail bank. The Company also owns a 9,400 square foot single story retail banking facility in Brooklyn Center, Minnesota completed to its specifications in mid-1992. The Company acquired in September of 1993 a 6,080 square foot single story retail banking facility in St. Louis Park, Minnesota that is subject to a ground lease which expires in 2031. The Company's remaining nine retail banking facilities in the Minneapolis/St. Paul metropolitan area are leased pursuant to agreements that provide various renewal and/or purchase options. The following table presents certain information regarding leases for retail banking offices:
Retail Banking Lease Expiration Office Location (after renewal option) --------------- ---------------------- Rand Tower 2009 St. Paul 2032 Ridgedale 2007 Edina 2007 Highland Park 2012 Roseville 2010 Bloomington 2001 Cub Foods Minnetonka 2013 IDS Center 2008
The Company leases space for its mortgage loan offices and its mortgage loan servicing operations. These leases have generally been for terms of three to five years. The location for each of the mortgage offices is as follows:
Mortgage Office Lease Location Expiration -------- ----------
Minnesota: --------- Edina 1998 Minnetonka (Builder Division) 1995 Minnetonka 1996 Roseville 2000 Eagan 1995 Coon Rapids 1995 Duluth 1995 St. Louis Park (Loan Servicing) 1998
Illinois: -------- Oak Brook 1996 Crystal Lake 1996 Orland Park 1996
Indiana: ------- Merrillville 1997
Wisconsin: --------- Waukesha 1996
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The Company also leases space for its private banking division in downtown Minneapolis which expires in 1995.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not currently engaged in any litigation. The Bank is party to various forms of litigation in the ordinary course of business, including foreclosure proceedings and various forms of consumer and employee complaints. The Company does not believe that any of such litigation is material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of the Company was held on March 15, 1995 to consider and vote upon the approval and adoption of an Agreement and Plan of Reorganization and a Plan of Merger, that provide for the merger of the Company with and into Firstar Corporation of Minnesota, a wholly owned subsidiary of Firstar Corporation. Stockholders holding 2,782,368, or approximately 79.3%, of the outstanding shares of Common Stock were represented at the meeting in person or by proxy. The breakdown of the vote is as follows:
TABULATION OF VOTES ---------------------------------------------------- FOR AGAINST WITHHELD --- ------- -------- 2,757,048 18,730 6,590
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PART II.
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICES AND TRADING DATA
The Company's Common Stock is traded on the Nasdaq National Market under the symbol INVS.
As of March 24, 1995, there were 3,467,097 shares of Common Stock outstanding. As of that date, there were approximately 246 shareholders of record.
The following table sets forth the high and low sale prices of the Company's Common Stock as reported by the Nasdaq National Market. These prices include interdealer prices, without retail markup, markdown or commissions, and do not always represent transactions with the public.
The Company paid quarterly common dividends in fiscal year 1993 at the annual rate of $.375 per share and in fiscal year 1994 at the annual rate of $.50 per share.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
INVESTORS BANK CORP. AND SUBSIDIARY
FIVE YEAR FINANCIAL HIGHLIGHTS (Dollars in thousands except per share data)
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ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER AGREEMENT
On August 21, 1994 the Company, Firstar Corporation (Firstar) and Firstar Corporation of Minnesota (Firstar Minnesota) entered into an Agreement and Plan of Reorganization (the Merger Agreement), pursuant to which the Company will be merged (the Merger) with and into Firstar Minnesota. The Agreement also calls for the merger of the Company's subsidiary, Investors Savings Bank, F.S.B. (the Bank) with and into Firstar Bank Minnesota, N.A. (Firstar Bank), on the date of, and immediately after the Merger becomes effective. Upon consummation of the Merger, each share of the Company's Common Stock will become the right to receive .8676 shares of Firstar common stock and each share of the Company's preferred stock will become the right to receive $27.50, plus accumulated dividends, in cash. See Note 14 of the accompanying Consolidated Financial Statements for additional discussion of the effect of the Merger on the Company's preferred stock, outstanding warrants and options and restricted stock.
The Company's stockholders approved the Merger Agreement at a special meeting on March 15, 1995. The Merger is expected to be consummated not prior to late April, 1995. The transactions required to consummate the Merger have been approved by the Federal Reserve Board and approved by the office of the Comptroller of the Currency remains pending.
At the Merger, the Company will be merged into Firstar Minnesota and the separate corporate existence of the Company will cease. Firstar Minnesota, as the surviving corporation in the Merger and a wholly owned subsidiary of Firstar, will continue operations. The officers and directors of Firstar Minnesota prior to the Merger will continue as the officers and directors of the surviving corporation, except that James M. Burkholder, President and Chief Executive Officer of the Company will be elected to the Board of Directors of Firstar Minnesota and Firstar Bank. The Bank will merge into Firstar Bank. After the Merger, Firstar Bank's management will be drawn from the officers of both banks, and its Board of Directors will consist of the same directors as just before the Merger, except that Mr. Burkholder will be added to the Board. Mr. Burkholder will also become President and Chief Executive Officer of Firstar's mortgage banking subsidiary, Firstar Home Mortgage Corporation. Because of the Merger, the following discussion focuses on the Company's recent performance with little discussion of the business policies and strategies and related risks to which the Company would be subjected should it continue in operation.
RESULTS OF OPERATIONS
PERFORMANCE SUMMARY. Investors Bank Corp.'s (the Company) net earnings were $8.3 million for 1994, compared to $10.0 million for 1993 and $7.8 million for 1992. Earnings per common share were $2.00 for 1994, compared to $2.49 for 1993 and $1.98 for 1992. The Company's 1994 results reflect increased net interest income from substantial interest-earning asset growth but reduced income from mortgage banking operations and increased expenses arising primarily from the opening of additional offices in late 1993. Total assets grew 10.8% during the year and were $1.1 billion at December 31, 1994.
Return on average assets was .82% in 1994, compared to 1.13% in 1993 and 1.14% in 1992. Return on average common equity decreased to 17.1% in 1994 from 25.6% in 1993 and 24.2% in 1992.
The Company's interest-earning asset base continued to grow in 1994 causing net interest income to increase $1.4 million or 5.6% despite a decline in the net interest margin from 2.94% in 1993 to 2.71% in 1994. Average interest-earning assets, primarily loans, were $980 million in 1994 compared to $855 million in 1993. Interest-earning assets reached $1.1 billion at December 31, 1994. This growth in interest-earning assets resulted from internally generated loans. The Company originated $290 million in new adjustable rate mortgage (ARM) loans, increasing mortgage loans $183 million during 1994. Through the Company's retail banking network, consumer loans were increased $25.5 million during the year. These increases were partially offset by a $72.9 million reduction in mortgage loans held for sale as increased market interest rates significantly reduced the demand for fixed rate mortgages.
The asset growth was funded primarily by increased borrowings from the Federal Home Loan Bank of Des Moines (FHLB) which increased $75 million to $400 million at December 31, 1994. In addition, the Company's efforts to increase deposits resulted in a $32.4 million increase or 5.4% during the current year to $636 million at December 31, 1994.
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As a result of the decreased level of mortgage banking activity in 1994, noninterest income decreased $1.8 million or 9.7% compared to 1993. The primary reason for the decline was the increase in market interest rates which brought refinancing activity to a very low level and also dampened demand for mortgages to purchase residences. In 1994, the Company closed $303 million of loans for sale in the secondary market, down from $838 million in 1993. Loans for sale purchased from correspondent lenders also declined with $50 million such loans purchased in 1994 compared to $115 million in 1993. Mortgage banking income decreased $3.7 million or 27.7% in 1994 compared to 1993. The portfolio of loans serviced for others declined $57 million during 1994 to $1.3 billion at year end because of early payoffs of mortgages during the year. However, loan servicing fees were up 83.7% or $2.4 million for the year primarily because high prepayments in 1993 resulted in adjustments of $1.4 million being made to capitalized servicing rights which did not occur in 1994.
Noninterest expense increased $1.8 million or 6.7% to $28.2 million in 1994. Staff levels in mortgage banking were reduced in response to the decreased activity resulting in level compensation expense compared to 1993. Other noninterest expenses increased in 1994 for a variety of reasons including greater occupancy costs from additional branches, higher data processing costs from vendor fee increases, costs incurred to dispose of foreclosed real estate and merger related costs.
The significantly higher earnings in 1993 as compared to 1992 resulted from strong retail banking and mortgage banking performance. Net interest income increased $3.0 million or 13.3% from $22.2 million in 1992 to $25.1 million in 1993, while noninterest income increased $4.4 million or 30.7% from $14.3 million in 1992 to $18.6 million in 1993. The increased net interest income for 1993 was due to the higher level of interest-earning assets. Average interest-earning assets, primarily loans, were $855 million in 1993 compared to $653 million in 1992. The higher noninterest income was primarily the result of the increase in mortgage banking income. Loans originated for sale in 1993 increased 26.3% over originations in 1992.
NET INTEREST INCOME. A significant portion of the Company's earnings is derived from net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income, when divided by average interest-earning assets, is referred to as the net interest margin. The net interest rate spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
Net interest income was $26.5 million in 1994, up $1.4 million or 5.6% from 1993. As shown in the volume/rate analysis table below, an increase in average interest-earning assets contributed $3.3 million to increasing net interest income during 1994. The positive contribution from the increased volume of interest-earning assets was partially offset by a $1.8 million decrease in net interest income due to a lower net interest rate spread in 1994 than in 1993. Net interest income in 1993 had increased $3.0 million or 13.3% from 1992 caused by a $5.5 million volume increase reflecting an increase in average interest-earning assets, but partially offset by a $2.5 million decrease from a decreased interest rate spread in 1993 over 1992.
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NET INTEREST INCOME VOLUME/RATE ANALYSIS (IN THOUSANDS)
Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. - 20 -
NET INTEREST INCOME YIELD ANALYSIS (DOLLARS IN THOUSANDS)
During 1994, the Company's average interest-earning assets were $980 million, a 14.6% increase over 1993. This increase was primarily in loans which averaged $917 million in 1994 compared to $798 million in 1993. Increased market interest rates during 1994 caused a shift in mortgage demand away from fixed rate mortgages to ARMs. Consequently, during 1994, the Company increased its mortgage loans held in portfolio $183 million and its consumer loan portfolio $25.5 million while its mortgage loans held for sale declined $72.9 million.
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Interest-earning assets were $1.1 billion at the current year end compared to $982 million at the end of 1993. Average interest-earning assets grew 31.0% in 1993 as average loans increased 30.4%. As a result of the significant lending activity during 1993, the mortgage loans held in portfolio increased $120 million and consumer loan portfolio increased $25.1 million.
In 1994, the Company funded the asset growth with increases in FHLB advances and deposits. Average interest-bearing liabilities increased 14.3% compared to 1993. Average FHLB advances increased $63.2 million and average interest-bearing deposits increased $55.9 million. The increase in deposits in 1994 was due to special deposit promotions and to the opening of new retail bank offices in late 1993. During 1993, average interest-bearing liabilities increased 28.8% compared to 1992. The increase occurred in FHLB advances and interest-bearing deposits which were used to fund the growth in interest-earning assets. FHLB advances averaged $249 million in 1993 compared to $132 million in 1992. Average interest-bearing deposits were up $40.1 million in 1993 compared to 1992.
The net interest rate spread decreased to 2.45% for 1994 from 2.70% during 1993 and 3.19% in 1992. The interest rate maturity of the Company's interest-bearing liabilities has historically been shorter than its interest-earning assets. The relatively high spread in 1992 was due to deposits and FHLB advances repricing at lower rates and decreasing the overall cost of funds while asset yields decreased at a slower rate. With short term interest rates remaining relatively flat in 1993, asset yield repricings caught up with liability repricings by declining at a more rapid rate causing the net interest rate spread to decline. In addition, adjustable rate mortgage loans originated in 1993 were at lower initial rates and the more aggressive deposit pricing in 1993 combined to further reduce the net interest rate spread. As the market interest rates increased in 1994, the Company's interest-sensitive liabilities repriced upward more rapidly than its assets. In addition, the Company's ARM loans have "caps" on the annual increase in interest rate allowed due to increased market rates. These caps, generally 2%, limited the amount of increase in yield on the Company's ARM portfolio during 1994.
The net interest margin was 2.71% for 1994, compared to 2.94% for 1993 and 3.39% in 1992. The majority of the changes in margin were the result of the changes in net interest rate spread previously explained. The difference between net interest margin and net interest spread widened in 1994, 1993 and 1992 as the ratio of average interest-earning assets to average interest-bearing liabilities increased. The increase in this ratio was largely due to the increase in equity from the retention of earnings for all three years. In addition, average noninterest bearing deposits increased during 1993 and 1992.
NONINTEREST INCOME. Noninterest income is a significant source of revenue for the Company and has a major impact on operating results. An active mortgage banking operation is an integral part of the Company's strategy to supplement net interest income with a significant amount of noninterest income. Mortgage banking generates income primarily through the sale of loan servicing rights and the sale of mortgage loans. This mortgage banking activity also adds to the portfolio of loans serviced for others, generating continuing noninterest income from loan servicing fees. Through mortgage banking, the Company originates government insured loans and fixed-rate conventional loans and sells such loans in the secondary market or pools the loans and sells the resulting mortgage-backed securities, generating a gain on sale of mortgage loans. For most of these sales the Company retains the servicing rights. The Company also regularly engages in the sale of portions of servicing rights it creates, generating significant gains on such sales. Historically, the amount of loans the Company has originated for sale has been significant.
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NONINTEREST INCOME (IN THOUSANDS)
The Company's mortgage banking income is highly dependent on the amount of mortgage loans originated for sale. Most of its loans are originated through loan closings by its mortgage loan offices, but loans are also purchased from correspondents. The Company has six Twin Cities offices, a Duluth office, four offices in the Chicago market and an office in the Milwaukee area which opened in late 1993. The Company's strategy is to employ experienced and high performing lending officers and to support their efforts with a wide range of competitive mortgage products. During 1993 and 1992 the Company also benefitted from the strong mortgage demand generated by reduced market interest rates. Mortgage refinancings increased to 49.0% and 46.5% of the total loans closed during 1993 and 1992, respectively. However, in 1994, market interest rates increased rapidly and significantly. As a result, refinancings declined to 17.5% of total loans closed. Furthermore, demand for mortgages to purchase homes weakened substantially. Reflecting these market conditions, mortgage banking income decreased $3.7 million or 27.7% in 1994 from the prior year and increased $2.1 million or 19.1% in 1993 compared to 1992. The decrease in 1994 was from a $6.4 million decrease in gain on sales of mortgage loans partially offset by a $2.7 million increase in gain on sales of loan servicing rights. Conversely, in 1993 there was a higher gain on sales of mortgage loans while there was reduced gain on sales of loan servicing rights.
MORTGAGE BANKING ACTIVITY (IN THOUSANDS)
The Company closed $303 million loans for sale in 1994, 63.8% less than in 1993. Also in 1994, loan purchases declined 56.8% to $49.7 million. In 1993, loans originated for sale totaled $838 million which was a 26.4% increase from 1992 and loan purchases were up 25.9% to $115 million.
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The 67.9% reduction in gain on sales of mortgage loans in 1994 was due to a 55.8% reduction in the amount of mortgage loans sold and less favorable market pricing. In 1993, the gain on sales of mortgage loans was $3.1 million or 48.4% greater than in 1992. This reflected 22.9% more loans sold in 1993 and higher cash gains as a result of the higher refinancing activity level in 1993.
Gain on sales of loan servicing rights was $6.0 million in 1994, an 80.0% increase from the gain earned in the previous year. Because of the reduced gains realized on the sales of mortgage loans in 1994, the Company increased the amount of loan servicing rights sold in the current year by 90.9% to $481 million. As part of the Merger Agreement discussed above, the Company agreed not to sell any loan servicing rights after the third quarter of 1994. During the third quarter of 1994, the Company sold $140 million of loan servicing rights to Firstar for a gain of $2.4 million. Gain on sales of loan servicing rights was $3.3 million for 1993, a 21.3% decrease from the gain earned in 1992. The decreased gain in 1993 reflects the Company's decision to retain more servicing rights because of the substantial gains on sales of mortgage loans.
Loan servicing fees were $5.2 million in 1994 compared to $2.8 million in 1993 and $1.5 million in 1992. In 1994, the average servicing portfolio was $110 million greater than in 1993. In addition, no adjustments were required to capitalized servicing rights. Loan servicing fees were negatively impacted in 1993 and 1992 by adjustments of $1.4 million and $1.5 million, respectively, made to capitalized servicing rights. These adjustments were necessary to reflect the high prepayment activity in the low interest rate environment and to conform with accounting and regulatory guidelines adopted in 1992. Because of the high level of originations in 1993, the servicing portfolio experienced a net growth during 1993 of $376 million.
Commissions on annuity sales were $566 thousand on sales of $11.5 million in 1994, almost the same as the $561 thousand on annuity sales of $11.4 million in 1993. The Company earned $575 thousand on annuity sales of $11.0 million in 1992. In early 1992, there were proposals to Congress that certain tax benefits enjoyed by the insurance industry be eliminated. This had the effect of increasing sales during 1992. During 1993 and 1994, sales remained strong due to the strength of the Company's experienced staff of licensed agents who regularly promote these products.
Commissions on title insurance sales were $427 thousand in 1994, $936 thousand in 1993 and $135 thousand in 1992. This activity began in late 1992 with 1993 being the first full year of operation and a year with record mortgage origination activity for the Company. During 1994, title insurance was sold on 832 loans compared to 2,894 loans in 1993 and 476 loans in 1992. The 1994 title insurance activity was adversely affected by the significantly reduced mortgage banking activity.
Other income increased to $1.0 million for 1994 from $991 thousand in 1993 and $876 thousand in 1992. Other income includes fees on retail accounts, credit life insurance commissions and other activity-related fees which have increased all three years along with the increasing numbers of loans and accounts.
NONINTEREST EXPENSE. Noninterest expense increased 6.7% to $28.2 million for the year ended December 31, 1994 compared to $26.5 million for the same period in 1993. Noninterest expense grew 17.6% in 1993 from the $22.5 million in 1992. The increase in noninterest expense over the three year period was generally attributable to the Company's continued expansion of both its mortgage banking and retail banking activities.
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NONINTEREST EXPENSE (In thousands)
Employee compensation and benefits for 1994 and 1993 were both $15.4 million. Three retail and two mortgage offices were opened during the second half of 1993, and 1994 experienced the first full year expense of the staff for these offices. Offsetting this was a 25% decrease in mortgage production staff overall as staff levels were adjusted for the decreased mortgage banking activity during 1994. Employee compensation and benefits for 1993 were 22.0% more than 1992 primarily because of an 18.2% increase in staffing to support the high level of mortgage activity and new offices. Mortgage production, title insurance, consumer lending, mortgage servicing and marketing increased staff to support the higher level of activity. Benefits increased in step with compensation and were also affected by higher health insurance costs.
Occupancy expense increased $326 thousand or 8.6% in 1994 over 1993 and $407 thousand or 11.9% in 1993 over 1992. The new offices opened in the second half of 1993 were largely responsible for the increases as 1994 expense included a full year of the new office expenses. Rents and related expenses increased 10.2% between 1994 and 1993 and 7.9% between 1993 and 1992. Equipment expenses were up 4.6% in 1994 over 1993 and 20.2% between 1993 and 1992. In 1993, depreciation expense for a full year was first incurred on computer equipment purchased in 1992 as part of a major networking project.
Continuing a strategy that began in 1993, the Company promoted its retail banking products in the media and through point of sale displays in its locations during 1994. In addition, a new mortgage product was heavily promoted. These efforts resulted in a $176 thousand or 19.0% increase to $1.1 million in advertising expense in 1994 over 1993. Advertising expense increased 38.8% to $926 thousand in 1993 from $667 thousand in 1992. In 1993, as part of its strategy to increase deposits and consumer loans, the Company increased both its advertising of retail products and targeted marketing efforts such as promotions for the new retail banks and point of sale materials.
Federal deposit insurance premiums increased 13.8% in 1994 from 1993 and 4.3% between 1993 and 1992 along with increased deposits. The Bank's insurance premium rate was .23% of the deposit base for 1994, 1993 and 1992 due to the Bank being categorized by the FDIC as "well capitalized." The increase in insurance expense does not always match the percent of deposit increase between periods because the premiums are based on deposit levels of prior six month periods.
Other expenses increased $1.1 million or 22.3% in 1994 over 1993. Data processing fees were $259 thousand greater in 1994 due to fee increases by the vendor. Foreclosure expenses increased by $369 thousand in 1994 as the Company incurred significant costs in connection with the disposal of several commercial real estate properties. The provision for real estate losses in 1994 was up by $208 thousand due to increased reserves on foreclosed commercial property. In connection with the Merger, the Company incurred $203 thousand in expenses in 1994. Other expenses were up 9.9% in 1993 over 1992 primarily due to the record production level and the Company's growth and new product lines. Decreases in expenses associated with holding foreclosed real estate were offset by increases in other categories. These included telephone expenses, which grew to support new offices and enhanced computer network capabilities, supplies, postage, data processing and professional fees.
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INCOME TAXES. Income tax expense was $6.1 million for 1994 compared to $6.8 million for 1993 and $5.2 million for 1992. Income tax expense has been between 40.1% and 42.3% of earnings before income tax expense for all three years. For additional information on income taxes, refer to Note 13 of Notes to Consolidated Financial Statements. Effective January 1, 1993, the Company adopted the new accounting standard for income taxes, Statement of Financial Accounting Standards No. 109. A $125 thousand cumulative effect of adopting the new standard was recognized in the first quarter of 1993.
FINANCIAL CONDITION
The Company's assets grew 10.8% to $1.1 billion between December 31, 1994 and 1993. This growth was primarily the result of origination of significant amounts of adjustable rate residential mortgage loans and, to a lesser extent, of consumer home equity loans. This reflects the Company's strategy to grow with high quality, interest-rate sensitive assets. Residential real estate loans continue to make up the largest portion of the Company's permanent loan portfolio. These loans were 85.2% of portfolio loans at December 31, 1994, up slightly from 84.6% at December 31, 1993. The Company has increased its emphasis on supplementing its residential loan portfolio by increasing its consumer lending capability, primarily through home equity loans. Continued marketing and exposure to the loans in the retail bank offices caused consumer loans to grow $25.5 million to 11.7% of the permanent loan portfolio at December 31, 1994 from 11.5% at December 31, 1993. The Company maintains a small commercial real estate loan portfolio originated in prior years and does not actively seek new commercial real estate loans.
FAIR VALUE OF FINANCIAL INSTRUMENTS. In Note 18 of the accompanying Consolidated Financial Statements, the Company has disclosed the estimated fair values of all on and off-balance sheet financial instruments. At December 31, 1994 and 1993, total financial assets had estimated fair values in excess of their carrying amounts of $14.8 million and $51.4 million, respectively. These excess amounts were primarily due to excess servicing rights in both years and also mortgage loans at December 31, 1993. Total financial liabilities had estimated fair values of $8.8 million less than their carrying amounts at December 31, 1994 and $3.5 million in excess of their carrying amounts at December 31, 1993. These amounts were due to changes in the estimated fair values of deposits and notes payable.
While the estimated fair values of mortgage loans were $32.1 million greater than the respective carrying amounts at December 31, 1993, at December 31, 1994 the estimated fair values had declined to a $746 thousand excess over the carrying amount. At year end 1993, ARM loans, such as the Company's, were generally being sold at a premium because their then current indexed rates were higher than initial market yields. Since that time, market rates have risen substantially, and the premium pricing advantage no longer existed at December 31, 1994. Excess servicing rights had estimated fair values greater than carrying amounts by $16.0 million at year end 1994 and $17.4 million at year end 1993. Excess servicing rights relate to servicing that the Company has created and retained from its own origination activities. Carrying amounts represent only the discounted present value of future service fee income in excess of a normal market rate servicing fee. Estimated fair values are significantly greater than these amounts.
Deposits had estimated fair values less than carrying amounts of $3.4 million at December 31, 1994 and $4.3 million greater than carrying amounts at December 31, 1993. Because of increases in market interest rates between year ends, certificates of deposits at December 31, 1994 had interest rates which were somewhat less than the Company's rates offered for deposits with similar maturities at that date. The reverse situation was true at December 31, 1993. At December 31, 1994 and 1993, the estimated fair values of notes payable were less than their carrying amounts by $5.3 million and $1.4 million, respectively. These differences result from the Company's borrowings at both year ends having interest rates somewhat less than rates charged at those dates by the FHLB for borrowings with similar maturities.
NONPERFORMING ASSETS. Nonperforming assets include all nonaccrual loans and real estate acquired through foreclosure net of specific reserves. Nonperforming assets were $4.6 million at December 31, 1994, down 45.8% from year end 1993. The substantial decline reflects reductions of $1.7 million in foreclosed residential real estate and $2.9 million in foreclosed commercial real estate partially offset by a $620 thousand increase in
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nonperforming residential real estate loans. During 1994, substantially all of the foreclosed residential real estate property was disposed of. In addition, several foreclosed commercial real estate properties were sold while there were no additional commercial properties foreclosed upon during 1994. Nonperforming assets were $8.6 million at December 31, 1993, down 7.5% from December 31, 1992. The decline resulted primarily from the net of a $1.4 million decrease in foreclosed residential real estate and an $810 thousand increase in foreclosed commercial real estate. Foreclosed commercial real estate had a net increase because two properties, valued at about $2.1 million, were added while a $1.3 million property was sold during 1993. Nonperforming loans as a percentage of loans held in portfolio increased slightly to .26% at December 31, 1994 from .24% at December 31, 1993 and declined from .31% at December 31, 1992. Nonperforming assets as a percentage of total assets also continued to decline and were .41% at December 31, 1994 compared to .85% at December 31, 1993 and 1.14% at December 31, 1992. The improvement in these ratios was both the result of the decline in nonperforming assets along with the increases in loans held in portfolio and total assets during 1994 and 1993.
NONPERFORMING ASSETS (DOLLARS IN THOUSANDS)
In accordance with generally accepted accounting principles, real estate owned and in judgment is carried at the lower of cost or fair value less estimated cost to sell. At December 31, 1994, commercial real estate owned included $1.9 million in properties acquired through foreclosure of three loans. In January, 1994, the Company completed foreclosure on a combination office and warehouse in a western suburb of Minneapolis which had an estimated fair value of $859 thousand at December 31, 1994. The Company is attempting to sell this property. In April 1993, the Company received title to seven fully leased retail and convenience store properties located in the Minneapolis-St. Paul area which originally secured a $1.1 million loan. The Company sold five of these properties in 1994 and is actively marketing the remaining two properties which had an estimated fair value of $492 thousand at December 31, 1994. No other nonperforming asset had a carrying value exceeding $400 thousand at December 31, 1994.
ANALYSIS OF RESERVES FOR LOAN AND REAL ESTATE LOSSES. The reserves for losses provide for potential losses in the Company's loan and real estate portfolios. The reserves are increased by the provision for losses and by recoveries and are decreased by charge-offs. The adequacy of the reserves is judgmental and based on the continued evaluation of the nature and volume of the loan and real estate portfolios, overall portfolio quality, specific problem loans, collateral values, historical experience and current economic conditions that may affect the borrowers' ability to pay.
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The reserve for loan losses was $3.6 million at December 31, 1994, $3.0 million at December 31, 1993, and $2.6 million at December 31, 1992. The increases over the three year period are a result of increased provisions to cover larger residential and consumer loan portfolios as well as a determination by the Company to increase the size of its unallocated general reserve which was established to cover unforeseen loan losses. The provision for loan losses was $652 thousand in 1994, $631 thousand in 1993 and $869 thousand in 1992. Of these provisions, $450 thousand, $192 thousand and $499 thousand, respectively, were allocated to the unallocated general reserve. In December, 1993 Federal bank regulatory agencies issued the "Interagency Policy Statement on the Allowance for Loan and Lease Losses" (Statement). The Statement provides guidance on the level of allowances considered adequate by regulators. In response to this Statement, the Company revised its loan loss reserve policies. As a result, while the total loan loss reserves maintained by the Company were not reduced, $631 thousand was reclassified from the general reserves to the unallocated reserves during 1994. Partially offsetting the provision were net charge-offs of $10 thousand, $250 thousand, and $252 thousand in 1994, 1993 and 1992, respectively. For a summary of the reserve for loan losses, see Note 5 of Notes to Consolidated Financial Statements of this report.
The reserve for real estate losses was $386 thousand, $135 thousand, and $696 thousand at December 31, 1994, 1993 and 1992, respectively. The provision for real estate losses (included in other expenses) was $328 thousand, $120 thousand and $286 thousand in 1994, 1993, and 1992, respectively. During 1994, the Company increased the reserves on its remaining foreclosed commercial real estate properties to reflect the characteristics of the properties that reduce their marketability. During 1993, the reserve declined because of the charge-off of a $599 thousand loss that had been previously reserved for on a commercial property acquired in late 1989. While the Company has experienced occasional losses on foreclosed residential real estate, its experience has generally been favorable. For a summary of the reserve for real estate losses, see Note 9 of Notes to Consolidated Financial Statements of this report.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK. The Company's continuing objective is to minimize the sensitivity of its earnings to interest rate fluctuations by matching the repricing characteristics of its assets and liabilities at a profitable interest rate spread. In order to achieve such matching, the Company has emphasized the origination and retention of ARMs and prime-rate related consumer lending for its own loan portfolio which have interest rates that adjust periodically in accordance with market interest rates. At December 31, 1994, loans that adjust with market interest rates constituted 97.1% of the Company's permanent loan portfolio. The Company sells substantially all of the long-term fixed-rate mortgages it originates.
The Company monitors its interest rate risk primarily through analysis of the match between the repricing characteristics of its assets and liabilities and the potential impact on net interest income from possible interest rate movements. The Company has not utilized hedging techniques such as financial futures or interest rate swaps.
The accompanying table sets forth the Company's interest rate sensitive assets and interest rate sensitive liabilities at December 31, 1994 and the related "gap" (the difference between the interest-earning assets and the interest-bearing liabilities that reprice during such period) for each repricing period. Loans are shown based on the repricing date or contractual maturity date, if applicable, and then adjusted for scheduled amortization and prepayment assumptions based on historical experience. Mortgage loans held for sale are shown in the "6 months or less" category. All fixed rate and noninterest-bearing checking and savings accounts have been adjusted for an annual decay rate based on industry experience. Certain advances and loan payments from borrowers held under escrow (escrow accounts) are included in transaction accounts while other escrow accounts are included in other borrowings depending on the nature of the escrow deposit. These escrow accounts have also been adjusted for annual decay rates. Other borrowings also include subordinated debt.
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ASSET/LIABILITY MATURITIES (DOLLARS IN THOUSANDS)
The Company's cumulative one year gap was a positive $27.5 million or 2.4% of assets at December 31, 1994 versus a positive 12.3% at December 31, 1993. During 1994, assets in the "one year or less" categories increased $74.3 million while liabilities in the same categories increased $172 million. The increase in assets for such categories was due primarily to an increase in one year ARM loans and also to an increase in prime rate related consumer loans originated offset slightly by a reduced cash position at year end. The increase in liabilities for these categories was from a $140 million increase in fixed maturity deposits and an $81.0 million increase in FHLB advances. These were reduced by $46.8 million decrease in money market and transaction accounts. The cumulative three year gap was $67.4 million or 6.0% of assets at December 31, 1994 which was less positive than the 9.1% at December 31, 1993.
The recorded value of capitalized servicing rights is susceptible to interest rate risk. At December 31, 1994, capitalized servicing rights were $4.1 million. The capitalized amounts and the amortization is based partly on prepayment assumptions of the underlying loans. Increased levels of prepayments generally occur in a declining interest rate environment. When a loan is prepaid, the Company ceases to collect servicing income on such loan. If actual prepayments exceed the Company's assumptions in the future, adjustments to the carrying value of servicing rights may be required. During 1994, because of the increase in market interest rates, actual prepayments did not exceed the assumed level of prepayments. Consequently, no additional adjustment to the carrying value of servicing rights was required in 1994. During 1993 and 1992, adjustments of $1.4 million, $1.5 million, respectively, were made to capitalized servicing rights on loans because of the higher prepayments experienced in the related periods. For additional information on these adjustments, see the discussion on loan servicing fees included in the "Noninterest Income" section.
LIQUIDITY. Cash and cash equivalents totaled $29.9 million at December 31, 1994, a decrease of $28.4 million from December 31, 1993. The decrease resulted from $210 million in net cash used by investing activities, primarily to fund new loans, partially offset by $82.2 million in net cash provided by operating activities and $99.4 million in net cash provided by financing activities. See the Statement of Cash Flows in the Consolidated Financial Statements for detail. As discussed earlier, increased market interest rates during 1994 reduced the market demand for fixed rate mortgage loans but increased the demand for ARMs. Consequently, the Company invested $209 million
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in additional loans. These loans were principally funded by $75.9 million in cash provided by the reduction in the amount of mortgage loans held for sale, $31.1 million in increased deposits, $75.0 million in additional FHLB advances and a $28.4 million reduction in cash and cash equivalents.
Cash and cash equivalents increased $18.1 million during 1993 to $58.3 million at December 31, 1993. The increase resulted from $191 million in net cash provided by financing activities less $159 million in net cash used by investing activities and $14.4 million in net cash used by operating activities.
Cash and cash equivalents totaled $40.2 million at December 31, 1992, an increase of $22.4 million from December 31, 1991. This increase was the result of $12.9 million in net cash provided from operating activities and $200 million in net cash provided by financing activities less $191 million in net cash used by investing activities.
Net cash was used by operating activities in 1993 primarily to fund a $14.3 million increase in mortgage loans held for sale. In 1992, net cash was provided by operating activities from a number of sources as detailed in the Statement of Cash Flows.
During 1993, $148 million of the net cash used by investing activities funded an increase in loans. Of this growth, $120 million was in mortgage loans as customer demand continued. Consumer loans made up the remainder of the increase. Funds were also invested in investment securities for a net increase of $9.6 million to help the Company meet its growing liquidity requirement caused by the asset growth. Of the net cash used by investing activities in 1992, $185 million was used to fund a net increase in loans. Approximately $149 million of this growth was in mortgage loans with consumer loans causing the remaining increase.
During 1993, the net cash provided by financing activities was from a $91 million increase in deposits and a $100 million net increase in FHLB advances. These funds were used to fund loan growth during the year. The net cash provided by financing activities in 1992 was due to a net increase of $175 million in FHLB advances used to fund loan growth and the $22.1 million of net proceeds from the issuance of subordinated notes. Deposits increased only $3.1 million as the Company had difficulty attracting deposits in the low interest rate environment. FHLB advances provided funding not met by other sources. FHLB borrowings were $400 million at December 31, 1994 and $325 million at December 31, 1993. The maximum FHLB borrowings were $400 million in 1994 compared to $325 million and $243 million for 1993 and 1992, respectively.
At December 31, 1994 the Company had aggregate loan funding commitments (including committed lines of credit) of $81.3 million and aggregate commitments for the sale of loans of $21.5 million. The Company's expected proceeds from loan sales and its ability to obtain advances from the FHLB exceeded its funding commitments at December 31, 1994.
The Bank is required by the OTS to maintain "liquidity" (cash and certain eligible investments) in an amount equal to a certain percentage of its deposits and short-term borrowings to assure its ability to meet demands for withdrawals and repayment of short-term borrowings. The percentage, which may be changed at any time by the OTS, is currently 5%. Management believes that the liquidity maintained by the Bank, together with the sources of funds discussed above, is adequate to meet contingencies.
CAPITAL MANAGEMENT. The Company's stockholders' equity increased 15.1% to $54.3 million at December 31, 1994 from $47.2 million at December 31, 1993. This increase was primarily the result of net earnings retained of $5.8 million. The Company began paying quarterly common stock dividends in the second quarter of 1992 at the annual rate of $.24 per share. For 1993, the Company increased the dividend rate 56.3% to $.375 per share and the 1994 dividend increased 33.3% to an annual rate of $.50 per share. Book value per common share was $13.31 at December 31, 1994 compared to $11.90 at December 31, 1993.
The Company increased its capital position in 1992 by issuing $23.0 million of 10 year subordinated notes. Of the net proceeds of $22.1 million, $12.0 million was contributed to the Bank's paid in capital during 1992 and an additional $5.0 million in 1993.
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The Bank is categorized by regulations as a "well capitalized" institution, the highest level obtainable. This categorization has allowed the Bank to have a lower deposit insurance premium cost and to have more operation flexibility. For additional information on capital requirements see Note 12 of Notes to Consolidated Financial Statements of this report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and notes thereto are set forth beginning on the page immediately following the signature page to this Annual Report on Form 10-K:
Consolidated Statements of Earnings for the years ended December 31, 1994, December 31, 1993, and December 31, 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the period from January 1, 1992 to December 31, 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 31, 1993 and December 31, 1992
Notes to Consolidated Financial Statements
Report of KPMG Peat Marwick LLP
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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PART III.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is furnished with respect to each director as of March 1, 1995:
PRINCIPAL OCCUPATION AND BUSINESS NAME AGE EXPERIENCE FOR PAST FIVE YEARS ---- --- --------------------------------- E. Thomas Binger . . . . . 72 General Partner in Pittsburgh Pacific Company, Ltd., a general partnership with interests in the iron ore business, from 1970 to 1993, at which time the company was liquidated. Member of the Board of Directors of MTS Systems Corp. and Bemis Company Inc.
Leonard E. Brown . . . . . 60 Partner with the accounting firm of KPMG Peat Marwick LLP, Minneapolis, Minnesota for over five years until his retirement in August 1988. Member of the Board of Directors of Gate City Federal Savings Bank, Fargo, North Dakota.
James M. Burkholder. . . . 52 President and Chief Executive Officer of the Company and Investors Bank, F.S.B. since September 1990 and Chairman since December 1990. Executive Vice President and Chief Financial Officer of the Company and Investors Savings Bank, F.S.B. from 1983 to September 1990.
Graham N. Heikes . . . . . 58 Sole practitioner since January 1994. Partner with Rice & Heikes, Ltd., a law firm he founded, from October 1989 to January 1994. Partner with the law firm of Jardine, Logan & O'Brien, St. Paul, Minnesota for over five years prior thereto.
John G. Lohmann, Jr. . . . 55 Executive Vice President and Secretary of the Company and Executive Vice President, Chief Lending Officer and Secretary of Investors Savings Bank, F.S.B. since 1983.
George E. Maas . . . . . . 57 Director of Simon-Telelect Inc. ("Simon- Telelect"). Chairman of the Board of Directors of Simon-Telelect from 1991 to 1993, and President of Simon-Telelect from 1979 to 1991.
Alice D. Mortenson . . . . 54 Director of Community Relations of M.A. Mortenson Co., a construction company, since 1989. Trustee of Westminister Presbyterian Church. Member of the Board of Directors of Courage Center, Dunwoody Institute and the Greater Minneapolis Council of Churches. Homemaker and community volunteer for at least five years.
For fiscal year 1994, the directors of the Company (other than executive officers) were compensated at a rate of $12,000 plus $500 per Board meeting attended, $250 per committee meeting associated with a Board meeting and $500 per committee meeting not associated with a Board meeting. With the exception of annual grants (on July 1 of each year prior to 1994, and on May 3, 1994) of non-qualified stock options to purchase 2,666 shares (and 2,000 shares with respect to the May 3, 1994 grant) of Common Stock of the Company at fair market value, directors who are not officers or employees receive no other compensation from the Company.
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EXECUTIVE OFFICERS
The following sets forth the Company's current executive officers:
NAME AGE POSITION ----------------------- --- ------------------------------------- James M. Burkholder 52 Chief Executive Officer, President and Chairman of the Board of Directors of the Company and the Bank
John G. Lohmann, Jr. 55 Executive Vice President, Secretary and Director of the Company and the Bank, Chief Lending Officer of the Bank
Daniel Arrigoni 44 Executive Vice President of the Company and the Bank
Lynn V. Bueltel 44 Senior Vice President and Chief Financial Officer of the Company and the Bank and Treasurer of the Bank
Mr. Burkholder has been President and Chief Executive Officer of the Company and Investors Savings Bank, F.S.B. since September 1990 and Chairman since December 1990. Mr. Burkholder was Executive Vice President and Chief Financial Officer of the Company and Investors Savings Bank, F.S.B. from 1983 to September 1990.
Mr. Lohmann has been Executive Vice President and Secretary of the Company and Executive Vice President, Chief Lending Officer and Secretary of Investors Savings Bank, F.S.B. since 1983.
Mr. Arrigoni has been Executive Vice President of the Company since May 1992 and Executive Vice President of the Bank since October 1, 1991. From September 1, 1986 until October 1, 1991, Mr. Arrigoni was President of the North Central Region of Margarettan Mortgage Co., Inc.
Mr. Bueltel has been Senior Vice President of the Company since May 1992, Senior Vice President, Treasurer and Chief Financial Officer of the Bank since September 1990, and a Vice President of the Bank since June 1984.
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SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company and the three executive officers of the Company (there being no other executive officers of the Company) whose salary and bonus earned in the fiscal year ended December 31, 1994 exceeded $100,000 for services rendered.
STOCK OPTIONS
The Company maintains a Restated Stock Option Plan and 1993 Stock Incentive Plan, pursuant to which executive officers, and other employees and consultants of the Company, may receive options to purchase the Company's common stock.
OPTION GRANTS IN FISCAL YEAR 1994
In fiscal year 1994, the Company did not grant stock options to the Chief Executive Officer or the executive officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1994 AND FISCAL YEAR-END OPTION VALUES
The following table summarizes option exercises during 1994 by the Chief Executive Officer and by the executive officers named in the Summary Compensation Table, and the value of the options held by such persons at the end of 1994.
LONG-TERM INCENTIVE PLAN AWARDS
Other than its Restated Stock Option Plan and 1993 Stock Incentive Plan, the Company does not maintain any long-term incentive plans.
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CHANGE IN CONTROL ARRANGEMENTS
In addition to the employment and severance pay agreements discussed below, the Company has certain other compensatory arrangements with its executive officers which will result from a change in control of the Company. All outstanding stock option agreements provide for the acceleration of exercisability of options upon a change in control. The restricted stock award agreements also provide for the full vesting of all outstanding shares of restricted stock if the holder is terminated following a change in control.
EMPLOYMENT AGREEMENTS
The Company has Employment Agreements with Messrs. Burkholder and Lohmann terminating December 31, 1996 but renewing annually thereafter. The employment agreements provide that the annual salaries of Messrs. Burkholder and Lohmann will be at least $195,000 and $161,000, respectively, that such officers shall be entitled to participate in incentive and other plans of the Company, and that the Company will establish and maintain disability insurance, term life insurance and retirement plans for such officers. See "Compensation Committee Report on Executive Compensation -- Long-Term Incentive Compensation." Both agreements also contain confidentiality obligations and covenants not to compete for one year after termination of employment. The agreements provide for severance pay on failure to renew in certain instances and provide that under certain circumstances (including a change in control) in the event of termination of employment prior to the termination of the agreements, the Company will pay to Messrs. Burkholder and Lohmann severance pay in an amount equal to three times and two times, respectively, the average annualized cash compensation (based on the last five years) of such officers.
In the event that the Merger (as described above in "Management's Discussion and Analysis of Financial Condition and Results of Operations") is consummated, the Merger Agreements provide that Firstar and FCM will appoint Mr. Burkholder as President and Chief Executive Officer of Firstar Home Mortgage Corporation ("FHMC") and elect Mr. Burkholder a director of FCM and of Firstar Bank. In addition, the Company and Firstar have entered into amended employment agreements with Mr. Burkholder and Mr. Lohmann and an amended severance agreement with Mr. Bueltel, that amend the provisions of the existing agreements between the Company and such officers, and have entered into a new employment agreement with Mr. Arrigoni, each of which is effective upon consummation of the Merger. Mr. Burkholder's amended employment agreement provides for his employment as President and Chief Executive Officer of FHMC for a period of four years after consummation of the Merger at an annual salary of $210,000, an annual bonus of at least $100,000, participation in the other bonus, incentive compensation and other benefit plans generally offered to Firstar's executives, and continuation of the disability and life insurance benefits received as an officer of the Company. Mr. Lohmann's amended employment agreement provides for his employment as Executive Vice President of Firstar Bank for a period of one year after the Merger, at an annual salary of $165,000 and with benefits similar to those afforded Mr. Burkholder. Mr. Bueltel's amended severance agreement provides for continuation of his severance agreement with Firstar on terms similar to his severance arrangement with the Company (which provides that in the event of termination for good reason (as defined in the agreement) Firstar will pay Mr. Bueltel as severance pay an amount equal to one year's compensation). Mr. Arrigoni's agreement provides for his employment as Executive Vice President of FHMC for a period of 30 months after the Merger at an annual salary of $158,000, an annual bonus of at least $100,000, and other benefits similar to those afforded Mr. Burkholder and Mr. Lohmann. Each of Mr. Burkholder, Mr. Lohmann and Mr. Arrigoni have also entered into agreements not to compete with Firstar for periods of four years, three years and 30 months, respectively, after the date of the Merger.
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ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1995, information about the ownership of Common Stock by each director, by each executive officer named in the Summary Compensation Table and by all directors and executive officers (including the named individuals) as a group and by any other shareholder who is known by the Company to own beneficially more than 5% of the outstanding Common Stock of the Company. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated.
SHARES BENEFICIALLY OWNED --------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) PERCENT ------------------------------------ -------- ------- James M. Burkholder. . . . . . . . . . . . . 268,953 (1) 7.7% 200 East Lake Street Wayzata, Minnesota 55391
John G. Lohmann, Jr. . . . . . . . . . . . . 276,777 (2) 7.9% 200 East Lake Street Wayzata, Minnesota 55391
E. Thomas Binger . . . . . . . . . . . . . . 212,291 (3) 6.2% 5775 Wayzata Boulevard St. Louis Park, Minnesota 55416
George Maas. . . . . . . . . . . . . . . . . 173,334 (4) 5.2% P.O. Box 7 Watertown, South Dakota 57201
First Bank System, Inc.. . . . . . . . . . . 179,589 (5) 5.3% 601 Second Avenue South Minneapolis, MN 55402-4302
Alice D. Mortenson . . . . . . . . . . . . . 60,130 (6) 1.7%
Graham N. Heikes . . . . . . . . . . . . . . 22,663 (7) *
Leonard E. Brown . . . . . . . . . . . . . . 19,997 (8) *
Daniel A. Arrigoni . . . . . . . . . . . . . 66,890 (9) 1.4%
Lynn V. Bueltel. . . . . . . . . . . . . . . 71,694 (10) 2.0%
All directors and executive officers as a group (9 persons) . . . . . . . . . . 1,172,729 (11) 31.3%
* Less than 1%.
(1) Includes 23,635 shares held in the Company's 401(k) plan, 18,333 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days, 32,333 shares held by such officer and director's spouse and 31,389 shares subject to Restricted Stock Agreements and certain forfeiture provisions.
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(2) Includes 22,507 shares held in the Company's 401(k) plan, 18,333 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days, 4,977 shares held by such officer and director's spouse and children and 31,389 shares subject to Restricted Stock Agreements and certain forfeiture provisions.
(3) Includes 6,665 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days.
(4) Includes 2,000 shares purchasable upon exercise of exercisable warrants.
(5) Based on information in Amendment No. 1 to a Schedule 13G Report dated February 13, 1995, delivered to the Company and indicating that First Bank Systems is the beneficial owner of such shares. Includes 172,477 shares for which First Bank System, Inc. exercises sole dispositive power and 7,112 shares for which it exercises shared dispositive power. Such shares are held by the banking affiliates of such entity in a fiduciary capacity on behalf of various customers.
(6) Includes 15,997 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days and 24,800 shares held by such director's spouse.
(7) Includes 15,997 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days and 2,000 shares purchasable upon exercise of warrants.
(8) Includes 18,664 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days.
(9) Includes 3,358 shares held in the Company's 401(k) plan, 40,000 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days and 13,532 shares purchasable upon exercise of exercisable warrants.
(10) Includes 16,879 shares held in the Company's 401(k) plan, 4,000 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days, 4,000 shares purchasable upon exercise of warrants and 1,333 shares subject to a Restricted Stock Agreement and subject to forfeiture.
(11) Includes 66,379 shares held in the Company's 401(k) plan as of September 30, 1994, 137,989 shares purchasable upon exercise of options currently exercisable or options which become exercisable within 60 days, 21,532 shares purchasable upon exercise of warrants, 64,778 shares subject to Restricted Stock Awards and 62,110 shares held by the spouses and children of officers and directors.
The Company also has outstanding 303,640 shares of Cumulative Perpetual Preferred Stock, Series 1991, a non-voting, nonparticipating preferred stock. None of the executive officers or directors held any shares of such series of preferred stock as of March 1, 1995, except Mr. Burkholder who held 60 shares through an IRA account and whose spouse held 500 shares directly and 60 shares through an IRA account and Mr. Maas who holds 4,000 such shares.
Under federal securities laws, the Company's directors and officers, and any beneficial owner of more than 10% of a class of equity securities of the Company, are required to report their ownership of the Company's equity securities and any changes in such ownership to the Securities and Exchange Commission (the "Commission") and the securities exchange on which the equity securities are registered. Specific due dates for these reports have been established by the Commission, and the Company is required to disclose in this Annual Report on Form 10-K any delinquent filing of such reports and any failure to file such reports during the fiscal year ended December 31, 1994. All of the required reports were timely filed by each of the directors and officers of the Company during 1994.
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ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following table sets forth certain information relating to mortgage and line of credit loans aggregating more than $60,000 made to executive officers named in the Summary Compensation Table and directors of the Company since December 31, 1993:
All of the loans set forth in the table above were made in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collection or present other unfavorable features.
Thomas R. Lohmann leases property constituting two banking offices to the Bank pursuant to leases expiring in 2010 and 2012. Thomas R. Lohmann is the brother of John G. Lohmann, Jr., an executive officer of the Company. Monthly net lease payments under such leases total approximately $36,600 (subject to adjustment for changes in price indices).
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PART IV.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements and notes thereto are set forth beginning on the page immediately following the signature page to this Annual Report on Form 10-K:
Consolidated Statements of Earnings for the years ended December 31, 1994, December 31, 1993, and December 31, 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the period from January 1, 1992 to December 31, 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 31, 1993 and December 31, 1992
Notes to Consolidated Financial Statements
Report of KPMG Peat Marwick LLP
(a) 2. FINANCIAL STATEMENT SCHEDULES
The schedules have been omitted because of absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.
(a) 3. LISTING OF EXHIBITS
Exhibit Number Description -------------- -----------
2.1 Agreement and Plan of Reorganization between Investors Bank Corp., Firstar Corporation and Firstar Corporation of Minnesota (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed August 25, 1994 (File No. 0-16163)).
2.2 Form of Voting Agreement (Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed August 25, 1994 (File No. 0-16163)).
3.1 Certificate of Incorporation of Company, as amended (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (Registration No. 33-9554) (the "Registration Statement")).
3.2 Certificate of Amendment to Certificate of Incorporation (Incorporated by reference to Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992) (File No. 0-16163)).
3.3 Certificate of Amendment to Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994) (File No. 0-16163)).
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3.4 Charter of Investors Savings Bank, F.S.B. (the "Bank") (Incorporated by reference to Exhibit 3.2 of the Registration Statement).
3.5 Bylaws of the Company (Incorporated by reference to Exhibit 3.3 to the Registration Statement).
3.6 Restated Bylaws of the Bank (Incorporated by reference to Exhibit 3.4 of the Registration Statement).
3.7 Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1991).
3.8 Certificate of Designation of Cumulative Perpetual Preferred Stock, Series 1991, of the Company (Incorporated by reference to Exhibit 4.5 to Amendment No. 1 to the Registration Statement on Form S-4 filed by the Company with the Commission on October 11, 1992 (File No. 33-42684) (hereafter "S-4 Amendment No. 1").
3.9 Amended Certificate of Designation of Cumulative Perpetual Preferred Stock, Series 1991 (Incorporated by reference to Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 0-16163)).
3.10 Warrant Agreement dated October 15, 1991 between the Company and Norwest Bank Minnesota National Association (Incorporated by reference to Exhibit 4.7 to the S-4 Amendment No. 1).
3.11 Specimen form of certificate for the Company's Cumulative Perpetual Preferred Stock, Series 1991 (Incorporated by reference to Exhibit 1.1 to the Company's Form 8-A dated January 6, 1992).
3.12 Specimen Certificate of the Company's Warrants to Purchase Common Stock (Incorporated by reference to Exhibit 1.2 to the Company's Form 8-A dated January 6, 1992).
3.13 Specimen Certificate for the Company's Common Stock (Incorporated by reference to Exhibit 4.1 to the Registration Statement).
3.14 Rights Agreement dated as of May 7, 1991, between the Company and Norwest Bank Minnesota National Association (Incorporated by reference to Exhibit 4 to the Company's current report on Form 8-K dated May 7, 1991).
4.1 First Amendment to Rights Agreement, as executed (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 16163)).
4.2 Form of Subordinated Debenture Due 1996 of the Bank (Incorporated by reference to Exhibit 4.3 to the Registration Statement).
4.3 Stock Option Plan of the Company, as amended (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (File No. 33-12893)).
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4.4 Investors Bank Corp. 1993 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
4.5 Form of Indemnification Agreement with Directors (Incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1987).
4.6 Indenture dated as of March 21, 1989 between the Bank and First Trust National Association relating to the 12.75% Subordinated Capital Notes due 1999 (Incorporated by reference to Exhibit 4.8 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
4.7 Form of 12.75% Subordinated Capital Note due 1999 of the Bank (Incorporated by reference to Exhibit 4.7 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
10.1 Lease dated January 7, 1987 between Thomas R. Lohmann, Susan M. Lohmann and the Bank relating to the Bank's Highland Park office (Incorporated by reference to Exhibit 10.14 of the Exchange Statement).
10.2 Leases dated June 3, 1988 between Pinehurst Properties, Inc. and the Bank relating to the Roseville office of the Bank and the Investors Mortgage division. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-16163)).
10.3 Investors Savings 401(k) Plan Trust Agreement (1988 Restatement). (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended June 30, 1988 (File No. 0-16163)).
*10.4 Deferred Compensation Plan (Incorporated by reference to Exhibit 4.9 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
*10.5 Restated Employment Agreement between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10- K for the year ended December 31, 1993 (File No. 0- 16163)).
*10.6 Restated Employment Agreement between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10- K for the year ended December 31, 1993 (File No. 0- 16163)).
*10.7 Form of Severance Agreement (Incorporated by reference to Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 0-16163)).
*10.8 Restricted Stock Award Agreement dated December 31, 1992 between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
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*10.9 Restricted Stock Award Agreement dated December 31, 1992 between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.10 Nonqualified Stock Option Agreement between the Company and Daniel Arrigoni (Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.11 Nonqualified Stock Option Agreement between the Company and Daniel Arrigoni (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0- 16163)).
*10.12 Performance Bonus Policy of the Company (Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.13 Restricted Stock Award Agreement dated January 4, 1994 between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
*10.14 Restricted Stock Award Agreement dated January 4, 1994 between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
*10.15 Restricted Stock Award Agreement dated January 4, 1994 between the Company and Lynn V. Bueltel (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
*10.16 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and James M. Burkholder (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.17 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.18 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and Daniel P. Arrigoni (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.19 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and James M. Burkholder (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.20 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.5 to the Company's
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Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.21 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and Daniel P. Arrigoni (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
11 Computation of Earnings per Common Share.
22 Subsidiaries of the Company (Incorporated by reference to Exhibit 22 to the Registration Statement).
24.1 Consent of KPMG Peat Marwick LLP
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
(b) Reports on Form 8-K -------------------
None
(c) See Exhibit Index and Exhibits attached as a separate section of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INVESTORS BANK CORP.
Dated: March 29, 1995 By /s/JAMES M. BURKHOLDER ------------------------------ James M. Burkholder, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date
/s/JAMES M. BURKHOLDER President, Chief Executive March 29, 1995 ------------------------- Officer and Director James M. Burkholder (Principal Executive Officer)
Executive Vice President, March __, 1995 ------------------------- Secretary and Director John G. Lohmann, Jr.
/s/LYNN V. BUELTEL Senior Vice President and March 29, 1995 ------------------------- Chief Financial Officer Lynn V. Bueltel (principal finacial and accounting officer)
/s/E. THOMAS BINGER Director March 29, 1995 ------------------------- E. Thomas Binger
/s/LEONARD E. BROWN Director March 29, 1995 ------------------------- Leonard E. Brown
Director March __, 1995 ------------------------- George E. Maas
/s/GRAHAM N. HEIKES Director March 29, 1995 ------------------------- Graham N. Heikes
Director March __, 1995 ------------------------- Alice D. Mortenson
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[KPMG Peat Marwick LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors Investors Bank Corp.:
We have audited the accompanying consolidated balance sheets of Investors Bank Corp. and subsidiary as of December 31, 1994 and 1993 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Investors Bank Corp. and subsidiary as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP Minneapolis, Minnesota January 20, 1995
INVESTORS BANK CORP. AND SUBSIDIARY Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
INVESTORS BANK CORP. AND SUBSIDIARY Consolidated Statements of Earnings
See accompanying notes to consolidated financial statements.
INVESTORS BANK CORP. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity
See accompanying notes to consolidated financial statements.
INVESTORS BANK CORP. AND SUBSIDIARY Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
INVESTORS BANK CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years ended December 31, 1994, 1993 and 1992
NOTE 1. DESCRIPTION OF THE BUSINESS
Investors Bank Corp. (the Company) is a holding company for a subsidiary engaged in the retail banking and mortgage banking businesses.
The subsidiary, Investors Savings Bank, F.S.B. (the Bank), is a federally chartered savings bank with deposits insured by the Federal Deposit Insurance Corporation through the Savings Association Insurance Fund. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.
NOTE 2. MERGER AGREEMENT
On August 21, 1994, the Company, Firstar Corporation ("Firstar") and Firstar Corporation of Minnesota ("Firstar Minnesota") entered into an Agreement and Plan of Reorganization (the "Agreement"), pursuant to which the Company will be merged (the "Merger") with and into Firstar Minnesota. The Agreement also calls for the merger of the Bank with and into Firstar Bank Minnesota, N.A., on the date of, and immediately after the Merger becomes effective. The Merger is to be accomplished by the exchange of .8676 shares of Firstar common stock for each share of the Company's common stock. See Note 14 for additional discussion of the effect of the Merger on the Company's preferred stock, outstanding warrants and options and restricted stock. For the year ended December 31, 1994, the Company had incurred $203,479 in costs related to the Merger.
The Merger is subject to a number of conditions including regulatory approval. The Agreement requires the Company to use its best efforts to repurchase shares of the Company common stock to be held in treasury for issuance upon exercise of outstanding options and warrants to the extent such repurchases do not exceed $2,000,000. Subsequent to the Agreement it was determined such a repurchase plan would violate a covenant in the Company's 9.25% Subordinated Notes ("Notes"). On January 20, 1995, the Company obtained consent of the holders of a majority in principal amount of the outstanding Notes to waive the covenant.
A special meeting of the Company's stockholders is scheduled for March 15, 1995 to vote on the Merger. All of the executive officers and directors of the Company have entered into agreements that require them to vote for the Merger. The Company may terminate the Agreement if the trading price of Firstar common stock during the ten trading days ending three days before the special stockholders' meeting to approve the Merger is below $29 per share and at least 12.5% below an index composed of certain commercial banks.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates or assumptions.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the reserve for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the reserves for loan and real estate losses, management obtains independent appraisals for significant properties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Investors Bank Corp. and its wholly owned subsidiary, Investors Savings Bank, F.S.B. All material intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, as of January 1, 1994. Under SFAS No. 115, the Company must classify its debt and marketable equity securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Securities available for sale include securities that management intends to use as part of its asset/liability strategy or that may be sold in response to changes in interest rate, changes in prepayment risk, the need to increase regulatory capital, or similar factors. The Company has the ability and intent to hold its securities to maturity. Accordingly, there are no securities held in a trading acount or available for sale and the adoption of SFAS No. 115 had no impact on the Company's consolidated financial statements as of January 1, 1994.
Investment securities, consisting primarily of investment grade corporate bonds and U.S. Government agency obligations, are stated at cost, adjusted for amortization of premiums and accretion of discounts on purchase. Premiums and discounts are amortized on the interest method over the term of the securities.
MORTGAGE LOANS
The Bank originates and purchases both adjustable rate mortgage (ARM) and fixed interest rate mortgage loans. Substantially all conventional ARM loans are held for portfolio investment while substantially all government insured ARM loans and all fixed interest rate loans are sold in the secondary market. Mortgage loans held for sale are carried at the lower of cost or market determined on an aggregate loan basis.
Interest is accrued monthly on outstanding principal balances unless management considers collection to be doubtful, which generally occurs when principal or interest payments are three months or more past due. Interest is subsequently recognized as income only to the extent cash is received. When properties securing loans are foreclosed upon, previously accrued but unpaid interest is reversed from income.
LOAN ORIGINATION FEES AND DISCOUNTS
Loan origination fees and certain other fees and certain direct loan origination costs are deferred and amortized to interest income as an adjustment of yield using the interest method, or recognized as a portion of gain on sales when the loans are sold. Loan discounts representing a return of yield are deferred and amortized to income using the interest method over the related periods to achieve a level yield.
MORTGAGE BANKING INCOME
Included in mortgage banking income are gain on sales of mortgage loans, gain on sales of loan servicing rights, and other lending fees.
Gain on sales of mortgage loans are recognized when the loans are sold. Gain on sales include any discounts or premiums and the excess value of servicing rights retained. The excess value of servicing rights retained represents the discounted present value of future service fee income in excess of a normal market rate servicing fee.
The Company engages in the sale of loan servicing rights. Gain on sales of servicing rights are recognized when the servicing rights are sold. Gains on sale result from net cash proceeds less the carrying value of capitalized servicing rights on the servicing pools sold.
LOAN SERVICING FEES
The Company derives loan servicing fees by collecting loan payments and performing certain escrow services for mortgage investors. Amortization of excess servicing rights and purchased servicing rights are recorded as a reduction to loan servicing fees.
CAPITALIZED SERVICING RIGHTS
Included in capitalized servicing rights is the unamortized balance of excess servicing rights capitalized. The amounts capitalized and the amortization thereon is based, in part, on certain prepayment assumptions of the underlying loans. If, in the future, actual prepayments exceed the Company's assumptions, adjustments to the carrying value of servicing rights may be required. Excess servicing rights are being amortized over the estimated remaining life of the related loans sold in proportion to estimated net servicing income.
The Company has engaged in bulk purchases of loan servicing rights. The cost of these rights is capitalized and amortized over the estimated remaining life of the related loans in proportion to estimated net servicing income. Loan servicing rights are also purchased from correspondents in connection with the purchase of mortgage loans. Service release premiums are paid to acquire these rights. These amounts are amortized over the estimated life of the related loans or are offset against gain on sales of mortgage loans when the related loans are sold.
FORWARD CONTRACTS
The Company uses mandatory, optional and standby forward contracts as part of its overall interest rate risk management strategy for its mortgage banking operations. Outstanding contracts represent future commitments and are not included in the consolidated balance sheets. Gains and losses on forward contracts used as hedges in mortgage banking operations are deferred and recognized when the related mortgages or commitments are sold or when a loss adjustment is recognized on an aggregate basis to reduce the Bank's unsold loans and loan commitments to the lower of cost or market. Forward contracts which are no longer needed to hedge specific assets or commitments are valued at market and the resulting gains or losses are recognized immediately.
RESERVE FOR LOAN LOSSES
The reserve for loan losses provides for potential losses in the loan portfolio. The reserve is increased by the provision for loan losses and by recoveries and is decreased by charge-offs. The adequacy of the reserve is judgmental and is based on continual evaluation of the nature and volume of the loan portfolio, overall portfolio quality, specific problem loans, collateral values, historical experience and current economic conditions that may affect the borrowers' ability to pay.
The Company adopted the provisions of SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES, as of January 1, 1994. SFAS No. 114 specifies how reserves for losses related to "impaired" loans should be measured. A loan is considered impaired if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company will measure the amount of impairment based on the present value of expected future cash flows, the loan's observable market price or the fair value of any collateral. If foreclosure is probable, the Company shall measure impairment based on the fair value of the collateral. SFAS No. 114 does not apply to large groups of small balance, homogeneous loans that are collectively evaluated for impairment. The adoption of SFAS Nos. 114 and 118 had no effect on the consolidated financial statements as of January 1, 1994.
Management believes that the reserves for losses on loans are adequate. While management uses available information to recognize losses on loans, future additions to the reserves may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the reserves for losses on loans. Such agencies may require additions to the reserves based on their judgments of information available to them at the time of their examination.
FORECLOSED REAL ESTATE
Real estate in judgment and acquired through foreclosure is initially recorded at the lower of cost or estimated fair value less selling costs. Provisions for possible losses on real estate are charged to earnings when necessary to reduce carrying values to estimated fair value less selling costs.
DEPRECIATION AND AMORTIZATION
Depreciation is computed on a straight-line basis over three to twelve years for office furniture and equipment and over forty years for buildings. Leasehold improvements are amortized using the straight-line method over the life of the asset or the term of the lease, whichever is less.
INCOME TAXES
The Company adopted SFAS No. 109 , "ACCOUNTING FOR INCOME TAXES", as of January 1, 1993 and applied the provisions prospectively as of that date. SFAS No. 109 requires a change from the deferred method of accounting for income taxes to the asset and liability method. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The cumulative effect of the application of SFAS No. 109 as of January 1, 1993 increased net earnings for the year ended December 31, 1993 by $125,000.
EARNINGS PER COMMON SHARE
Net earnings are adjusted for preferred stock dividends in the computation of earnings per common share. Earnings per common share are computed on the basis of the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares represent the dilutive effect of outstanding stock options and warrants.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include investments in certificates of deposit with maturities of three months or less.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements of prior periods to conform to the current presentation. The reclassifications had no effect on net earnings or stockholders' equity as previously reported.
NOTE 4. INVESTMENTS
Investments consisted of the following:
There were no sales of investments during 1994, 1993 or 1992.
The amortized cost and estimated market value of investment securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because obligors may have the right to call or prepay obligations with or without call or prepayment penalties.
Included in accrued interest receivable at December 31, 1994 and 1993 is interest receivable on investments of $357,174 and $315,587, respectively.
NOTE 5. LOANS HELD IN PORTFOLIO
Mortgage loans consisted of the following:
Consumer loans consisted of the following:
The Company originates consumer and residential real estate loans in the metropolitan area of Minneapolis/St. Paul. The Company also originates residential real estate loans in Duluth, Minnesota and the Chicago and Milwaukee metropolitan areas. The Company maintains a small commercial real estate loan portfolio originated in prior years and is not actively seeking new commercial real estate loans. The commercial real estate portfolio consists mainly of loans secured by apartment complexes and small retail shopping malls in the Minneapolis/St. Paul metropolitan area. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers' ability to honor their loans is dependent on the economic strength of the metropolitan areas of Minneapolis/St. Paul, Duluth, Chicago and Milwaukee.
Following is a summary of the reserve for losses on loans:
At December 31, 1994 and 1993 the Company had approximately $2,105,000 and $1,903,000, respectively, of loans in a nonaccrual status. Had nonaccrual loans been accruing interest in accordance with original terms, interest income would have been increased by approximately $41,000 , $40,000 and $54,000 for the years ended December 31, 1994, 1993 and 1992, respectively. The Company's loan portfolio as of December 31, 1994 includes no restructured loans. There are no commitments to lend additional funds to customers whose loans were in a nonaccrual status at December 31, 1994.
Included in accrued interest receivable at December 31, 1994 and 1993 is interest receivable on loans of $4,928,718 and $3,237,750, respectively.
The aggregate amount of loans to executive officers and directors of the Company and executive officers of the Bank were $126,000 and $243,000 at December 31, 1994 and 1993, respectively. During the year ended December 31, 1994, approximately $1,000 of new loans were made and reductions totaled $118,000. Such loans were made in the ordinary course of business at the normal credit terms and collateralization and do not represent more than normal risk of collection.
NOTE 6. MORTGAGE BANKING
Mortgage loans held for sale consisted of the following:
Mortgage banking income consisted of the following:
Mortgage banking activity is summarized as follows:
Included in accrued interest receivable at December 31, 1994 and 1993 is interest receivable on loans held for sale of $36,443 and $100,116, respectively.
NOTE 7. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The mortgage loans serviced for others consisted of the following:
Capitalized servicing rights, net of accumulated amortization were as follows:
NOTE 8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following:
NOTE 9. FORECLOSED REAL ESTATE
Foreclosed real estate consisted of the following:
The following is a summary of the reserve for losses on real estate:
NOTE 10. DEPOSITS
Deposits are summarized as follows:
At December 31, 1994 and 1993 the Bank had $43,929,650 and $38,675,442, respectively, of certificate accounts with balances of $100,000 or more.
Scheduled maturities and related weighted average rates of certificate accounts at December 31, 1994 are as follows:
Interest expense on deposits for the years presented are as follows:
NOTE 11. BORROWINGS
Notes payable to Federal Home Loan Bank (FHLB) of Des Moines consisted of the following:
The interest rates on notes due in 1997, 1998 and 2000 are reset by the FHLB on the anniversary dates to a rate indexed to the current rate charged by the FHLB for one year borrowings. The Company also has the option of repaying each such note at its anniversary date without penalty.
Notes payable to the FHLB are collateralized by FHLB stock and first mortgage real estate loans. At December 31, 1994, the Company had a collateral requirement on first mortgage real estate loans of $500,000,000 and had pledged specific collateral with an aggregate carrying value of approximately $553,000,000.
Subordinated debt is as follows:
The subordinated debt is unsecured. At the option of the Company, the 9.25% notes may be redeemed at par on or after December 15, 1995. On November 7, 1994, the Company elected to exercise its right to redeem at par the 10% debentures on January 3, 1995. The 12.75% capital notes were redeemed at par on April 1, 1994. During 1991, $7,591,000 of the 12.75% capital notes were exchanged by the capital note holders for preferred stock (see Note 14).
Covenants for the 9.25% notes provide that the Company must maintain at least $1,000,000 in certain investments with a maturity of one year or less, of which no more than $500,000 may be placed on account at the Bank.
The interest is payable monthly for the 9.25% notes and quarterly for the 10% debentures. The notes and debentures are subordinated in payment of principal and interest to all customer deposits and other indebtedness of the Bank for borrowed money as defined in the note and debenture agreements.
Unamortized debt issue costs of $817,882 and $852,248 are included in other assets at December 31, 1994 and 1993, respectively.
Interest expense for borrowings for the periods presented are as follows:
NOTE 12. FEDERAL HOME LOAN BANK STOCK, LIQUIDITY AND CAPITAL REQUIREMENTS
The Bank, as a member of the FHLB, is required to hold a specified number of shares of capital stock, which is carried at cost, in the FHLB of Des Moines. In addition, under regulations currently in effect, the Bank is required to maintain cash and other liquid assets in an amount equal to 5% of its deposit accounts and other obligations due within one year. The Bank has met these requirements.
The Bank is subject to capital standards established by the Federal Deposit Insurance Corporation Improvement Act of 1991 which defines five capital tiers, the highest of which is "well capitalized". Under the regulations a "well capitalized" institution must have a leverage ratio of at least 5%, a tier 1 risk based capital ratio of at least 6% and a total risk based capital ratio of at least 10%.
At December 31, 1994 and 1993, the Bank exceeded each of these requirements and is categorized as a "well capitalized" institution.
The following is a summary of the Bank's capital ratios (unaudited):
Management believes the Bank will continue to meet the requirements to be categorized as a "well capitalized" institution in 1995.
The Bank is also required by federal regulations to maintain minimum levels of capital that are measured by three ratios: a tangible capital ratio of at least 1.5% of tangible assets; a core capital ratio of at least 3%, and a risk based capital ratio of at least 8%. The Bank exceeded all three ratios during 1994 and 1993 and management believes the Bank will continue to do so in 1995.
In 1993, the Office of Thrift Supervision (OTS) issued its final regulations on interest rate risk. Under the final rule, institutions deemed to have an "above normal" level of interest rate risk are subject to a capital charge and must deduct a portion of that risk from total capital for regulatory capital purposes. As of December 31, 1994 and 1993 the Bank's required regulatory capital was not impacted by the interest rate risk rule.
NOTE 13. INCOME TAXES
The Company and the Bank file consolidated federal income tax returns. Federal income taxes are allocated to the Company and the Bank based on their contributions to consolidated taxable income.
The components of income tax expense for the years ended December 31 consists of the following:
A reconciliation of the statutory federal income tax rate with the actual rate provided on earnings is as follows:
The Bank qualifies under various provisions of the Internal Revenue Code which permit it to deduct from taxable income an allowance for bad debts which differs from the provision for such losses charged to income for financial statement purposes. Accordingly, retained earnings at December 31, 1994 includes approximately $1,072,000 for which no provision for income taxes has been made. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, income taxes may be imposed at the then applicable rates. It is not contemplated that any portion of retained earnings will be used in a manner that will result in additional taxable income.
The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993 are as follows:
No valuation allowance was required for deferred tax assets at December 31, 1994 and 1993.
Deferred income taxes for 1992 relate primarily to the difference in recognition of components of gains on sales of mortgage loans and depreciation for financial reporting and income tax purposes.
NOTE 14. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has outstanding 303,640 shares of preferred stock originally issued in exchange for $7,591,000 of the Bank's 12.75% Subordinated capital notes due 1999. The preferred stock was issued in units consisting of one share of preferred stock and one warrant to purchase one-half share of the Company's common stock (See "Stock Warrants"). Dividends on the preferred stock were at an annual rate of $3.1875 per share until October 31, 1993 and are at an annual rate of $2.75 per share thereafter. Dividends are cumulative and are payable quarterly. There were no preferred dividends due but not paid as of December 31, 1994. The preferred stock has a liquidation preference of $25.00 per share plus accumulated and unpaid dividends. The preferred stock is redeemable at the option of the Company, in whole or in part, at any time on or after October 31, 1996, at $25.00 per share plus accumulated and unpaid dividends. Pursuant to the Merger discussed in Note 2, each outstanding share of the preferred stock would become the right to receive $27.50 plus accumulated and unpaid dividends in cash.
COMMON STOCK
In November, 1993, the Company declared a four-for-three split of its common stock payable on December 31, 1993 to all holders of record as of December 1, 1993. The split was effected by means of a stock dividend. No fractional shares were issued.
STOCKHOLDER RIGHTS PLAN
On May 7, 1991 the Company's Board of Directors adopted a stockholders rights plan (Plan) under which each share of the Company's common stock has an associated preferred stock purchase right that would allow the holders to purchase the Company's common stock at a discounted price upon certain events. In contemplation of execution of the Merger Agreement as discussed in Note 2, the Company's Board of Directors amended the Plan as of August 21, 1994 to provide that the Merger would not trigger provisions of the Plan.
DIVIDEND RESTRICTIONS
The Company is limited in its ability to declare dividends by the dividend restrictions imposed on its savings bank subsidiary. Under applicable regulations of the OTS, the Bank could declare dividends to the Company without regulatory approval in an amount equal to accumulated net income for the current calendar year plus 50% of the amount by which its capital exceeded its capital requirements at the beginning of the year. However, the Bank could not declare dividends that would cause it to fall below its capital requirement without OTS approval.
STOCK OPTIONS
The Company has a stock option plan under which 618,554 shares of common stock are reserved for issuance to employees and directors of the Company.
At the Company's annual meeting of shareholders on May 3, 1994, the shareholders voted to approve the Investors Bank Corp. 1993 Stock Incentive Plan ("1993 Plan") which, in effect, replaced the Company's Restricted Stock Option Plan. The 1993 Plan permits the granting of a variety of different types of awards valued in whole or in part by reference to or otherwise based upon the Company's stock. An award may not be for less than 100% of the fair value of the Company's common stock on the date of the award. Under terms of the Merger agreement discussed in Note 2, the Company agreed not to grant any awards without the prior approval of Firstar. Since the date of the Merger announcement, no additional awards have been granted. Pursuant to the terms of the Merger, all options would become fully exercisable immediately upon the effective date of the Merger as options in Firstar common stock at the exchange ratio of .8676 shares of Firstar common stock for each share of the Company's common stock.
The following is a summary of activity in the plan:
STOCK WARRANTS
In conjunction with the issuance of preferred stock there are warrants to purchase 201,427 shares of common stock at a price of $11.06 per share on or after February 11, 1992. The warrants expire on November 13, 1996. The Company has reserved common stock for the outstanding warrants. Pursuant to the Merger discussed in Note 2, the warrants would become warrants to purchase an equivalent .8676 shares of Firstar common stock.
RESTRICTED STOCK AWARD AGREEMENTS
The Company entered into Restricted Stock Award Agreements in 1992 and 1994. Under the terms of the 1992 agreement, 45,973 shares of restricted stock were granted to two executive officers of the Company. These shares vest over a ten-year period at the rate of 10% per year. A January 4, 1994 agreement granted an additional 28,000 shares of restricted stock to three executive officers of the Company. These shares vest over a three-year period at 33 1/3% per year. Compensation expense for all the shares vesting in 1994, 1993 and 1992 was $384,087, $182,048 and $49,996, respectively.
Under the terms of the Merger agreement discussed in Note 2, the value of the stock award granted in 1992 will be independently appraised and, based upon the appraised value, exchanged for .8676 equivalent unrestricted shares of Firstar common stock. The 1994 restricted stock will be exchanged for .8676 equivalent restricted shares of Firstar common stock.
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, mortgage loan purchase commitments and forward mortgage loan sales commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and purchase mortgage loans is represented by the contract or notional amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. For forward mortgage loan sales commitments, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of forward mortgage loan sales commitments through credit approvals, credit limits and monitoring procedures.
The contract or notional amounts of these financial instruments at December 31, 1994 were as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on the loan type and on management's credit evaluation of the borrower. Collateral consists primarily of residential real estate and personal property.
Forward mortgage loan sales commitments are contracts for the delivery of securities backed by mortgage loans in which the Company agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of the counterparties to meet the terms of their contracts and from movements in mortgage loan values and interest rates.
NOTE 16. COMMITMENTS
The Company has several noncancelable operating lease agreements for its office properties which have remaining lease terms of up to fourteen years except for one land lease with a remaining term of thirty-seven years. In addition, one retail banking office is under a capital lease which has a remaining term of six years. Future minimum payments under these leases are as follows:
In addition, the Company has several renewal options on all its retail banking office leases and some of its mortgage office leases ranging from two- to five-year periods. At present, the Company intends to exercise most options on its retail banking offices when the original leases expire. If this occurs, total future minimum payments (estimated using original lease term costs) under these leases, as shown above, would increase by approximately $7,689,000.
The Company previously sold two retail banking office properties to third parties under sale/leaseback arrangements. These lease agreements include purchase options at market value at certain points during the lease terms.
Total rent expense for the years ended December 31, 1994, 1993 and 1992 was approximately $1,659,000, $1,509,000 and $1,007,000, respectively.
NOTE 17. RETIREMENT PLAN
The Company currently offers a 401(k) plan which is available to all permanent employees who have attained age twenty-one and have met the one year eligibility requirement, as defined. Under the 401(k) plan, an employee may defer up to 15% of his or her compensation, as defined, with discretionary matching Company contributions. The Company may also make discretionary profit sharing contributions to be invested in common stock of the Company and has done so in 1994, 1993 and 1992. Eligible employees vest in the Company's matching and profit sharing contributions ratably over their first five years of employment. Total expense under the plan for the years ended December 31, 1994, 1993 and 1992 was $421,914, $541,579 and $403,294, respectively.
Under terms of the merger agreement, the Company agreed not to amend the 401(k) plan without the consent of Firstar. The Company expects the 401(k) plan to be maintained for a period after the Merger and to eventually be merged with Firstar's 401(k) plan.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose estimated fair values of its financial instruments, including assets, liabilities and off- balance sheet items, for which it is practicable to estimate fair value. These fair values are estimates made as of December 31, 1994 and 1993 based on relevant market information, if available, and upon characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Company's financial instruments, many of the fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. Thus, the estimates are subjective in nature, involving uncertainties and requiring judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based only on existing financial instruments. The Company has not attempted to estimate the value of anticipated future business or assets, liabilities or activities that are not considered financial instruments. For example, the Company has a substantial mortgage banking operation that contributes significant amounts of noninterest income annually. The mortgage banking operation is not a financial instrument and its value has not been incorporated into the fair value estimates. In addition, the tax effects of unrealized gains or losses implied in the fair value estimates have not been considered in the estimates nor have costs necessary to consummate a sale been considered. Accordingly, the aggregate fair value amounts do not represent an estimate of the underlying fair value of the Company.
The estimated fair value of the Company's financial instruments are shown below. Following the table, there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instrument.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximates their fair value.
INVESTMENT SECURITIES HELD TO MATURITY
The fair values of investment securities are based on quoted market prices. See Note 4 for the carrying amounts and fair values of the various components of the Company's investment portfolio.
MORTGAGE LOANS HELD FOR SALE
In order to manage the market exposure on its residential loans held for sale and its commitments to extend credit for residential loans, the Company enters into forward mandatory, optional and standby mortgage loan sales commitments. Therefore, the estimated fair value of mortgage loans held for sale is based on the committed sales prices.
MORTGAGE LOANS
The fair values of mortgage loans were estimated for groups of loans with similar characteristics. See Note 5 for the descriptions and amounts of these groups. Nonperforming loans were subtracted and discounted by the average historical rate of loss that the Company has experienced on these types of loans.
The largest group, adjustable first mortgage loans, has experienced no significant change in credit risk. Its fair value was estimated by subtracting nonperforming loans, classifying the loans into segments with similar characteristics which determine saleability and obtaining market quotes for each of the segments.
The fair value of the commercial real estate loans was estimated using discounted cash flow analysis. The discount rates used were estimated market rates for similar types of loans adjusted upward to reflect the decline in the collateral market values of commercial real estate properties over the last few years. In addition, certain loans have experienced increased credit risk since origination. The discount rate for these loans was further adjusted upward to compensate for this additional risk.
The credit risk of the adjustable second mortgage loans and other mortgages has not changed appreciably. Discounted cash flow analysis of scheduled payments applying a discount rate based on an estimated market rate appropriate for each type of loan was used to estimate the fair value of these loans.
CONSUMER LOANS
Consumer loans consist primarily of loans secured by residential real estate. See Note 5 for the classifications of such loans. The Company believes the credit risk of these loans has not changed significantly since origination. Nonperforming second mortgage loans were removed from the total and discounted to reduce them to estimated fair value. The remaining loans were segmented into groups with similar characteristics and the fair value was estimated by discounting the expected cash flows using discount rates that equaled the Company's origination rates for similar loans as of December 31, 1994 and 1993.
FEDERAL HOME LOAN BANK STOCK
The carrying amount of FHLB stock approximates its fair value.
EXCESS SERVICING FEES
Excess servicing fees are included in capitalized servicing rights on the balance sheet. See Note 7 for additional information. The fair value of excess servicing fees was estimated by discounting the expected cash flows associated with the servicing of the underlying loans. The mortgages serviced for others were sorted into groups with characteristics similar to loan pools for which servicing is typically bought or sold. An estimated market rate of return was assumed for each pool and these rates were used as the discount rates in the analysis.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present unanticipated credit concerns.
DEPOSITS
The fair value of deposits with no stated maturity, such as checking, savings and money market accounts, is equal to the amount payable on demand as of December 31, 1994 and 1993. See Note 10 for deposit classifications. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using as discount rates the rates that were offered by the Company as of December 31, 1994 and
1993 for deposits with maturities similar to the remaining maturities of the existing certificates of deposit.
The fair value estimate for deposits does not include the benefit that results from the low-cost funding provided by the Company's existing deposits and long-term customer relationships compared to the cost of obtaining different sources of funding. This benefit, generally referred to as core deposit intangible, has not been quantified by the Company.
NOTES PAYABLE
Notes payable consist of FHLB advances. The carrying amount of notes payable which may be repaid at any time without penalty at the Company's discretion approximates their fair value. The fair values of the notes payable with fixed maturities are estimated based on discounted cash flow analyses using as discount rates interest rates charged by the FHLB at December 31, 1994 and 1993 for borrowings of similar remaining maturities.
SUBORDINATED DEBT
There are two subordinated debt instruments at December 31, 1994. See Note 11 for more information. The fair value of the 9.25% notes due 2002 was estimated based on the bid market prices as of December 31, 1994 and 1993. The fair value of the 10% debentures due 1996 as of December 31, 1994 was based upon their carrying value because the Bank called the debentures on January 3, 1995. As of December 31, 1993 the 10% debentures were valued based on an estimated market price taking into account their rate, maturity and risk in relation to the 9.25% notes. The fair value at December 31, 1993 of the 12.75% capital notes due 1999 approximated their carrying amount because the market anticipated the Company's redemption of the notes at par on April 1, 1994.
COMMITMENTS TO EXTEND CREDIT
At December 31, 1994 and 1993, the Company had commitments to extend credit with total notional amount of $81,324,000 and $94,549,000, respectively. See Note 15 for the type and amounts of commitments as well as related discussion. The fair value of commitments to extend credit is not based on the notional amounts, but rather is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties. For commitments to extend credit for residential mortgage loans and for commercial development of residential property, the fair value is based on the fees charged for these commitments. Because of the short term nature of the commitments, no adjustment was necessary for change in creditworthiness or changes in market interest rates. The Company does not charge fees for commitments to retail customers to extend credit under available lines of credit. Accordingly, no fair value was assigned to these commitments. The estimated fair values of commitments to extend credit at December 31, 1994 and 1993 were $24,000 and $73,000, respectively.
NOTE 19. PARENT COMPANY FINANCIAL INFORMATION
The Investors Bank Corp. (parent company only) condensed financial statements are as follows:
NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly data for 1994 and 1993 follows: (in thousands except per share data)
INVESTORS BANK CORP. ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
Exhibit Number Description Page -------------- ----------- ---- 2.1 Agreement and Plan of Reorganization between Investors Bank Corp., Firstar Corporation and Firstar Corporation of Minnesota (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed August 25, 1994 (File No. 0-16163)).
2.2 Form of Voting Agreement (Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed August 25, 1994 (File No. 0-16163)).
3.1 Certificate of Incorporation of Company, as amended (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (Registration No. 33-9554) (the "Registration Statement")).
3.2 Certificate of Amendment to Certificate of Incorporation (Incorporated by reference to Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992) (File No. 0-16163)).
3.3 Certificate of Amendment to Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994) (File No. 0-16163)).
3.4 Charter of Investors Savings Bank, F.S.B. (the "Bank") (Incorporated by reference to Exhibit 3.2 of the Registration Statement).
3.5 Bylaws of the Company (Incorporated by reference to Exhibit 3.3 to the Registration Statement).
3.6 Restated Bylaws of the Bank (Incorporated by reference to Exhibit 3.4 of the Registration Statement).
3.7 Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1991).
3.8 Certificate of Designation of Cumulative Perpetual Preferred Stock, Series 1991, of the Company (Incorporated by reference to Exhibit 4.5 to Amendment No. 1 to the Registration Statement on Form S-4 filed by the Company with the Commission on October 11, 1992 (File No. 33- 42684) (hereafter "S-4 Amendment No. 1").
3.9 Amended Certificate of Designation of Cumulative Perpetual Preferred Stock, Series 1991 (Incorporated by reference to Exhibit 4.17 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 0- 16163)).
3.10 Warrant Agreement dated October 15, 1991 between the Company and Norwest Bank Minnesota National Association (Incorporated by reference to Exhibit 4.7 to the S-4 Amendment No. 1).
3.11 Specimen form of certificate for the Company's Cumulative Perpetual Preferred Stock, Series 1991 (Incorporated by reference to Exhibit 1.1 to the Company's Form 8-A dated January 6, 1992).
3.12 Specimen Certificate of the Company's Warrants to Purchase Common Stock (Incorporated by reference to Exhibit 1.2 to the Company's Form 8-A dated January 6, 1992).
3.13 Specimen Certificate for the Company's Common Stock (Incorporated by reference to exhibit 4.1 to the Registration Statement).
3.14 Rights Agreement dated as of May 7, 1991, between the Company and Norwest Bank Minnesota National Association (Incorporated by reference to Exhibit 4 to the Company's current report on Form 8-K dated May 7, 1991).
4.1 First Amendment to Rights Agreement, as executed (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 16163)).
4.2 Form of Subordinated Debenture Due 1996 of the Bank (Incorporated by reference to Exhibit 4.3 to the Registration Statement).
4.3 Stock Option Plan of the Company, as amended (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (File No. 33-12893)).
4.4 Investors Bank Corp. 1993 Stock Incentive Plan (Incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0- 16163)).
4.5 Form of Indemnification Agreement with Directors (Incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended June 30, 1987).
4.6 Indenture dated as of March 21, 1989 between the Bank and First Trust National Association relating to the 12.75% Subordinated Capital Notes due 1999 (Incorporated by reference to Exhibit 4.8 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
4.7 Form of 12.75% Subordinated Capital Note due 1999 of the Bank (Incorporated by reference to Exhibit 4.7 to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
10.1 Lease dated January 7, 1987 between Thomas R. Lohmann, Susan M. Lohmann and the Bank relating to the Bank's Highland Park office (Incorporated by reference to Exhibit 10.14 of the Exchange Statement).
10.2 Leases dated June 3, 1988 between Pinehurst Properties, Inc. and the Bank relating to the Roseville office of the Bank and the Investors Mortgage division. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-16163)).
10.3 Investors Savings 401(k) Plan Trust Agreement (1988 Restatement). (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended June 30, 1988 (File No. 0-16163)).
*10.4 Deferred Compensation Plan (Incorporated by reference to Exhibit 4.9 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1989 (File No. 0-16163)).
*10.5 Restated Employment Agreement between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
*10.6 Restated Employment Agreement between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16163)).
*10.7 Form of Severance Agreement (Incorporated by reference to Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 0-16163)).
*10.8 Restricted Stock Award Agreement dated December 31, 1992 between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.9 Restricted Stock Award Agreement dated December 31, 1992 between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163))
*10.10 Nonqualified Stock Option Agreement between the Company and Daniel Arrigoni (Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.11 Nonqualified Stock Option Agreement between the Company and Daniel Arrigoni (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16163)).
*10.12 Performance Bonus Policy of the Company (Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0- 16163)).
*10.13 Restricted Stock Award Agreement dated January 4, 1994 between the Company and James M. Burkholder (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10- K for the year ended December 31, 1993 (File No. 0-16163)).
*10.14 Restricted Stock Award Agreement dated January 4, 1994 between the Company and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0- 16163)).
*10.15 Restricted Stock Award Agreement dated January 4, 1994 between the Company and Lynn V. Bueltel (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0- 16163)).
*10.16 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and James M. Burkholder (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.17 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.18 Employment Agreement dated August 21, 1994 between the Company, Firstar Corporation and Daniel P. Arrigoni (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.19 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and James M. Burkholder (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.20 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and John G. Lohmann, Jr. (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
*10.21 Noncompetition Agreement dated August 21, 1994 between Firstar Corporation and Daniel P. Arrigoni (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-16163)).
11 Computation of Earnings per Common Share.
22 Subsidiaries of the Company (Incorporated by reference to Exhibit 22 to the Registration Statement).
24.1 Consent of KPMG Peat Marwick LLP
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.