<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities and
Exchange Act of 1934 for the Year Ended December 31, 1994.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________
COMMISSION FILE NO. (0-16163)
INVESTORS BANK CORP.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1566301
------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Lake Street
Wayzata, Minnesota 55391
---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(612) 475-8500
-----------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /x/
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 24, 1995 was approximately $57,359,000 (based on the
closing sale price of such stock on March 24, 1995 as reported by the Nasdaq
National Market).
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 24, 1995 was:
Common Stock, $.01 par value: 3,467,097 shares
<PAGE>
PART I.
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.
- 1 -
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio at December 31 by type of loan:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Balance % Balance % Balance % Balance % Balance %
------ --- ------- --- ------- --- ------- --- ------- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $855,305 85.2% $671,659 84.6% $550,117 84.7% $398,270 85.1% $448,195 88.5%
Commercial 31,363 3.1 30,630 3.9 32,722 5.1 35,266 7.6 33,051 6.5
Total real estate
loans 886,668 88.3 702,289 88.5 582,839 89.8 733,496 92.7 481,246 95.0
Consumer loans 117,176 11.7 91,691 11.5 66,489 10.2 34,261 7.3 25,388 5.0
Total portfolio
loans $1,003,844 100.0% $793,980 100.0% $649,328 100.0% $467,757 100.0% $506,634 100.0%
</TABLE>
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:
<TABLE>
<CAPTION>
1 2 3 4-5 6-10 11-15 Over 15
Year Years Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Adjustable Rate:
1-4 Family residential
real estate loans. . . . . $11,074 $11,851 $12,657 $28,006 $88,677 $350,875 $350,853 $853,993
Fixed Rate:
1-4 family residential
real estate loans. . . . . 124 135 150 343 560 1,312
Commercial real estate. . . 1,347 998 4,455 7,534 9,504 7,525 31,363
Total Mortgage Loans . . . . 12,545 12,984 17,262 35,883 98,741 358,400 350,853 886,668
Consumer loans . . . . . . . 7,250 2,317 4,163 27,791 50,658 22,110 2,887 117,176
Total Loans. . . . . . . . $19,795 $15,301 $21,425 $63,674 $149,399 $380,510 $353,740 $1,003,844
</TABLE>
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
- 2 -
<PAGE>
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.
- 3 -
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Additions to mortgage loans:
Mortgage loans originated . . . . . . . . . . $578,027 $1,102,916 $929,088
Mortgage loans purchased from
correspondents . . . . . . . . . . . . . . . 64,954 125,896 111,788
Other mortgage loans purchased. . . . . . . . 114 609 1,126
Loans to finance foreclosed real estate . . . 10 308 823
Total. . . . . . . . . . . . . . . . . . . . . 634,105 1,229,729 1,042,825
Reductions to mortgage loans:
Mortgage loans sold:
GNMA pass-through certificates . . . . . . . 168,301 397,791 245,244
FNMA mortgage-backed certificates. . . . . . 182,228 501,255 481,163
Others . . . . . . . . . . . . . . . . . . . 84,108 83,718 73,296
Repayments. . . . . . . . . . . . . . . . . . 97,156 99,613 90,139
Foreclosures. . . . . . . . . . . . . . . . . 773 2,329 893,066
Total. . . . . . . . . . . . . . . . . . . . . 532,566 1,084,706 893,066
Net increase in mortgage loans . . . . . . . . $110,539 $145,023 $149,759
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Amounts of loans serviced for
others at year end. . . . . . . . . . . $1,317,125 $1,357,204 $981,468
Loan servicing fees collected. . . . . . $5,199 $2,830 $1,491
Servicing fees as percentage
of interest income. . . . . . . . . . . 7.86% 4.90% 2.84%
Servicing contracts for others
at year end . . . . . . . . . . . . . . 17,854 16,510 12,361
</TABLE>
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
- 4 -
<PAGE>
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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<PAGE>
$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:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Residential real estate . . . . . $2,472 $1,852 $1,987 $3,509 $3,382
Commercial real estate. . . . . . 1,182
Consumer. . . . . . . . . . . . . 148 51 43 160 749
2,620 1,903 2,030 4,851 4,131
Real estate owned
and in judgment, net:
Residential. . . . . . . . . . . 136 1,868 3,242 3,068 2,723
Commercial . . . . . . . . . . . 1,890 4,807 3,997 3,275 3,367
2,026 6,675 7,239 6,343 6,090
Total nonperforming assets . . . . $4,646 $8,578 $9,269 $11,194 $10,221
Nonperforming loans as a
percentage of net loans
held in portfolio . . . . . . . . .26% .24% .31% 1.04% .82%
Nonperforming assets as a
percentage of total assets. . . . .41% .85% 1.14% 1.85% 1.67%
</TABLE>
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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<PAGE>
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:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance. . . . . . . . . $2,981 $2,599 $1,982 $1,067 $450
Provisions for losses. . . . . . . 651 632 869 1,009 803
Charge-offs:
Residential real estate loans . . (3) (103) (199) (28) (140)
Commercial real estate loans. . . (286) (5)
Consumer loans. . . . . . . . . . (51) (35) (151) (124) (43)
Total Charge-offs. . . . . . . . (54) (424) (350) (152) (188)
Recoveries:
Residential real estate loans . . 41 111 65 47 2
Consumer loans. . . . . . . . . . 3 63 33 11
Total recoveries . . . . . . . . 44 174 98 58 2
Ending balance . . . . . . . . . . $3,622 $2,981 $2,599 $1,982 $1,067
Ratio of net charge-offs
to average loans outstanding. . . .001% .03% .04% .02% .04%
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allocation Amount:
Residential real estate. . . . . . $212 $591 $507 %394 $426
Commercial real estate . . . . . . 261 260 283 336 322
Consumer . . . . . . . . . . . . . 506 568 439 381 202
Total allocated . . . . . . . . . 979 1,419 1,229 1,111 950
Unallocated portion. . . . . . . . 2,643 1,562 1,370 871 117
Total reserve . . . . . . . . . . $2,622 $2,981 $2,599 $1,982 $1,067
Allocations as a Percent of
Real Estate:
Residential real estate. . . . . . .02% .08% .08% .08% .09%
Commercial real estate . . . . . . .03 .03 .04 .07 .06
Consumer . . . . . . . . . . . . . .05 .07 .07 .08 .04
Total allocated . . . . . . . . . .10 .18 .19 .23 .19
Unallocated portion. . . . . . . . .26 .20 .21 .19 .02
Total reserve . . . . . . . . . . .36% .38% .40% .42% .21%
</TABLE>
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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<PAGE>
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:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allocation Amount:
Residential real estate. . . . . . $ 1 $ 35 $ 82 $ 104 $ 120
Commercial real estate . . . . . . 385 100 614 418 286
Total reserve . . . . . . . . . . $ 386 $ 135 $ 696 $ 522 $ 406
Allocations as a Percent of
Real Estate:
Residential real estate. . . . . . .03% .51% 1.03% 1.51% 1.85%
Commercial real estate . . . . . . 15.98 1.47 7.74 6.06 4.40
Total reserve . . . . . . . . . . 16.01% 1.98% 8.77% 7.60% 6.25%
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Obligations of U.S.
Government corporations
and agencies. . . . . . . . . . . $12,602 $11,626 $5,372 $4,371 $4,291
State and municipal
obligations . . . . . . . . . . . 80 210 510 430 550
Investment grade corporate
bonds . . . . . . . . . . . . . . 15,872 15,439 11,789 12,760 12,496
Other. . . . . . . . . . . . . . . 408 504 504
$28,962 $27,779 $18,172 $17,561 $17,337
</TABLE>
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.
- 8 -
<PAGE>
The following table presents information regarding the scheduled maturities
and yields on investment securities at December 31, 1994:
<TABLE>
<CAPTION>
Due in one Due in one
year or less year or less Total
------------ ------------ -----
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Obligations in U.S.
Government and agencies . . . . . $693 7.73% $11,909 6.04% $12,602 6.13%
State and Municipal
obligations . . . . . . . . . . . 80 5.65 80 5.65
Investment grade corporate
bonds . . . . . . . . . . . . . . 4,117 5.90 11,755 5.20 15,872 5.38
Other. . . . . . . . . . . . . . . 408 4.17 408 4.17
$5,298 6.00% $23,644 5.62% $28,962 5.69%
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net deposit inflow (outflow) . . . . . . $ 9,940 $ 70,754 ($ 22,094)
Interest credited or accrued . . . . . . 22,441 20,307 23,897
Net increase in deposits . . . . . . . . $ 32,381 $ 91,061 $ 1,803
Deposits at end of period. . . . . . . . $ 635,794 $ 603,413 $ 512,352
</TABLE>
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."
- 9 -
<PAGE>
BORROWINGS. The following table sets forth the Company's borrowings at
December 31:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
FHLB advances. . . . . . . . . . . . $400,000 $325,000 $225,000
Subordinated debt. . . . . . . . . . 23,391 25,800 25,800
Capitalized lease obligations. . . . 418 466 510
$423,809 $351,266 $251,310
</TABLE>
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.
- 10 -
<PAGE>
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
- 11 -
<PAGE>
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.
- 12 -
<PAGE>
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).
- 13 -
<PAGE>
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.
- 14 -
<PAGE>
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
- 15 -
<PAGE>
The Company also leases space for its private banking division in downtown
Minneapolis which expires in 1995.
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. 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
- 16 -
<PAGE>
PART II.
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------------------
HIGH LOW
---- ---
<S> <C> <C>
First Quarter $16.50 $10.69
Second Quarter 16.88 13.50
Third Quarter 19.13 13.50
Fourth Quarter 20.63 16.50
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------------------
HIGH LOW
---- ---
<S> <C> <C>
First Quarter $20.75 $17.25
Second Quarter $19.00 $17.00
Third Quarter $26.00 $17.50
Fourth Quarter $24.50 $21.00
</TABLE>
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. SELECTED FINANCIAL DATA
INVESTORS BANK CORP. AND SUBSIDIARY
FIVE YEAR FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Interest income $66,119 $57,769 $52,516 $54,793 $56,483
Interest expense 39,598 32,652 30,354 36,654 43,576
------------ ------------ ------------ ------------ ------------
Net interest income 26,521 25,117 22,162 18,139 12,907
Provision for loan losses 652 631 869 1,010 803
Mortgage banking income 9,620 13,313 11,178 6,399 4,766
Loan servicing fees 5,199 2,830 1,491 2,201 1,864
Other noninterest income 2,004 2,487 1,586 1,156 1,482
Noninterest expense 28,226 26,462 22,509 18,452 16,779
------------ ------------ ------------ ------------ ------------
Earnings before income tax expense and
cumulative effect of accounting change 14,466 16,654 13,039 8,433 3,437
Income tax expense 6,121 6,754 5,227 3,397 1,396
Cumulative effect of accounting change 125
------------ ------------ ------------ ------------ ------------
Net earnings $8,345 $10,025 $7,812 $5,036 $2,041
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net earnings available for
common stockholders $7,510 $9,080 $6,844 $4,931 $2,041
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per common share $2.00 $2.49 $1.98 $1.51 $0.66
Dividends per common share $.50 $.38 $.18
FINANCIAL RATIOS:
Net interest margin 2.71% 2.94% 3.39% 3.23% 2.36%
Return on average assets .82 1.13 1.14 .84 .35
Return on average common equity 17.1 25.6 24.2 22.0 10.9
Average equity to average assets 5.1 4.9 5.2 3.9 3.2
AVERAGE BALANCE SHEET DATA:
Total assets $1,015,234 $889,425 $685,790 $601,903 $580,322
Interest-earning assets 980,327 855,441 653,162 561,538 547,622
Stockholders' equity 51,594 43,113 35,867 23,544 18,730
ENDING BALANCE SHEET DATA:
Total assets $1,126,462 $1,017,085 $815,844 $605,823 $610,464
Investment securities 28,962 27,779 18,172 17,561 17,737
Loans 1,014,482 878,372 710,106 531,404 541,074
Deposits 635,794 603,413 512,352 510,549 505,968
Borrowings 423,811 351,267 251,310 53,348 76,322
Stockholders' equity 54,280 47,153 39,068 32,654 19,766
Book value per common share 13.31 11.9 9.6 7.8 6.52
</TABLE>
- 17 -
<PAGE>
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.
- 18 -
<PAGE>
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.
- 19 -
<PAGE>
NET INTEREST INCOME VOLUME/RATE ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31, 1994 Year ended December 31, 1993
versus same period in 1993 versus same period in 1992
-------------------------- --------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans . . . . . . . . . . . . . . $ 8,056 $ (161) $ 7,895 $ 13,474 $ (8,673) $ 4,801
Cash and
investments . . . . . . . . . . . . 170 (26) 144 713 (579) 134
Other assets. . . . . . . . . . . . 244 67 311 361 (43) 318
Total interest income. . . . . . . . . . 8,470 (120) 8,350 14,548 (9,295) 5,253
Interest expense on:
Deposits:
Interest-bearing
accounts . . . . . . . . . . . . (457) (410) (867) (170) (1,692) (1,862)
Certificates . . . . . . . . . . 3,272 (134) 3,138 2,351 (4,239) (1,888)
Total deposits . . . . . . . 2,815 (544) 2,271 2,181 (5,931) (3,750)
FHLB advances . . . . . . . . . . . 2,753 2,401 5,154 4,671 (821) 3,850
Other Borrowings. . . . . . . . . . (348) (130) (478) 2,212 (15) 2,197
Total interest expense . . . . . . . . . 5,220 1,727 6,947 9,064 (6,767) 2,297
Net interest income . . . . . . . . $ 3,250 $ (1,847) $ 1,403 $ 5,484 $ (2,528) $ 2,956
</TABLE>
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 -
<PAGE>
NET INTEREST INCOME YIELD ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------ -------------------------
Average Yield/ Average Yield/ Average Yield/
balance Interest rate balance Interest rate balance Interest rate
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1). . . . . . . . . . $ 916,736 $ 62,145 6.78% $ 797,895 $ 54,250 6.80% $ 611,772 $ 49,449 8.08%
Cash and investments. . . . 46,504 2,541 5.46 43,400 2,397 5.52 31,769 2,263 7.12
Other assets. . . . . . . . 17,087 1,433 8.39 14,146 1,122 7.93 9,621 804 8.36
---------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest-
earning assets . . . . 980,327 $ 66,119 6.74% 855,441 $ 57,769 6.75% 653,162 $ 52,516 8.04%
-------- ---- -------- ---- -------- ----
Other assets(2). . . . . . . . 34,907 33,984 32,628
---------- --------- ---------
Total assets. . . . . . . . $1,015,234 $ 889,425 $ 685,790
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing
deposits. . . . . . . . . . $ 31,533 $ 31,294 $ 15,686
Interest-bearing deposits:
Checking, savings,
money market. . . . . . . 165,445 $ 3,904 2.36% 183,973 4,771 2.59% 188,939 $ 6,633 3.51%
Certificates. . . . . . . . 417,908 18,364 4.39 343,478 15,226 4.43 298,400 17,114 5.74
---------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest-
bearing deposits. . . . . 583,353 22,268 3.82 527,451 19,997 3.79 487,339 23,747 4.87
FHLB advances. . . . . . . . . 312,575 14,867 4.76 249,370 9,713 3.89 131,547 5,863 4.46
Other borrowings . . . . . . . 26,062 2,463 9.45 29,697 2,941 9.90 7,361 744 10.09
---------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest-bearing
liabilities . . . . . . . 921,990 $ 39,598 4.29% 806,518 $ 32,651 4.05% 626,247 $ 30,354 4.85%
-------- ---- -------- ---- -------- ----
Other liabilities(2) . . . . . 10,117 8,500 7,990
---------- --------- ---------
Total liabilities . . . . . 963,640 846,312 649,923
Stockholders' equity(2). . . . 51,594 43,113 35,867
---------- --------- ---------
Total liabilities and
stockholders'
equity. . . . . . . . . . $1,015,234 $ 889,425 $ 685,790
---------- --------- ---------
---------- --------- ---------
Net interest income. . . . . . $ 26,521 $ 25,118 $ 22,162
-------- -------- --------
-------- -------- --------
Net interest rate spread . . . 2.45% 2.70% 3.19%
---- ---- ----
---- ---- ----
Net interest margin. . . . . . 2.71% 2.94% 3.39%
---- ---- ----
---- ---- ----
<FN>
(1) Nonaccrual loans are included in average loan balances.
(2) Average balance is based on month-end balances for 1991.
</TABLE>
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.
- 21 -
<PAGE>
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.
- 22 -
<PAGE>
NONINTEREST INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Mortgage banking . . . . . . . . . . . . . . . . . $ 9,620 $ 13,313 $ 11,178
Loan servicing fees. . . . . . . . . . . . . . . . 5,199 2,830 1,491
Commissions on annuity sales . . . . . . . . . . . 566 561 575
Commissions on title insurance sales . . . . . . . 427 935 135
Other. . . . . . . . . . . . . . . . . . . . . . . 1,011 991 876
-------- -------- --------
$ 16,823 $ 18,630 $ 14,255
-------- -------- --------
-------- -------- --------
</TABLE>
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)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Loans originated for sale:
Loans closed. . . . . . . . . . . . . . . . . . $ 303,344 $ 838,097 $ 663,275
Loans purchased . . . . . . . . . . . . . . . . 49,727 114,986 91,346
--------- --------- ---------
$ 353,071 $ 953,083 $ 754,621
--------- --------- ---------
--------- --------- ---------
Mortgage loans sold. . . . . . . . . . . . . . . . $ 434,637 $ 982,764 $ 799,703
Gain on sales of mortgage loans. . . . . . . . . . 3,016 9,391 6,329
Loan servicing rights sold . . . . . . . . . . . . 481,324 252,178 301,642
Gain on sales of loan servicing rights . . . . . . 5,997 3,331 4,232
Other lending fees . . . . . . . . . . . . . . . . 607 591 617
</TABLE>
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.
- 23 -
<PAGE>
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.
- 24 -
<PAGE>
NONINTEREST EXPENSE
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Employee compensation and benefits . . . . . . . $ 15,393 $ 15,430 $ 12,650
Occupancy and equipment. . . . . . . . . . . . . 4,140 3,814 3,407
Advertising. . . . . . . . . . . . . . . . . . . 1,103 926 667
Federal deposit insurance premiums . . . . . . . 1,393 1,224 1,173
Other. . . . . . . . . . . . . . . . . . . . . . 6,197 5,068 4,612
--------- --------- ---------
$ 28,226 $ 26,462 $ 22,509
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
- 25 -
<PAGE>
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
- 26 -
<PAGE>
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)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Loans:
Residential real estate. . . . . . . . . . . $ 2,472 $ 1,852 $ 1,987
Consumer . . . . . . . . . . . . . . . . . . 148 51 43
------- ------- -------
2,620 1,903 2,030
------- ------- -------
Real estate owned and
in judgment, net:
Residential. . . . . . . . . . . . . . 136 1,868 3,242
Commercial . . . . . . . . . . . . . . 1,890 4,807 3,997
------ ------- -------
2,026 6,675 7,239
------ ------- -------
Total nonperforming assets . . . . . . . . . . $ 4,646 $ 8,578 $ 9,269
------- ------- -------
------- ------- -------
Nonperforming Loans as a
percentage of net Loans held
in portfolio . . . . . . . . . . . . . . . 26% .24% .31%
Nonperforming assets as a
percentage of total assets . . . . . . . . .41% .85% 1.14%
</TABLE>
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.
- 27 -
<PAGE>
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.
- 28 -
<PAGE>
ASSET/LIABILITY MATURITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------------------------------------
6 months 6 months 1 to 3 3 to 5 More than
or less to 1 year years years 5 years Total
------- --------- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage loans. . . . . . . . . . . . $ 432,302 $ 351,961 $ 111,956 $ 384 $ 1,209 $ 897,812
Consumer loans. . . . . . . . . . . . 78,487 11,366 7,164 9,381 10,272 116,670
Cash and investment securities. . . . 52,129 2,409 14,107 9,557 78,202
Total rate sensitive assets . . . . . $ 562,918 $ 365,736 $ 133,227 $ 19,322 $ 11,481 $1,092,684
Liabilities:
Fixed maturity deposits . . . . . . . $ 245,714 $ 140,896 $ 66,347 $ 13,062 $ 2 $ 466,021
Transaction accounts. . . . . . . . . 9,431 7,761 18,440 7,886 19,240 62,758
Money market accounts . . . . . . . . 103,097 103,097
FHLB advances . . . . . . . . . . . . 341,000 52,000 7,000 400,000
Other borrowings. . . . . . . . . . . 849 431 1,487 1,191 26,237 30,195
Total rate sensitive liabilities. . . $ 700,091 $ 201,088 $ 93,274 $ 22,139 $ 45,479 $1,062,071
Gap . . . . . . . . . . . . . . . . . $ (137,173) $ 164,648 $ 39,953 $ (2,817) $ (33,998) $ 30,613
Cumulative gap. . . . . . . . . . . . $ 27,475 $ 67,428 $ 64,611 $ 30,613
Cumulative gap to total assets. . . . (12.2)% 2.4% 6.0% 5.7% 2.7%
</TABLE>
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
- 29 -
<PAGE>
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.
- 30 -
<PAGE>
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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 31 -
<PAGE>
PART III.
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.
- 32 -
<PAGE>
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.
- 33 -
<PAGE>
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.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------- ---------------------------------------------
AWARDS PAYOUTS
NAME OTHER -------------------- ------- ALL
AND ANNUAL RESTRICTED OTHER
PRINCIPAL COMPEN- STOCK LTIP COMPEN-
POSITION YEAR SALARY BONUS(1) SATION(2) AWARDS(3) OPTIONS PAYOUTS SATION(4)
-------- ---- ------ -------- --------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAMES M. BURKHOLDER
President, Chief 1994 $202,000 $185,000 $45,319 $261,625 $ 9,668
Executive Officer 1993 195,000 185,000 34,189 13,333 9,612
and Chairman of 1992 175,000 125,000 14,597 249,980 8,670
the Company and
the Bank
JOHN G. LOHMANN, JR.
Executive Vice 1994 166,000 140,000 45,319 261,625 9,273
President and 1993 161,000 140,000 34,189 13,333 8,643
Secretary of the 1992 155,000 105,000 14,597 249,980 8,340
Company and the Bank;
Chief Lending Officer
of the Bank
LYNN V. BUELTEL
Senior Vice 1994 103,000 60,000 40,250 6,120
President and 1993 100,000 57,000 4,000 6,397
Chief Financial 1992 96,000 52,000 5,780
Officer of the
Company and Bank;
Treasurer of the Bank
DANIEL A. ARRIGONI
Executive Vice 1994 150,000 110,000 6,000
President of the 1993 141,000 110,000 7,272
Company and 1992 135,000 81,000
Executive Vice
President of the Bank-
Mortgage Production
<FN>
(1) Represents cash bonuses paid in the following year with respect to services
performed in the years indicated.
(2) Amounts shown as Other Annual Compensation are payments made in the
following year for the benefit of certain named executive officers for
federal and state withholding taxes in the preceding year arising from the
lapse of restrictions on restricted stock held by such named executive
officers.
(3) The amounts reported in this column represent the market value on the date
of grant, without giving effect to the diminution in value attributable to
the restrictions on such stock. In fiscal 1993, the Company
- 34 -
<PAGE>
awarded 22,986 shares of restricted stock to each of Messrs. Burkholder
and Lohmann, with vesting occurring at the rate of 10% per year beginning
on the date of grant. In fiscal 1994, the Company awarded 13,000 shares of
restricted stock to each of Messrs. Burkholder and Lohmann, and 2,000
shares of restricted stock to Mr. Bueltel, with vesting occurring at the
rate of 33-1/3% per year beginning January 1, 1995. Regular dividends are
paid on the restricted stock reported in this column.
(4) The total amounts shown in this column for the last fiscal year consist of
the following: (i) Mr. Burkholder: $6,120 - Company contributions to the
Company's 401(k) plan; $3,548 - Benefit attributable to employee-owned life
insurance policy; (ii) Mr. Lohmann: $6,120 - Company contributions to the
Company's 401(k) plan; $3,153 - Benefit attributable to employee-owned life
insurance policy; (iii) Mr. Bueltel and Mr. Arrigoni- all amounts are
Company contributions to the Company's 401(k) plan.
</TABLE>
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.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END(1) AT FISCAL YEAR-END(2)
ACQUIRED VALUE -------------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Burkholder 47,333 $760,473 18,333 -0- $253,850 -0-
Mr. Lohmann 46,333 748,348 18,333 -0- 253,850 -0-
Mr. Bueltel 14,198 268,704 4,000 -0- 49,250 -0-
Mr. Arrigoni -- -- 40,000 13,332 680,000 $226,644
-------------------------
<FN>
(1) All of such options, with the exception of the options granted to Mr.
Arrigoni, are exercisable at a price equal to the fair market value of the
common stock on the date of grant.
(2) Represents the difference between the closing price of the Company's Common
Stock as reported on the Nasdaq National Market on December 31, 1994 and
the exercise price of the options.
</TABLE>
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.
- 35 -
<PAGE>
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.
- 36 -
<PAGE>
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.
- 37 -
<PAGE>
(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.
- 38 -
<PAGE>
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:
<TABLE>
<CAPTION>
LARGEST AMOUNT
INDEBTEDNESS OUTSTANDING
NAME OF EXECUTIVE INTEREST SINCE AT
OFFICER OR DIRECTOR RATE JANUARY 1, 1994 DECEMBER 31, 1994
------------------- ---- --------------- -----------------
<S> <C> <C> <C>
Daniel A. Arrigoni (1) . . . . 8.7 $611,617 $603,195(1)
Graham N. Heikes . . . . . . . 6.4 127,109 125,618
-------------------------
<FN>
(1) Mr. Arrigoni was retained as Executive Vice President and a member of the
Executive Management Committee of the Bank on September 30, 1991, and the
loans set forth above were incurred prior to his employment with the Bank.
At December 31, 1991, Mr. Arrigoni had sold his interest in the property
securing the mortgage loan set forth above. The property was purchased by
the buyer but Mr. Arrigoni remains personally liable to the Bank for its
repayment.
</TABLE>
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).
- 39 -
<PAGE>
PART IV.
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)).
- 40 -
<PAGE>
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)).
- 41 -
<PAGE>
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)).
- 42 -
<PAGE>
*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
- 43 -
<PAGE>
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.
- 44 -
<PAGE>
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
- 45 -
<PAGE>
[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
F-1
<PAGE>
INVESTORS BANK CORP. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------------------
1994 1993
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 29,934,244 $ 58,314,515
Investment securities held to maturity (market value
of $27,781,902 and $28,021,177, respectively) (Note 4) 28,962,361 27,778,989
Mortgage loans held for sale (Note 6) 15,449,390 88,351,696
Mortgage loans (Note 5) 882,363,160 698,895,887
Consumer loans (Note 5) 116,669,596 91,124,400
Federal Home Loan Bank stock (Notes 11 and 12) 20,000,000 16,250,000
Capitalized servicing rights (Note 7) 4,051,433 4,425,281
Office properties and equipment (Note 8) 15,774,236 15,731,333
Accrued interest receivable (Notes 4, 5 and 6) 5,322,335 3,653,453
Foreclosed real estate (Note 9) 2,026,488 6,674,799
Other assets 5,908,720 5,884,713
--------------- ---------------
Total assets $ 1,126,461,963 $ 1,017,085,066
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 10) $ 635,793,665 $ 603,412,708
Notes payable (Note 11) 400,000,000 325,000,000
Advances and loan payments from borrowers held under escrow 6,383,836 8,409,797
Income taxes (Note 13) 1,892,425 549,263
Subordinated debt (Note 11) 23,391,000 25,800,000
Other liabilities 4,720,813 6,760,035
--------------- ---------------
Total liabilities 1,072,181,739 969,931,803
--------------- ---------------
--------------- ---------------
Stockholders' Equity (Note 14):
Preferred stock, par value $.01, 1,000,000
shares authorized, 303,640 shares issued and outstanding 3,036 3,036
Common stock, par value $.01, 5,000,000
shares authorized, 3,506,824 and 3,325,522 shares
issued and outstanding, respectively 35,068 33,255
Additional paid-in capital 20,902,567 19,111,504
Unamortized restricted stock (1,115,944) (675,808)
Retained earnings, subject certain restrictions 34,455,497 28,681,276
--------------- ---------------
Total stockholders' equity 54,280,224 47,153,263
--------------- ---------------
Total liabilities and stockholders' equity $ 1,126,461,963 $ 1,017,085,066
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
INVESTORS BANK CORP. AND SUBSIDIARY
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Interest Income:
Interest on loans $ 62,144,404 $ 54,250,037 $ 49,449,041
Interest on cash and investments 2,541,286 2,396,639 2,262,820
Interest and dividends on other assets 1,433,011 1,122,410 803,998
------------- ------------- -------------
Total interest income 66,118,701 57,769,086 52,515,859
------------- ------------- -------------
Interest Expense:
Interest on deposits (Note 10) 22,268,321 19,997,333 23,747,373
Interest on borrowings (Note 11) 17,329,786 12,654,143 6,606,392
------------- ------------- -------------
Total interest expense 39,598,107 32,651,476 30,353,765
------------- ------------- -------------
Net interest income 26,520,594 25,117,610 22,162,094
Provision for loan losses (Note 5) 651,600 631,446 868,758
------------- ------------- -------------
Net interest income after provision for loan losses 25,868,994 24,486,164 21,293,336
------------- ------------- -------------
Noninterest Income:
Mortgage banking (Note 6) 9,619,680 13,313,359 11,178,090
Loan servicing fees (Note 7) 5,198,942 2,829,749 1,490,797
Commissions on annuity sales 565,886 560,733 575,053
Commissions on title insurance sales 427,140 935,681 135,081
Other 1,011,606 990,761 875,571
------------- ------------- -------------
Total noninterest income 16,823,254 18,630,283 14,254,592
------------- ------------- -------------
Noninterest Expense:
Employee compensation and benefits 15,393,040 15,429,639 12,650,501
Occupancy and equipment 4,140,360 3,813,908 3,406,693
Advertising 1,102,503 926,178 666,779
Federal deposit insurance premiums 1,392,730 1,224,472 1,172,908
Other 6,197,219 5,067,996 4,611,767
------------- ------------- -------------
Total noninterest expense 28,225,852 26,462,193 22,508,648
------------- ------------- -------------
Earnings before income tax expense and cumulative
effect of accounting change 14,466,396 16,654,254 13,039,280
Income tax expense (Note 13) 6,121,759 6,753,835 5,227,251
------------- ------------- -------------
Earnings before cumulative effect
of accounting change 8,344,637 9,900,419 7,812,029
Cumulative effect of accounting change (Note 3) 125,000
------------- ------------- -------------
Net earnings $ 8,344,637 $ 10,025,419 $ 7,812,029
------------- ------------- -------------
------------- ------------- -------------
Net earnings available for common stockholders $ 7,509,627 $ 9,079,707 $ 6,844,175
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share:
Before cumulative effect of accounting change $2.00 $2.46 $1.98
Cumulative effect of accounting change .03
------------- ------------- -------------
Net earnings $2.00 $2.49 $1.98
------------- ------------- -------------
------------- ------------- -------------
Average common and common equivalent shares 3,758,339 3,641,375 3,448,057
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INVESTORS BANK CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unamortized
Preferred Common paid-in restricted Retained
stock stock capital stock earnings Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31 , 1991 $ 3,036 $ 24,110 $ 18,051,929 $ 14,575,349 $ 32,654,424
Issuance of 45,973 restricted shares 345 499,615 $ (499,960)
Amortization of restricted stock 49,996 49,996
Dividends on preferred stock (967,854) (967,854)
Dividends on common stock (579,902) (579,902)
Exercise of options 134 60,321 60,455
Installment payments on common
stock issued to employees 39,036 39,036
Net earnings 7,812,029 7,812,029
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1992 3,036 24,589 18,650,901 (449,964) 20,839,622 39,068,184
Remeasurement of restricted stock 310,320 (310,320)
Amortization of restricted stock 84,476 84,476
Dividends on preferred stock (945,712) (945,712)
Dividends on common stock (1,238,053) (1,238,053)
Exercise of options 351 155,648 155,999
Exercise of warrants 2 2,948 2,950
Net earnings 10,025,419 10,025,419
Four-for-three stock split 8,313 (8,313)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1993 3,036 33,255 19,111,504 (675,808) 28,681,276 47,153,263
Issuance of 28,000 restricted shares 280 563,220 (563,500)
Remeasurement of restricted stock 170,086 (170,086)
Amortization of restricted stock 293,450 293,450
Dividends on preferred stock (835,010) (835,010)
Dividends on common stock (1,735,406) (1,735,406)
Exercise of options and related tax benefits 1,526 1,049,661 1,051,187
Exercise of warrants 7 8,096 8,103
Net earnings 8,344,637 8,344,637
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1994 $ 3,036 $ 35,068 $ 20,902,567 $(1,115,944) $ 34,455,497 $ 54,280,224
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INVESTORS BANK CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $8,344,637 $10,025,419 $7,812,029
Adjustments to reconcile net earnings
to net cash provided
(used) by operating activities:
Depreciation and amortization 2,065,864 3,799,572 3,732,627
Amortization of deferred loan fees
and discounts (1,592,677) (1,723,350) (1,402,410)
Gain on sales of mortgage loan servicing rights (5,996,840) (3,330,642) (4,231,620)
Proceeds from the sales of mortgage loan
servicing rights 7,931,120 4,676,016 6,471,360
Gain on sales of mortgage loans (3,015,605) (9,391,057) (6,328,687)
Provision for loan and real estate losses 979,581 751,623 1,154,743
Deferred (prepaid) income taxes 2,890,385 (401,241) (863,075)
Change in:
Capitalized servicing rights (2,310,518) (2,639,546) (3,826,393)
Accrued interest receivable (1,668,882) (178,430) 254,809
Interest payable on deposit accounts 1,266,280 60,405 (1,288,251)
Mortgage loans held for sale 75,917,911 (14,298,313) 8,407,745
Other, net (2,589,404) (1,769,027) 2,971,738
------------- ------------- ------------
Net cash provided (used) by operating activities 82,221,852 (14,418,571) 12,864,615
------------- ------------- ------------
Cash Flows from Investing Activities:
Net increase in loans (208,844,795) (147,846,650) (185,108,155)
Purchase of investment securities held to maturity (7,323,370) (16,632,480) (5,560,543)
Maturities of investment securities held to maturity 6,140,000 7,025,000 4,950,000
Purchase of FHLB stock (3,750,000) (3,321,800) (6,142,100)
Sales of foreclosed real estate 5,093,733 4,805,145 3,679,461
Increase in office properties and equipment, net (1,358,681) (2,674,643) (2,492,026)
------------- ------------- ------------
Net cash used by investing activities (210,043,113) (158,645,428) (190,673,363)
------------- ------------- ------------
Cash Flows from Financing Activities:
Net increase in deposits 31,114,677 91,000,008 3,091,344
Proceeds from FHLB advances 380,000,000 412,000,000 420,000,000
Repayment of FHLB advances (305,000,000) (312,000,000) (245,000,000)
Net proceeds from issuance of subordinated debt 22,133,514
Redemption of subordinated capital notes (2,409,000)
Net proceeds from common stock transactions 331,690 158,949 99,491
Dividends on preferred stock (835,010) (967,853) (911,395)
Dividends on common stock (1,735,406) (1,238,053) (579,902)
Net increase (decrease) in advances and loan payments
from borrowers held under escrow (2,025,961) 2,246,457 1,329,221
------------- ------------- ------------
Net cash provided by financing activities 99,440,990 191,199,508 200,162,273
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (28,380,271) 18,135,509 22,353,525
Cash and cash equivalents at beginning of year 58,314,515 40,179,006 17,825,481
------------- ------------- ------------
Cash and cash equivalents at end of year $29,934,244 $58,314,515 $40,179,006
------------- ------------- ------------
------------- ------------- ------------
Supplemental Disclosures:
Cash paid during the year for:
Interest $38,398,434 $32,408,299 $31,627,990
Income taxes 4,052,000 7,190,000 5,700,000
Noncash transfer of loans to foreclosed real estate 773,403 4,361,725 4,860,867
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
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.
F-6
<PAGE>
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.
F-7
<PAGE>
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.
F-8
<PAGE>
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.
F-9
<PAGE>
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.
F-10
<PAGE>
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.
F-11
<PAGE>
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.
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1994:
Obligations of U.S.
Government corpora-
tions and agencies $ 12,601,550 $ 5,245 $ 643,919 $ 11,962,876
State and municipal
obligations 80,000 957 79,043
Investment grade corporate
bonds 15,872,275 3,001 543,829 15,331,447
Other 408,536 408,536
------------- ------------- ------------- -------------
$ 28,962,361 $ 8,246 $1,188,705 $ 27,781,902
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
December 31, 1993:
Obligations of U.S.
Government corpora-
tions and agencies $ 11,625,812 $ 174,746 $ 35,747 $ 11,764,811
State and municipal
obligations 210,000 1,150 211,150
Investment grade corporate
bonds 15,439,296 127,314 25,275 15,541,335
Other 503,881 503,881
------------- ------------- ------------- -------------
$ 27,778,989 $ 303,210 $ 61,022 $ 28,021,177
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
There were no sales of investments during 1994, 1993 or 1992.
F-13
<PAGE>
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.
<TABLE>
<CAPTION>
Estimated
Amortized cost market value
-------------- --------------
<S> <C> <C>
Due in one year or less $ 5,297,920 $ 5,264,700
Due after one year through five years 23,664,441 22,517,202
-------------- --------------
$ 28,962,361 $ 27,781,902
-------------- --------------
-------------- --------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
-----------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Adjustable rate first mortgage $ 842,241,833 $ 656,402,702
Adjustable rate commercial real estate 31,362,695 30,629,989
Adjustable rate second mortgage 11,577,903 13,567,815
Other mortgage 1,485,175 1,688,696
-------------- --------------
886,667,606 702,289,202
Less:
Unearned discount and fees 1,188,757 979,061
Reserve for losses 3,115,689 2,414,254
-------------- --------------
$ 882,363,160 $ 698,895,887
-------------- --------------
-------------- --------------
</TABLE>
F-14
<PAGE>
Consumer loans consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Home equity $ 104,858,453 $ 80,025,235
Other consumer 6,147,649 6,324,975
Business purpose 6,169,725 5,340,521
-------------- --------------
117,175,827 91,690,731
Less reserve for losses 506,231 566,331
-------------- --------------
$ 116,669,596 $ 91,124,400
-------------- --------------
-------------- --------------
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance $ 2,980,585 $ 2,599,392 $ 1,982,274
Provision for losses 651,600 631,446 868,758
Charge-offs:
Residential real estate (2,738) (103,430) (199,456)
Commercial real estate (285,651)
Consumer (51,656) (34,575) (150,568)
------------ ------------ ------------
Total charge-offs (54,394) (423,656) (350,024)
Recoveries 44,129 173,403 98,384
------------ ------------ ------------
Ending balance $ 3,621,920 $ 2,980,585 $ 2,599,392
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
-------------------------------
1994 1993
------------ ------------
<S> <C> <C>
Loans held for sale $ 15,529,678 $ 88,636,117
Less unearned discount and fees 80,288 284,421
------------ ------------
$ 15,449,390 $ 88,351,696
------------ ------------
------------ ------------
</TABLE>
Mortgage banking income consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Gain on sales of mortgage loans $ 3,015,605 $ 9,391,057 $ 6,328,687
Gain on sales of loan servicing
rights 5,996,840 3,330,642 4,231,620
Other lending fees 607,235 591,660 617,783
------------ ------------ ------------
$ 9,619,680 $ 13,313,359 $ 11,178,090
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-16
<PAGE>
Mortgage banking activity is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Loans originated for sale:
Loans closed $ 303,344 $ 838,097 $ 663,275
Loans purchased 49,727 114,986 91,346
------------ ------------ ------------
$ 353,071 $ 953,083 $ 754,621
------------ ------------ ------------
------------ ------------ ------------
Mortgage loans sold $ 434,637 $ 982,764 $ 799,703
Loan servicing rights sold 481,324 252,178 301,642
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
--------------------------
1994 1993
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Outstanding principal balance $ 1,317,125 $ 1,357,204
Number of loans 17,854 16,510
</TABLE>
F-17
<PAGE>
Capitalized servicing rights, net of accumulated amortization were as follows:
<TABLE>
<CAPTION>
Excess Servicing Fees
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,958,834 $ 3,199,739 $ 4,052,228
Additions 1,081,833 2,288,643 3,501,078
Scheduled amortization (438,639) (610,814) (897,016)
Amortization resulting from higher
than anticipated prepayments (614,448) (1,257,136)
Basis of servicing sales (1,645,571) (1,304,286) (2,199,415)
------------ ------------ ------------
Balance at end of year 1,956,457 2,958,834 3,199,739
------------ ------------ ------------
<CAPTION>
Purchased Servicing
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
Balance at beginning of year 1,466,447 2,595,098 2,889,476
Additions 1,228,685 350,902 325,315
Scheduled amortization (311,447) (668,747) (326,724)
Amortization resulting from higher
than anticipated prepayments (769,718) (252,644)
Basis of servicing sales (288,709) (41,088) (40,325)
------------ ------------ ------------
Balance at end of year 2,094,976 1,466,447 2,595,098
------------ ------------ ------------
Total capitalized servicing rights $ 4,051,433 $ 4,425,281 $ 5,794,837
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Land $ 2,395,869 $ 2,009,464
Office buildings 8,141,400 7,919,911
Furniture and equipment 8,272,291 8,017,352
Leasehold improvements 2,667,168 2,458,410
------------ ------------
21,476,728 20,405,137
Less accumulated depreciation and amortization 5,702,492 4,673,804
------------ ------------
$ 15,774,236 $ 15,731,333
------------ ------------
------------ ------------
</TABLE>
F-18
<PAGE>
NOTE 9. FORECLOSED REAL ESTATE
Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Real estate in judgment, subject to redemption $ 136,091 $ 2,275,596
Real estate acquired through foreclosure 2,276,646 4,534,303
------------ ------------
2,412,737 6,809,899
Less reserve for losses 386,249 135,100
------------ ------------
$ 2,026,488 $ 6,674,799
------------ ------------
------------ ------------
</TABLE>
The following is a summary of the reserve for losses on real estate:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance $ 135,100 $ 696,191 $ 521,842
Provisions 327,981 120,177 285,985
Charge-offs:
Residential real estate (58,148) (88,426) (32,990)
Commercial real estate (19,261) (598,757) (124,804)
------------ ------------ ------------
Total charge-offs (77,409) (687,183) (157,794)
Recoveries 577 5,915 46,158
------------ ------------ ------------
Ending balance $ 386,249 $ 135,100 $ 696,191
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-19
<PAGE>
NOTE 10. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
rate at
December 31 December 31
------------ --------------------------
1994 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Checking and savings accounts:
Noninterest-bearing
checking accounts $ 26,648,320 $ 46,456,372
Interest-bearing checking
accounts 1.53% 23,245,322 24,941,059
Savings accounts 1.99 12,863,265 13,744,563
Money market savings
accounts 2.80 103,098,288 146,131,513
------------ ------------
2.11 165,855,195 231,273,507
------------ ------------
Certificate accounts:
1.50% to 2.00% 269,605 486,041
2.01% to 3.00% 2,202,500 7,947,456
3.01% to 4.00% 65,490,524 156,870,882
4.01% to 5.00% 235,340,508 162,431,985
5.01% to 6.00% 98,761,372 28,379,596
6.01% to 7.00% 61,222,793 5,493,667
7.01% to 8.00% 2,734,196 7,359,800
8.01% to 9.00% 519,082
------------ ------------
4.96 466,021,498 369,488,509
------------ ------------
Accrued interest payable 3,916,972 2,650,692
------------ ------------
Total deposits 4.19 $635,793,665 $603,412,708
------------ ------------
------------ ------------
</TABLE>
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.
F-20
<PAGE>
Scheduled maturities and related weighted average rates of certificate
accounts at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31
-----------
<S> <C> <C>
1995 4.84% $ 386,611,212
1996 5.29 48,184,293
1997 6.06 18,162,219
1998 5.68 11,117,830
1999 5.56 1,945,944
------------
4.96 $ 466,021,498
------------
------------
</TABLE>
Interest expense on deposits for the years presented are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Checking and savings
accounts $ 638,640 $ 663,526 $ 750,100
Money market savings
accounts 3,265,132 4,107,465 5,882,888
Certificate accounts 18,364,549 15,226,342 17,114,385
------------ ------------ ------------
$ 22,268,321 $ 19,997,333 $ 23,747,373
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 11. BORROWINGS
Notes payable to Federal Home Loan Bank (FHLB) of Des Moines
consisted of the following:
<TABLE>
<CAPTION>
Weighted
average
rate at
December 31 December 31
------------ --------------------------
1994 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Due in 1994 $220,000,000
1995 6.13% $301,000,000 6,000,000
1996 5.68 7,000,000 7,000,000
1997 5.77 45,000,000 45,000,000
1998 4.72 20,000,000 20,000,000
2000 5.59 27,000,000 27,000,000
------------ ------------
$400,000,000 $325,000,000
------------ ------------
------------ ------------
</TABLE>
F-21
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
9.25% Subordinated notes due
December 15, 2002 $23,000,000 $23,000,000
10% Subordinated debentures due April 1, 1996 391,000 391,000
12.75% Subordinated capital notes due
March 15, 1999 2,409,000
------------ ------------
$23,391,000 $25,800,000
------------ ------------
------------ ------------
</TABLE>
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.
F-22
<PAGE>
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:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Notes payable to FHLB $14,867,266 $ 9,712,763 $ 5,863,469
Subordinated debt 2,278,606 2,582,741 483,635
Other borrowings 183,914 358,639 259,288
------------ ------------ ------------
$17,329,786 $12,654,143 $ 6,606,392
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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.
F-23
<PAGE>
The following is a summary of the Bank's capital ratios (unaudited):
<TABLE>
<CAPTION>
December 31
-----------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
Leverage:
Adjusted total assets $ 1,125,665,717 $ 1,015,633,415
Tier 1 capital 69,670,732 63,839,691
Leverage ratio 6.19% 6.29%
Tier 1 risk based capital:
Risk weighted assets $ 668,730,695 $ 591,320,941
Tier 1 capital 69,670,732 63,839,691
Tier 1 risk based capital ratio 10.42% 10.80%
Total risk based capital:
Risk weighted assets $ 668,730,695 $ 591,320,941
Total risk based capital 72,963,591 68,383,760
Total risk based capital ratio 10.91% 11.56%
</TABLE>
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.
F-24
<PAGE>
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:
<TABLE>
<CAPTION>
Asset/Liability Deferred
Method Method
-------------------------- ------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,276,551 $ 5,525,886 $ 4,700,907
State 954,823 1,629,190 1,389,419
----------- ----------- -----------
3,231,374 7,155,076 6,090,326
----------- ----------- -----------
Deferred (prepaid):
Federal 2,467,399 (310,106) (666,177)
State 422,986 (91,135) (196,898)
----------- ----------- -----------
2,890,385 (401,241) (863,075)
----------- ----------- -----------
$ 6,121,759 $ 6,753,835 $ 5,227,251
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
A reconciliation of the statutory federal income tax rate with the
actual rate provided on earnings is as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax
rate 35.0% 35.0% 34.0%
State income taxes, net of
federal benefit 6.2 6.0 6.0
Other 1.1 (0.4) 0.1
-------- -------- --------
42.3% 40.6% 40.1%
-------- -------- --------
-------- -------- --------
</TABLE>
F-25
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 938,048 $ 700,050
Deferred loan fees 441,628 504,428
Other 137,486 216,382
------------ ------------
1,517,162 1,420,860
------------ ------------
Deferred tax liabilities:
Mortgage loan original issue discount 2,363,281
Office properties and equipment 1,027,370 623,474
Federal Home Loan Bank stock 916,094 916,094
Other 335,972 116,462
------------ ------------
4,642,717 1,656,030
------------ ------------
Net deferred tax liability $ 3,125,555 $ 235,170
------------ ------------
------------ ------------
</TABLE>
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.
F-26
<PAGE>
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.
F-27
<PAGE>
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.
F-28
<PAGE>
The following is a summary of activity in the plan:
<TABLE>
<CAPTION>
Number of
shares Option price
under option per share
------------ ------------
<S> <C> <C>
December 31, 1991 397,385 Average $4.22
Exercised (17,764) $2.50-4.50
Granted 33,333 $9.19-9.66
Canceled (444) $4.13
--------
December 31, 1992 412,510 Average $4.68
Exercised (48,898) $2.50-9.66
Granted 42,667 $10.69-15.00
Canceled (1,779) $4.50
--------
December 31, 1993 404,500 Average $5.52
Exercised (152,568) $2.50-9.66
Granted 45,330 $17.00-18.38
Canceled (15,378) $2.50-9.19
--------
December 31, 1994 281,884
--------
--------
Exercisable at December 31, 1994 193,148
Available for grant at December 31, 1994 336,670
</TABLE>
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.
F-29
<PAGE>
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.
F-30
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
------------------------
1994 1993
------------------------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit:
Loans held for sale $ 11,481 $ 24,507
Portfolio loans 2,439 9,261
Purchased loans held for sale 9,250 14,941
Purchased portfolio loans 8,730 309
Available lines of credit 49,424 45,531
Financial instruments whose notional or contract
amounts do not represent credit risk:
Forward mortgage loan sales commitments $ 21,500 $ 125,525
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. 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.
F-31
<PAGE>
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:
<TABLE>
<CAPTION>
Year ending December 31 Capital Operating
------------ ------------
<S> <C> <C>
1995 $ 95,000 $ 1,227,000
1996 95,000 973,000
1997 95,000 804,000
1998 95,000 764,000
1999 95,000 699,000
Thereafter 95,000 4,991,000
------------ ------------
Total minimum lease payments 570,000 $ 9,458,000
------------
------------
Less amounts representing interest 152,000
------------
Present value of net minimum obligations $ 418,000
------------
------------
</TABLE>
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.
F-32
<PAGE>
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
F-33
<PAGE>
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.
F-34
<PAGE>
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.
<TABLE>
<CAPTION>
December 31
---------------------------------------
1994 1993
------------------- ------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,934 $ 29,934 $ 58,315 $ 58,315
Investment securities held to maturity 28,962 27,782 27,779 28,021
Mortgage loans held for sale 15,449 15,428 88,352 88,767
Mortgage loans 882,363 883,109 698,896 731,017
Consumer loans 116,670 115,948 91,124 92,335
Federal Home Loan Bank stock 20,000 20,000 16,250 16,250
Excess servicing fees 1,956 17,960 2,959 20,353
Accrued interest receivable 5,322 5,322 3,653 3,653
Financial liabilities:
Deposits 635,794 632,386 603,413 607,743
Notes payable 400,000 394,678 325,000 323,589
Subordinated debt 23,391 23,276 25,800 26,379
</TABLE>
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.
F-35
<PAGE>
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.
F-36
<PAGE>
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
F-37
<PAGE>
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
F-38
<PAGE>
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:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 4,943,767 $ 5,168,198
Investment securities held to maturity 607,891 503,881
Investment in subsidiary 69,974,145 63,938,648
Other assets 2,139,055 925,004
------------ ------------
Total assets $ 77,664,858 $ 70,535,731
------------ ------------
------------ ------------
Liabilities and stockholders' equity:
Liabilities:
Subordinated debt $ 23,000,000 $ 23,000,000
Other liabilities 384,634 382,468
------------ ------------
Total liabilities 23,384,634 23,382,468
------------ ------------
Stockholders' equity:
Preferred stock 3,036 3,036
Common stock 35,068 33,255
Additional paid-in capital 20,902,567 19,111,504
Unamortized restricted stock (1,115,944) (675,808)
Retained earnings 34,455,497 28,681,276
------------ ------------
Total stockholders' equity 54,280,224 47,153,263
------------ ------------
Total liabilities and stockholders'equity $ 77,664,858 $ 70,535,731
------------ ------------
------------ ------------
F-39
<PAGE>
<CAPTION>
CONDENSED STATEMENTS OF EARNINGS
Year ended December 31
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
Interest income $ 134,360 $ 254,165 $ 34,118
Interest expense 2,156,011 2,221,593 124,122
Noninterest expense 469,183 224,494 154,401
----------- ----------- -----------
Loss before income tax benefit and
equity in earnings of subsidiary (2,490,834) (2,191,922) (244,405)
Income tax benefit 799,974 753,158 82,439
----------- ----------- -----------
Loss before equity in earnings of subsidiary (1,690,860) (1,438,764) (161,966)
Equity in earnings of subsidiary 10,035,497 11,464,183 7,973,995
----------- ----------- -----------
Net earnings $ 8,344,637 $10,025,419 $ 7,812,029
----------- ----------- -----------
----------- ----------- -----------
F-40
<PAGE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 8,344,637 $10,025,419 $ 7,812,029
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities: (10,035,497) (11,464,183) (7,973,995)
Equity in earnings of subsidiary
Increase (decrease) in other assets
and liabilities, net (190,835) 195,367 10,016
----------- ----------- -----------
Net cash used by
operating activities (1,881,695) (1,243,397) (151,950)
----------- ----------- -----------
Cash flows from investing activities:
Capital contributed to subsidiary (5,000,000) (12,000,000)
Dividends received from subsidiary 4,000,000 3,350,000 1,491,297
Purchase of investment securities (401,010) (500,000)
Maturities of investment securities 297,000
----------- ----------- -----------
Net cash provided (used)
by investing activities 3,895,990 (1,650,000) (11,008,703)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from common stock
transactions 331,690 158,949 99,491
Net proceeds from issuance of
subordinated debt 22,133,514
Dividends on preferred stock (835,010) (967,853) (911,395)
Dividends on common stock (1,735,406) (1,238,053) (579,902)
----------- ----------- -----------
Net cash provided (used)
by financing activities (2,238,726) (2,046,957) 20,741,708
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (224,431) (4,940,354) 9,581,055
Cash and cash equivalents at beginning of
year 5,168,198 10,108,552 527,497
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,943,767 $ 5,168,198 $10,108,552
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-41
<PAGE>
NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly data for 1994 and 1993 follows:
(in thousands except per share data)
<TABLE>
<CAPTION>
1994 1993
-------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 18,962 $ 17,146 $ 15,290 $ 14,721 $ 15,042 $ 14,677 $ 14,546 $ 13,504
Interest expense 12,206 10,427 8,759 8,206 8,649 8,345 7,999 7,659
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 6,756 6,719 6,531 6,515 6,393 6,332 6,547 5,845
Provision for loan losses 318 110 106 118 187 84 171 189
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 6,438 6,609 6,425 6,397 6,206 6,248 6,376 5,656
Mortgage banking income 423 3,004 2,743 3,450 4,037 3,281 2,987 3,008
Other noninterest income 1,646 1,789 1,892 1,876 1,293 1,487 1,181 1,356
Noninterest expense 7,096 7,041 6,887 7,202 7,364 6,748 6,470 5,880
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income tax
expense and cumulative
effect of accounting change 1,411 4,361 4,173 4,521 4,172 4,268 4,074 4,140
Income tax expense 671 1,869 1,724 1,857 1,617 1,844 1,634 1,659
Cumulative effect of
accounting change 125
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings $ 740 $ 2,492 $ 2,449 $ 2,664 $ 2,555 $ 2,424 $ 2,440 $ 2,606
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings available for
common stockholders $ 531 $ 2,284 $ 2,240 $ 2,455 $ 2,336 $ 2,182 $ 2,198 $ 2,364
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Earnings per common share $.14 $.60 $.60 $.66 $ .63 $.60 $.61 $.66
</TABLE>
F-42
<PAGE>
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
<PAGE>
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
<PAGE>
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)).
<PAGE>
*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)).
<PAGE>
*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.
<PAGE>
EXHIBIT 11
INVESTORS BANK CORP.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRIMARY (1):
Average shares outstanding 3,462 3,301 3,221 3,052 3,032
Net effect of the assumed purchase of stock
under the stock option plan based on the
treasury stock method using average
market price 202 281 227 191 53
Net effect of the assumed exercise of common
stock warrants based on the treasury
stock method using average market price 94 59 20
-------- -------- -------- -------- --------
3,758 3,641 3,448 3,263 3,085
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings:
Earnings before cumulative effect
of accounting change $8,345 $9,900 $7,812 $5,036 $2,041
Preferred stock dividends 835 945 968 105
Earnings available for common stockholders
before cumulative effect of accounting
change -------- -------- -------- -------- --------
7,510 8,955 6,844 4,931 2.041
Cumulative effect of accounting change 125
Net earnings available for common
stockholders -------- -------- -------- -------- --------
$7,510 $9,080 $6,844 $4,931 $2,041
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common share:
Before cumulative effect of accounting change $2.00 $2.46 $1.98 $1.51 $0.66
Cumulative effect of accounting change 0.03
-------- -------- -------- -------- --------
Net earnings $2.00 $2.49 $1.98 $1.51 $0.66
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
FULLY DILUTED (1):
Average shares outstanding 3,462 3,301 3,221 3,052 3,032
Net effect of the assumed purchase of stock
under the stock option plan based on the
treasury stock method using ending
market price 208 317 243 227 53
Net effect of the assumed exercise of common
stock warrants based on the treasury
stock method using ending market price 105 94 33
-------- -------- -------- -------- --------
3,775 3,712 3,464 3,312 3,085
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings:
Earnings before cumulative effect
of accounting change $8,345 $9,900 $7,812 $5,036 $2,041
Preferred stock dividends $835 945 968 105
Earnings available for common stockholders
before cumulative effect of accounting
change -------- -------- -------- -------- --------
7,510 8,955 6,844 4,931 2,041
Cumulative effect of accounting change 125
Net earnings available for common -------- -------- -------- -------- --------
stockholders $7,510 $9,080 $6,844 $4,931 $2,041
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common share:
Before cumulative effect of accounting change $1.99 $2.42 $1.98 $1.49 $0.66
Cumulative effect of accounting change 0.03
-------- -------- -------- -------- --------
Net earnings $1.99 $2.45 $1.98 $1.49 $0.66
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<FN>
(1) All share data for the years 1993, 1992, 1991 and 1990 restated for effect
of four-for-three common stock split effective December 31, 1993
</TABLE>
<PAGE>
Exhibit 24.1
The Board of Directors
Investors Bank Corp.:
We consent to incorporation by reference in the registration statements (No.
33-12893, 33-20115 and 33-22880) on Form S-8 of Investors Bank Corp. of our
report dated January 20, 1995, relating to the 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,
which report appears in the December 31, 1994 annual report on Form 10-K of
Investors Bank Corp.
KPMG Peat Marwick LLP
March 23, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1994
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993
<PERIOD-START> JAN-01-1994 JAN-01-1993
<PERIOD-END> DEC-31-1994 DEC-31-1993
<CASH> 29,934,244 58,314,515
<INT-BEARING-DEPOSITS> 605,228,373 554,305,644
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 28,962,361 27,778,987
<INVESTMENTS-MARKET> 27,781,902 28,021,177
<LOANS> 1,019,104,066 883,310,690
<ALLOWANCE> 3,621,920 2,980,585
<TOTAL-ASSETS> 1,126,461,963 1,017,085,066
<DEPOSITS> 635,793,665 603,412,708
<SHORT-TERM> 400,000,000 325,000,000
<LIABILITIES-OTHER> 12,997,074 15,719,095
<LONG-TERM> 23,391,000 25,800,000
<COMMON> 46,689,224 39,562,263
0 0
7,591,000 7,591,000
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,126,461,963 1,017,085,066
<INTEREST-LOAN> 62,144,404 54,250,037
<INTEREST-INVEST> 2,541,286 2,396,639
<INTEREST-OTHER> 1,433,011 1,122,410
<INTEREST-TOTAL> 66,118,701 57,769,086
<INTEREST-DEPOSIT> 22,268,321 19,997,333
<INTEREST-EXPENSE> 39,598,107 32,651,476
<INTEREST-INCOME-NET> 26,520,594 25,117,610
<LOAN-LOSSES> 651,600 631,446
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 28,225,852 26,462,193
<INCOME-PRETAX> 14,466,396 16,654,254
<INCOME-PRE-EXTRAORDINARY> 8,344,637 9,900,419
<EXTRAORDINARY> 0 0
<CHANGES> 0 125,000
<NET-INCOME> 8,344,637 10,025,419
<EPS-PRIMARY> 2.00 2.49
<EPS-DILUTED> 1.99 2.45
<YIELD-ACTUAL> 2.71 2.94
<LOANS-NON> 2,619,563 1,903,549
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,980,585 2,599,392
<CHARGE-OFFS> 54,394 423,656
<RECOVERIES> 44,129 173,403
<ALLOWANCE-CLOSE> 3,621,920 2,980,585
<ALLOWANCE-DOMESTIC> 979,413 1,418,309
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,642,507 1,562,276
</TABLE>
