FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPT. 30, 1999 COMMISSION FILE NUMBER 1-2981
FIRSTAR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1940778
(State of Incorporation) (I.R.S. EMPLOYER
Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Telephone Number (414) 765-4321
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 precedeing 12 months and (2) has been subject to such filing
requirements for the past 90 days.
As of October 31, 1999, 980,186,669 shares of common stock were
outstanding.
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<PAGE>
FIRSTAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1999
Page
Table of Contents Number
- ----------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights.........................................3
Item 1. Financial Statements:
Condensed Consolidated Financial Statements..........4
Notes to Condensed Consolidated Financial Statements.8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................20
Part II. Other Information:
Item 1. Legal Proceedings.................................none
Item 2. Changes in Securities.............................none
Item 3. Defaults Upon Senior Securities...................none
Item 4. Submission of Matters to a Vote
of Security Holders...............................none
Item 5. Other Information.................................none
Item 6. Exhibits and Reports on Form 8-K....................29
Signatures..........................................................29
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<PAGE>
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
FIRSTAR CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
Third Quarter Nine Months Ended September 30,
----------------------------------- ------------------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
----------- ----------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 28,360 $ 192,766 (85.3)% $ 607,273 $ 702,280 (13.5)%
Per share:
Basic earnings per common share $ 0.03 $ 0.20 (85.0)% $ 0.61 $ 0.73 (16.4)%
Diluted earnings per common share 0.03 0.19 (84.2) 0.60 0.71 (15.5)
Common stock cash dividends
declared 0.10 0.08 25.0 0.30 0.24 25.0
Book value per common share 6.56 6.70 (2.1) 6.56 6.70 (2.1)
Market value per common share 25.63 22.04 16.3 25.63 22.04 16.3
Average balances:
Total assets $ 73,744,641 $ 71,435,352 3.2 % $ 73,822,468 $ 70,310,071 5.0 %
Earning assets 66,633,862 64,383,723 3.5 66,357,524 63,535,192 4.4
Loans 49,814,529 46,773,325 6.5 49,125,447 46,260,952 6.2
Deposits 51,375,982 51,740,781 (0.7) 52,201,932 51,211,830 1.9
Total shareholders' equity 6,667,774 6,434,979 3.6 6,756,939 6,204,681 8.9
Ratios:
Return on average assets 0.15% 1.07% 1.10% 1.34%
Return on average equity 1.69 11.88 12.02 15.13
Average total shareholders' equity
to average total assets 9.04 9.01 9.15 8.82
Risk-based capital ratios:
Tier 1 8.60 9.58 8.60 9.58
Total 10.70 12.06 10.70 12.06
Leverage - average assets (a) 7.43 7.47 7.43 7.47
Net interest margin 4.04 4.02 4.07 4.04
Noninterest expense to net revenue 82.11 64.65 48.64 54.24
Noninterest income as a percent
of net revenue 34.05 36.96 33.99 34.71
Net income to net revenue 2.77 18.74 19.83 23.84
Excluding Merger Related Charges:
Net income $ 320,313 $ 266,352 20.3 % $ 928,358 $ 775,866 19.7 %
Noninterest expense 478,089 545,708 (12.4) 1,489,979 1,598,153 (6.8)
Basic earnings per common share 0.32 0.27 18.5 0.94 0.80 17.5
Diluted earnings per common share 0.32 0.27 18.5 0.92 0.79 16.5
Return on average assets 1.72% 1.48% 1.68% 1.48%
Return on average equity 19.06 16.42 18.37 16.72
Noninterest expense to net revenue 46.70 55.66 48.64 55.14
(a) - defined by regulatory authorities as tier 1 equity to the current quarter's adjusted
average assets
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 2,824,575 $ 4,110,168
Money market investments 346,618 495,316
Trading securities 101 129,294
Investment securities:
Available-for-sale 12,719,317 15,641,934
Held-to-maturity (market value of $255,781 at
September 30, 1999 and $236,623 at December 31, 1998) 254,005 233,014
-------------- --------------
Total securities 12,973,322 15,874,948
Loans held for sale 2,407,079 1,757,833
Loans:
Commercial loans 16,367,714 15,422,146
Real estate loans 19,822,534 21,767,354
Retail loans 12,510,599 10,830,185
-------------- --------------
Total loans 48,700,847 48,019,685
Allowance for loan losses 714,547 704,846
-------------- --------------
Net loans 47,986,300 47,314,839
Premises and equipment 1,024,498 1,116,712
Acceptances - customers' liability 20,809 38,569
Other assets 3,762,042 3,438,337
-------------- --------------
Total assets $ 71,345,344 $ 74,276,016
-------------- --------------
-------------- --------------
LIABILITIES:
Deposits:
Noninterest-bearing deposits $ 9,732,482 $ 11,102,247
Interest-bearing deposits 40,976,653 43,209,915
-------------- --------------
Total deposits 50,709,135 54,312,162
Short-term borrowings 7,457,294 6,645,968
Long-term debt 5,597,854 5,457,203
Acceptances outstanding 20,809 38,569
Other liabilities 1,124,379 1,218,446
-------------- --------------
Total liabilities 64,909,471 67,672,348
SHAREHOLDERS' EQUITY:
Common stock:
Shares authorized - 2,000,000,000 at September 30,
1999 and December 31, 1998
Shares issued - 983,280,704 at September 30, 1999
and 987,596,220 at December 31, 1998 9,833 9,876
Surplus 1,922,199 2,170,024
Retained earnings 4,551,451 4,302,420
Treasury stock, at cost - 2,046,663 shares at September
30, 1999 and 2,223,365 shares at December 31, 1998 (17,616) (19,659)
Accumulated other comprehensive income (29,994) 141,007
-------------- --------------
Total shareholders' equity 6,435,873 6,603,668
-------------- --------------
Total liabilities and shareholders' equity $ 71,345,344 $ 74,276,016
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
Third Quarter Nine Months Ended Sept. 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 1,004,394 $ 992,622 $ 2,944,213 $ 2,941,683
Interest and fees on loans held for sale 25,168 20,526 78,289 55,725
Interest on investment securities:
Taxable 207,841 228,654 635,372 673,325
Non-taxable 24,084 24,377 70,938 71,154
Interest on trading securities 1,021 1,827 6,412 6,792
Interest on money market investments 5,177 8,562 18,413 27,584
----------- ----------- ----------- -----------
Total interest income 1,267,685 1,276,568 3,753,637 3,776,263
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 415,495 469,314 1,255,939 1,391,937
Interest on short-term borrowings 106,455 94,513 268,852 294,404
Interest on long-term debt 84,254 79,554 248,529 210,677
----------- ----------- ----------- -----------
Total interest expense 606,204 643,381 1,773,320 1,897,018
----------- ----------- ----------- -----------
Net interest income 661,481 633,187 1,980,317 1,879,245
Provision for loan losses 55,325 55,909 143,552 124,885
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 606,156 577,278 1,836,765 1,754,360
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income 105,705 95,833 314,005 279,211
Mortgage banking income 37,490 44,618 118,963 155,252
Retail deposit income 45,689 45,389 133,357 130,886
Cash management income 36,574 30,552 103,808 85,860
Credit card income 28,793 24,307 81,248 66,695
ATM Income 10,147 10,100 28,080 27,230
Investment securities gains/(losses)-net (1,491) 2,607 14,753 10,690
All other income 85,714 126,721 246,929 266,767
----------- ----------- ----------- -----------
Total noninterest income 348,621 380,127 1,041,143 1,022,591
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries 214,578 248,487 656,210 717,580
Pension and other employee benefits 32,742 40,284 113,572 131,211
Equipment expense 36,484 39,640 110,367 119,008
Occupancy expense - net 41,092 43,088 124,901 123,949
All other expense 153,193 174,209 484,929 506,405
----------- ----------- ----------- -----------
478,089 545,708 1,489,979 1,598,153
Merger related charges 362,500 119,162 407,600 119,162
----------- ----------- ----------- -----------
Total noninterest expense 840,589 664,870 1,897,579 1,717,315
----------- ----------- ----------- -----------
INCOME BEFORE TAX 114,188 292,535 980,329 1,059,636
Income tax 85,828 99,769 373,056 357,356
----------- ----------- ----------- -----------
NET INCOME $ 28,360 $ 192,766 $ 607,273 $ 702,280
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share $ 0.03 $ 0.20 $ 0.61 $ 0.73
Diluted earnings per common share 0.03 0.19 0.60 0.71
Common stock cash dividends declared 0.10 0.08 0.30 0.24
The accompanying notes are an integral part of these statements
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
Employee
Stock
Accumulated Ownership
Other Plan Shares
Preferred Common Retained Treasury Comprehensive Purchased Total
Stock Stock Surplus Earnings Stock Income With Debt Equity
-------- -------- ----------- ----------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 5,308 $ 9,441 $ 1,794,210 $ 3,820,195 $ (173,185) $ 58,070 $ (1,846) $ 5,512,193
Net income 702,280 702,280
Unrealized gain
on securities
available for sale 122,851 122,851
Reclassification
adjustment for gains
realized in net income (10,690) (10,690)
Income taxes (38,642) (38,642)
-----------
Comprehensive income 775,799
Cash dividends declared
on common stock (313,509) (313,509)
Cash dividends declared
on preferred stock (83) (83)
Conversion of preferred
stock into common stock (5,308) 4,724 492 64 (28)
Issuance of common stock
and treasury shares 394 (12,240) (467) 277,538 265,225
Issuance of common stock
in acquisitions 320,497 138,231 357 2,835 461,320
Purchase of treasury
stock (138,710) (138,710)
Shares reserved to meet
deferred compensation
obligations 2,454 (1,261) 1,193
Amortization of stock
awards 568 568
ESOP debt reduction and
other (143) 1,846 1,703
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
Balance,
September 30, 1998 $ - $ 9,835 $ 2,110,213 $ 4,346,996 $ (35,197) $ 133,824 $ - $ 6,565,671
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
Balance, January 1, 1999 $ - $ 9,876 $ 2,170,024 $ 4,302,420 $ (19,659) $ 141,007 $ - $ 6,603,668
Net income 607,273 607,273
Unrealized loss
on securities
available for sale (428,013) (428,013)
Reclassification
adjustment for gains
realized in net income 162,980 162,980
Income taxes 94,032 94,032
-----------
Comprehensive income 436,272
Cash dividends declared
on common stock (358,242) (358,242)
Issuance of common stock
and treasury shares 84 88,106 78,546 166,736
Purchase of treasury
stock (127) (343,866) (74,754) (418,747)
Shares reserved to meet
deferred compensation
obligations 1,749 (1,749) -
Amortization of stock
awards 6,186 6,186
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
Balance,
September 30, 1999 $ - $ 9,833 $ 1,922,199 $ 4,551,451 $ (17,616) $ (29,994) $ - $ 6,435,873
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
-------- -------- ----------- ----------- ---------- ---------- ---------- -----------
The accompanying notes are an integral part of these statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Nine Months Ended
September 30
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 607,273 $ 702,280
Adjustments:
Depreciation and amortization 123,349 139,244
Intangible amortization 90,862 83,290
Provision for loan losses 143,552 124,885
Net (increase) decrease in trading securities 130,276 (9,995)
Provision for deferred taxes 147,998 31,914
(Gain) / loss on sale of premises and equipment - net (1,692) (730)
Loss on sale of securities - and other assets 159,576 (32,262)
Gain on sale of mortgage loans (84,858) (103,832)
Proceeds from sale of mortgage loans 6,383,769 4,830,532
Mortgage loans originated for sale on the secondary market (5,393,448) (5,201,650)
Net change in other assets and liabilities (259,323) (59,473)
------------ ------------
Total adjustments 1,440,061 (198,077)
------------ ------------
Net cash provided by/(used in) operating activities 2,047,334 504,203
------------ ------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity securities 86,104 484,135
Proceeds from maturities of available-for-sale securities 3,420,352 4,474,696
Proceeds from sales of available-for-sale securities 5,701,116 1,822,997
Purchase of held-to-maturity securities (19,978) (167,491)
Purchase of available-for-sale securities (6,648,423) (6,739,845)
Net increase in loans (2,608,322) (795,653)
Proceeds from sales of loans 98,041 309,752
Proceeds from sales of premises and equipment 18,163 19,976
Purchases of premises and equipment (132,766) (142,704)
Purchases of corporate owned life insurance (160,000) (125,000)
Acquisitions, net of cash acquired 0 (229,025)
Sale of banking offices, net of cash paid (116,961) 57,947
Net change due to acquisitions of branch offices 0 901,611
------------ ------------
Net cash provided by/(used in) investing activities (362,674) (128,604)
------------ ------------
Cash Flows from Financing Activities:
Net decrease in deposits (3,475,610) (1,772,335)
Net increase/(decrease) in short-term borrowings 833,652 (394,373)
Principal payments on long-term debt (1,616,308) (925,559)
Proceeds from issuance of long-term debt 1,757,761 2,486,547
Proceeds from issuance of common stock 152,191 56,814
Purchase of treasury stock (418,747) (138,710)
Dividends paid (351,891) (300,013)
------------ ------------
Net cash provided by/(used in) financing activities (3,118,952) (987,629)
------------ ------------
Net decrease in cash and cash equivalents (1,434,292) (612,030)
Cash and cash equivalents at beginning of period 4,605,484 3,951,784
------------ ------------
Cash and cash equivalents at end of period $ 3,171,192 $ 3,339,754
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,765,649 $ 914,350
Income taxes 201,329 117,030
Transfer to foreclosed assets from loans $ 56,684 $ 12,345
</TABLE>
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<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
- ------------------------------
These consolidated financial statements have been prepared by Firstar
Corporation ("Firstar") pursuant to the rules and regulations of the Securities
and Exchange Commission and, therefore, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in Firstar's annual report on
Form 10-K for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
These consolidated financial statements include the accounts of Firstar
and all of its subsidiaries and reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
periods reported. All such adjustments are of a normal recurring nature.
Note 2. Investment Securities
- ------------------------------
<TABLE>
<CAPTION>
The following table summarizes unrealized gains and losses for
held-to-maturity and available-for-sale securities at September 30, 1999 and
December 31, 1998. (dollars in thousands)
September 30, 1999 December 31, 1998
----------------------------------------- -----------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- ------- ----------- ---------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
- ----------------
U.S. Treasuries and
agencies $ -- $ -- $ -- $ -- $ 8,817 $ 64 $ (12) $ 8,869
Mortgage-backed
securities 100,899 2,048 (1,227) 101,720 150,745 3,413 (2,184) 151,974
Obligations of state and
political subdivisions 153,031 3,110 (2,155) 153,986 73,452 2,951 (623) 75,780
Corporate debt securities 75 -- -- 75 -- -- -- --
---------- ------- ------- ----------- ---------- ------- ------- -----------
Total held-to-
maturity securities $ 254,005 $ 5,158 $(3,382) $ 255,781 $ 233,014 $6,428 $(2,819) $ 236,623
---------- ------- ------- ----------- ---------- ------- ------- -----------
---------- ------- ------- ----------- ---------- ------- ------- -----------
September 30, 1999 December 31, 1998
----------------------------------------- -----------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- ------- ----------- ---------- ------- ------- -----------
Available-for-Sale
- ------------------
U.S. Treasuries and
agencies $ 1,886,966 $ 20,136 $ (6,585) $ 1,900,517 $ 4,321,195 $ 79,527 $(1,998) $ 4,398,724
Mortgage-backed
securities 6,546,291 31,466 (70,108) 6,507,649 7,120,985 96,755 (9,583) 7,208,157
Obligations of state and
political subdivisions 1,661,017 19,628 (5,789) 1,674,856 1,897,461 52,939 (367) 1,950,033
Other debt securities 1,639,820 27 (35,753) 1,604,094 1,141,622 9,767 (9,658) 1,141,731
Money market mutual funds 307,756 -- -- 307,756 221,734 -- -- 221,734
Federal Reserve/FHLB
stock and other
equity securities 724,374 71 -- 724,445 720,811 745 (1) 721,555
---------- ------- -------- ----------- ---------- ------- ------- ----------
Total available-for-
sale securities $12,766,224 $ 71,328 $(118,235) $12,719,317 $15,423,808 $239,733 $(21,607) $15,641,934
---------- ------- -------- ----------- ---------- ------- ------- ----------
---------- ------- -------- ----------- ---------- ------- ------- ----------
</TABLE>
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<PAGE>
Note 3. Loans
- -------------
<TABLE>
<CAPTION>
The following table summarizes the composition of the loan portfolio,
net of unearned interest, as of September 30, 1999 and December 31, 1998.
(dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Commercial loans:
Corporate loans $13,170,368 $12,413,886
Asset-based lending 1,220,090 1,172,020
Commercial leasing 1,604,916 1,330,184
Industrial revenue bonds 372,340 506,056
----------- -----------
Total commercial loans 16,367,714 15,422,146
----------- -----------
Real estate loans:
Residential mortgage 8,948,420 11,221,283
Commercial mortgage 8,879,427 8,409,474
Construction and land development 1,994,687 2,136,597
----------- -----------
Total real estate loans 19,822,534 21,767,354
----------- -----------
Retail loans:
Installment 9,414,999 8,125,288
Credit cards 1,323,274 1,265,382
Retail leasing 1,772,326 1,439,515
----------- -----------
Total retail loans 12,510,599 10,830,185
----------- -----------
Total loans $48,700,847 $48,019,685
----------- -----------
----------- -----------
</TABLE>
Note 4. Impaired Loans
- -----------------------
<TABLE>
<CAPTION>
The following table shows Firstar's recorded investment in impaired loans and
the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No.
118) at September 30, 1999 and December 31, 1998. (dollars in thousands)
September 30, 1999 December 31, 1998
--------------------------- ------------------------
<S> <C> <C> <C> <C>
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ----------- ---------- ----------
Impaired Loans:
Valuation allowance required $ 20,850 $ 7,646 $ 47,560 $ 9,723
No valuation allowance required 122,568 -- 97,702 --
---------- ----------- ---------- ----------
Total impaired loans $ 143,418 $ 7,646 $ 145,262 $ 9,723
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The average recorded investment in impaired loans for the nine months ended
September 30, 1999 was $152.5 million, compared to $150.2 million for the same period
in 1998. As a general policy, Firstar applies both principal and interest payments
received on impaired loans as a reduction of principal.
</TABLE>
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<PAGE>
Note 5. Allowance for Loan Losses
- ---------------------------------
A summary of the activity in the allowance for loan losses is shown in the
following table. (dollars in thousands)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
Balance - beginning of period $704,846 $657,098
Loans charged-off (189,373) (167,117)
Recoveries on loans previously charged-off 55,522 56,342
-------- --------
Net charge-offs (133,851) (110,755)
Provision charged to earnings 143,552 124,885
Allowances of banks purchased -- 47,693
-------- --------
Balance - end of period $714,547 $718,901
-------- --------
-------- --------
Note 6. Deposits
- -----------------
<TABLE>
<CAPTION>
The following table summarizes the composition of deposits of Firstar as of
September 30, 1999 and December 31, 1998. (dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Noninterest-bearing deposits $ 9,732,482 $11,102,247
Interest-bearing deposits:
Savings 3,557,345 4,039,413
NOW accounts 6,610,208 7,130,540
Money market deposit accounts 10,521,491 10,111,250
Time deposits $100,000 and over - domestic 3,293,615 3,565,425
Foreign deposits $100,000 and over 701,443 825,347
All other deposits 16,292,551 17,537,940
----------- -----------
Total interest-bearing deposits 40,976,653 43,209,915
----------- -----------
Total deposits $50,709,135 $54,312,162
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
Note 7. Merger Related Charges
- ------------------------------
<TABLE>
<CAPTION>
Firstar recorded merger and integration charges of $119.2 million in the first nine months of 1998
and $407.6 million in the first nine months of 1999. The components of the charges are shown below.
Firstar expects to incur additional merger-related expenses in connection with the combining of
operations of Firstar Corporation, Star Banc Corporation, and Mercantile Bancorporation, Inc.
(dollars in thousands)
Nine Months Ended September 30, 1999
------------------------------------
Firstar/ Firstar/
Star Mercantile
Merger Merger Total
---------- ---------- ----------
<S> <C> <C> <C>
Severance and related costs $ 9,878 $ 129,789 $ 139,667
Fixed asset write-downs 2,233 - 2,233
Lease termination charges 1,297 - 1,297
System conversions 59,974 12,641 72,615
Charitable contributions - 35,000 35,000
Other merger-related charges 1,718 31,337 33,055
---------- ---------- ----------
Sub-total 75,100 208,767 283,867
Losses on sale of securities - 177,733 177,733
Reversal of accruals - (54,000) (54,000)
---------- ---------- ----------
Total $ 75,100 $ 332,500 $ 407,600
---------- ---------- ----------
---------- ---------- ----------
Nine Months Ended September 30, 1998
------------------------------------
Trans
Financial Mercantile
Acquisition Acquisitions Total
----------- ------------ ----------
<S> <C> <C> <C>
Severance and related costs $ 8,995 $ 16,477 $ 25,472
Fixed asset write-downs 5,300 9,140 9,140
Lease termination charges - - -
System conversions 4,701 23,892 28,593
Charitable contributions 3,000 - -
Other merger-related charges 7,974 39,683 55,957
---------- ---------- ----------
Total $ 29,970 $ 89,192 $ 119,162
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
The following table presents a summary of activity with respect to the merger related accrual:
Firstar/ Firstar/ Mercantile
Mercantile Star 1998 Mercantile Mercantile
Merger Merger Acquisitions Restructuring Other Total
---------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ 125,191 $ 40,232 $ 42,842 $ 17,565 $ 225,830
1Q99 Merger-related charge - 15,000 - - - 15,000
1Q99 Cash payments - (44,367) (11,136) (8,552) (9,094) (73,149)
1Q99 Noncash write-downs - (26,884) (272) (1,224) (625) (29,005)
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 - 68,940 28,824 33,066 7,846 138,676
2Q99 Merger-related charge - 30,100 - - - 30,100
2Q99 Cash payments - (44,812) (4,607) (2,660) (4,764) (56,843)
2Q99 Noncash write-downs - (5,258) (976) - - (6,234)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 - 48,970 23,241 30,406 3,082 105,699
3Q99 Merger-related charge 208,767 30,000 - - - 238,767
Reversal of prior acquisition
accruals - (20,000) (10,037) (22,306) (1,657) (54,000)
Transfer remaining Trans
Financial balance - 107 - - (107) -
3Q99 Cash payments (112,213) (43,289) (5,170) (1,583) (647) (119,613)
3Q99 Noncash write-downs (16,996) (507) (224) (1,125) - (62,141)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 $ 79,558 $ 15,281 $ 7,810 $ 5,392 $ 671 $ 108,712
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- -11-
<PAGE>
Note 8. Mortgage Servicing Assets
- ----------------------------------
Mortgage servicing rights are capitalized based upon their fair value at
the time a loan is sold. Impairment testing is performed on a quarterly basis
in accordance with SFAS No. 125 which was adopted by Firstar in 1997.
The fair value of capitalized mortgage servicing rights was $229.0 million
on September 30, 1999 and $253.2 million on December 31, 1998. Firstar serviced
$21.9 billion of mortgage loans for other investors as of September 30, 1999
and $26.3 billion of mortgage loans for other investors as of December 31, 1998.
Changes in capitalized mortgage servicing rights at September 30, 1999 and
December 31, 1998 are summarized in the following table. (dollars in thousands)
September 30, December 31,
1999 1998
------------- ------------
Mortgage Servicing Assets:
Balance at beginning of year $ 232,105 $ 124,292
Amount added in acquisitions -- 52,648
Amount capitalized 130,740 166,069
Amortization (37,413) (43,066)
Sales (117,378) (67,838)
--------- ---------
Balance at end of period $ 208,054 $ 232,105
Note 9. Earnings Per Share
- ---------------------------
<TABLE>
<CAPTION>
The following table shows the amounts used in the computation of basic
and diluted earnings per common share, in accordance with SFAS No. 128, for
the three months and nine months ended September 30, 1999 and 1998.
(dollars in thousands)
Three Months Nine Months
------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 28,360 $192,766 $607,273 $702,280
Dividends on preferred stock -- -- -- 83
Interest on convertible notes -- 10 3 33
-------- -------- -------- --------
Net income available to
common shareholders $ 28,360 $192,776 $607,276 $702,396
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares (000s):
Common shares 985,779 974,214 989,799 965,633
Options, stock plan, and convertible
notes 13,519 18,281 16,103 18,976
-------- -------- -------- --------
Weighted average diluted common shares 999,298 992,495 1,005,902 984,609
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per common share $ 0.03 $ 0.20 $ 0.61 $ 0.73
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per common share $ 0.03 $ 0.19 $ 0.60 $ 0.71
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
-12-
<PAGE>
Note 10. Acquisitions
- ---------------------
<TABLE>
<CAPTION>
The following table shows acquisitions completed in 1998 and 1999.
(dollars in millions)
Consideration
----------------------
Cash Shares Accounting
Date Assets Deposits Paid Issued Method
---------------- ------- -------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Mercantile Bancorporation September 1999 $35,520 $24,334 -- 331,772,028 Pooling
Firstar Corporation November 1998 20,688 14,560 -- 331,737,543 Pooling
First Financial Bancorporation September 1998 558 478 12 6,563,279 Pooling(1)
Financial Services Corporation
of the Midwest August 1998 514 414 4 4,331,398 Pooling(1)
Trans Financial, Inc. August 1998 2,409 1,620 -- 10,700,000 Pooling
CBT Corporation July 1998 1,006 696 34 10,712,640 Pooling
Firstbank of Illinois Co. July 1998 2,285 1,970 64 27,920,372 Pooling
Cargill Leasing Corporation July 1998 613 -- 220 n/a Purchase
Bank One Branches June/August 1998 193 1,198 137 n/a Purchase
HomeCorp, Inc. March 1998 335 309 14 1,787,303 Pooling(1)
Horizon Bancorp, Inc. February 1998 537 454 2 5,331,987 Pooling(1)
Great Financial Corporation February 1998 2,809 2,001 135 9,500,000 Purchase
(1) Firstar's historical financial statements were not restated for the acquisition due to the
immateriality of the acquiree's financial condition and results of operations to those of
Firstar.
</TABLE>
Note 11. Business Segments
- --------------------------
Firstar's operations include three primary business segments: Consumer
Banking, Wholesale Banking, and Trust and Private Banking. Selected financial
information by business segment is summarized below. This information is
derived from the internal reporting systems used by management to assess
segment performance.
Consumer banking provides deposit, installment and credit card lending,
mortgage banking, leasing, investment, payment systems and other financial
services to individuals and small businesses. These services are provided
through retail branch offices, ATMs, voice banking, PC and video banking
options.
Wholesale banking provides traditional business lending, asset-based
lending, commercial real estate loans, equipment financing, cash management
services and international trade services to businesses and governmental
entities.
Trust and private banking provides personal financial and asset
management services, comprehensive employee benefit plan services, mutual fun
custody and corporate bond and stock transfer services.
Treasury includes the net effect of transfer pricing of interest income
and expense along with the operating results of the investment securities and
residential loan portfolios. All revenue and expenses of administrative and
support functions have been allocated to the primary business segments.
Prior year amounts are not presented due to the unavailability of
comparable data from the merged companies.
-13-
<PAGE>
<TABLE>
<CAPTION>
For the quarter ended September 30, 1999
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income* $ 426,514 $ 153,732 $ 17,920 $ 76,961 $ 675,127 $ -- $ 675,127
Provision for loan losses 35,001 11,301 225 1,298 47,825 7,500 55,325
Noninterest income 174,457 47,440 114,692 12,032 348,621 -- 348,621
Noninterest expense 353,639 40,858 79,474 4,118 478,089 362,500 840,589
Income taxes* 73,360 51,484 18,281 34,396 177,521 (78,047) 99,474
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 138,971 $ 97,529 $ 34,632 $ 49,183 $ 320,313 $ 291,953 $ 28,360
- ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 24,162 $ 18,480 $ 1,122 $ 6,051 $ 49,815
Total assets 27,937 20,834 1,651 23,323 73,745
Deposits 42,283 5,869 1,908 1,316 51,376
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income* $ 1,227,434 $ 451,652 $ 55,620 $ 287,243 $ 2,021,949 $ -- $ 2,021,949
Provision for loan losses 105,571 29,047 460 974 136,052 7,500 143,552
Noninterest income 515,037 139,892 340,955 45,259 1,041,143 -- 1,041,143
Noninterest expense 1,093,787 135,498 248,402 12,292 1,489,979 407,600 1,897,579
Income taxes* 187,646 147,528 51,035 122,494 508,703 (94,015) 414,688
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 355,467 $ 279,471 $ 96,678 $ 196,742 $ 928,358 $ 321,085 $ 607,273
- ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 23,719 $ 17,890 $ 1,075 $ 6,441 $ 49,125
Total assets 27,768 20,458 1,536 24,060 73,822
Deposits 42,830 6,126 1,943 1,303 52,202
- ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
</TABLE>
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
With the inclusion of significant merger related costs as discussed below, net
income of Firstar Corporation ("Firstar") for the quarter ended September 30,
1999 was $28.4 million compared with $192.8 million in the third quarter of
1998. Net income for the first nine months of 1999 was $607.3 million compared
with $702.3 million in the same period of 1998. Diluted earnings per common
share were $.03 for the third quarter of 1999, compared to $.19 for the same
period of the prior year, and for the first nine months of 1999 diluted
earnings per share were $.60 compared with $.71 in the same period of 1998.
As a result of the Firstar merger with Mercantile Bancorporation Inc.
("Mercantile"), which was completed on September 20, 1999, all historical
financial information has been restated to reflect the pooling of interests
of the two companies. Information concerning other acquisitions and mergers
occurring during 1998 and 1999 is presented in Note 10 to the financial
statements. Some of these transactions affect the comparability of financial
results from period to period.
Included in the third quarter of 1999 operating results were $370.0 million
of merger-related charges. In September 1999, a pretax restructuring and
merger-related charge of $340.0 was recorded in connection with the
Firstar/Mercantile merger. Included in this merger-related charge was $177.7
million in securities losses related to the Mercantile balance sheet
restructuring, $129.0 million of severance and employee related costs, $12.0
million of system conversion costs, $35.0 million to augment a charitable
foundation and $40.0 million of other merger-related costs which include
legal fees, investment banking fees and other professional fees. Partially
offsetting these charges were $54.0 million of previously accrued Mercantile
and Firstar merger-related and restructuring charges that were reversed
relating primarily to excess employee severance reserves. An additional
$30.0 million in comparable charges were incurred relating to the Firstar/Star
merger. Also included in the $340.0 million restructuring and merger-related
expense was a $7.5 million provision for loan losses that was charged to
earnings on the merger date to conform Mercantile with Firstar's retail credit
policies.
In the third quarter of 1998 Mercantile recorded merger-related charges of
$89.2 million in conjunction with its four acquisitions, and the Firstar/Trans
Financial merger costs were $30.0 million. Additionally, acquired companies
recorded conforming loan loss provisions of $31.9 million. Mercantile also
recorded a one-time gain of $48.1 million on the required divestiture of
two Missouri banks. Note 7 to the financial statements provides a summary
of all merger-related costs and activity.
Excluding the above merger-related charges and gains, net income for the
third quarter was $320.3 million, an increase of 20.3% over the third quarter
of 1998. Net income before merger-related charges and gains for the first
nine months of 1999 was $928.4 million, a 19.7% increase over the same period
of 1998. The corresponding adjusted third quarter 1999 diluted earnings per
common share were $.32 or an 18.5% increase over the same quarter of last
year, while diluted earnings per common share for the first nine months
of 1999 were $.92, a 16.5% increase over the same period of 1998. The
corresponding adjusted return on average assets was 1.72% while return
on average common equity was 19.06% in the third quarter of 1999. For
the first nine months of 1999 return on average assets was 1.68% and
return on average equity was 18.37%.
-15-
<PAGE>
The improvement in net income before merger-related charges for both the
quarter and first nine months of 1999 resulted from higher net interest
revenue and noninterest revenue together with significantly lower operating
costs. This was partially offset by an increased loan loss provision in the
first nine months of 1999 versus 1998.
Total assets at September 30, 1999, were $71.35 billion compared to $74.28
billion at December 31, 1998, while total earning assets were $64.43 billion
at September 30,1999, compared to $66.28 billion at last year end. The
reductions in total assets and earnings assets have been due to sales, pay
downs and maturities in the investment and single family residential mortgage
portfolios partially offset by commercial and retail loan growth.
Total loans were $48.70 billion at September 30, 1999, which is $682 million,
or 1.4% more than the year-end 1998 level. Residential real estate loans have
declined reflecting management's decision to sell a large part of the
single-family residential real estate loan originations into the secondary
market and the transfer of a portion of the residential loan portfolio to
loans held for sale. Excluding residential real estate loans, total loans
increased $2.95 billion or 8.0% since December 31, 1998. Specifically, retail
loans, which include such areas as installment lending, auto leasing and credit
card services have increased $1.68 billion or 15.5% due to successful marketing
efforts and the strong economy. Specialized lending and corporate loans
increased $946 million or 6.1% since December 31, 1998. Commercial and
construction real estate loans increased $328 million or 3.1% since December
31, 1998. In the third quarter of 1998, Firstar established a loan conduit,
Stellar Funding Group, Inc. At September 30, 1999, $2.2 billion of short term,
high quality, low yielding commercial loans had been funded in the conduit,
including $833 million transferred from Mercantile in the current quarter.
This represents an increase of $940 million over the June 30, 1999 level.
Total investment securities were $12.97 billion at September 30, 1999
compared to $15.87 billion at year-end 1998. The decrease in investment
securities was primarily due to the Mercantile balance sheet restructuring
as well as maturities and prepayments of mortgage- backed securities. Due
to the rise in interest rates since the announcement of the merger, the
balance sheet restructuring completed at the end of September 1999 resulted
in realized investment portfolio security losses of $177.7 million versus
an original estimate of $30 million. The assets sold in connection with
the restructuring were previously carried on Mercantile's balance sheet
at fair value, with net unrealized losses carried in stockholders' equity
as a component of comprehensive income. Specifically, the restructuring,
which totals $4.5 billion of investment securities, included the following:
the sale of $2.4 billion in U.S. government agency callable securities,
$1.9 billion in fixed rate pass-through mortgage-backed securities and
$175.0 million non-agency securities out of compliance with Firstar's
investment policies. The proceeds from these sales were used to reduce
short term borrowed funds and to fund the purchase of short term investment
securities. At September 30, 1999 the net unrealized loss on remaining
available for sale securities was $46.9 million and the related after tax
decrease to shareholders' equity was $30.0 million. Loans held for sale
were $ 2.41 billion at September 30, 1999 compared to $1.76 billion at
December 31, 1999. The balance sheet restructuring included the transfer
of $1.6 billion Mercantile residential real estate mortgage loans to held
for sale.
-16-
<PAGE>
Total deposits were $50.71 billion at September 30, 1999, a reduction of
$3.60 billion or 6.6% from year-end 1998. Non-interest bearing demand
deposit balances declined by $1.37 billion from year-end when deposit
levels typically peak. Interest-bearing deposits decreased by $2.23
billion or 5.2% from December 31, 1998. The shift in deposit preferences
continues with reductions in savings, NOW accounts and certificates of
deposit, collectively down by $2.52 billion, being partially offset by a
$409 million increase in money market accounts. Retail deposit customers
are seeking higher yields in deposit accounts and alternative investment
vehicles thus limiting Firstar's ability to maintain or increase deposits.
Also contributing to the decline was the $172 million of deposits sold by
Mercantile in non-strategic branch sales since last December. Short-term
borrowed funds at $7.46 billion were up $811 million since year-end 1998
as this funding source was necessary to replace the reduced levels of
deposits.
Results of Operations
Net interest income, Firstar's principal source of revenue, increased by
$26.8 million, or 4.1% on a tax equivalent basis compared to the third
quarter of 1998. For the first nine months of 1999 net interest income
on a tax equivalent basis rose by $98.2 million, or 5.1%, compared to
the same period of last year. These increases were due to higher average
earning asset balances along with a slightly improved net interest margin.
Average earning assets for the first nine months of the year grew $2.82
billion, or 4.4%, over the same period of 1998.
Year-to-date average retail loans increased by $1.13 billion or 10.9%,
while commercial loans rose by $1.84 billion, or 12.8%. Year-to-date
average total real estate loans declined by $110 million or .5%.
Commercial mortgage loans grew by $1.10 billion or 14.0% and
construction and land development loans increased by $209 million or
13.6%. This growth was offset by a $1.42 billion decline in average
residential mortgage loans due to both maturities and repayments along
with the sale of new originated loans into the secondary market in 1999
and the transfer of loans to held for sale status. Correspondingly,
average loans held for sale increased by $428 million, or 41.8%.
Year-to-date average investment securities were reduced by $459 million,
or 2.9% for the reasons discussed previously. The increases in total
average earning assets along with a change in mix of assets from lower
yielding investment securities and residential mortgages to higher
yielding loans have largely contributed to the increase in net interest
income. This positive factor was partially offset by the increased use
of higher cost funding sources in lieu of core deposits, the funding of
bank-owned life insurance and funds used in stock repurchase programs.
The net interest margin increased by two basis points to 4.04% in the
third quarter of 1999 compared to the third quarter of 1998. For the
first three quarters of 1999 the net interest margin increased by
three basis points to 4.07% compared to the same period of last year.
The year-to-date yield on total earning assets declined by 39 basis
points to 7.64%. Likewise, the yield on total loans decreased by 49
basis points reflecting generally market driven forces. The comparable
rate paid on interest bearing liabilities declined by 46 basis points
similarly reflecting lower market rates. Interest spread, the
difference between the rate earned on total earning assets and the
rate paid on interest bearing liabilities increased by seven basis
points. The contribution of interest free funds to the net interest
margin declined by four basis points producing the net increase to the
margin of three basis points. Additionally the contribution of interest
free funds was lessened by the increase in non-earning assets along with
a higher proportion of earning assets funded by interest bearing
liabilities. Tables 1 and 2 provide detailed information on the average
balances, interest income/expense and rates earned or paid.
-17-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Third Quarter, 1999 Third Quarter, 1998
------------------------------------------ -----------------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
------------ ----------- ------ ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans $ 16,686,654 $ 326,272 7.76% $ 14,780,844 $ 307,848 8.27%
Real estate loans 21,075,142 414,222 7.83 21,392,893 435,756 8.12
Retail loans 12,052,733 266,727 8.78 10,599,588 252,302 9.44
------------ ----------- ------------ -----------
Total loans 49,814,529 1,007,221 8.04 46,773,325 995,906 8.46
Loans held for sale 1,389,305 25,168 7.25 1,123,034 20,526 7.31
Investment securities 14,912,621 242,745 6.51 15,920,634 267,002 6.70
Money market investments 517,407 6,197 4.75 566,730 8,284 5.80
------------ ----------- ------------ -----------
Total interest-
earning assets 66,633,862 1,281,331 7.65% 64,383,723 1,291,718 7.99%
Cash and due from banks 3,212,444 2,941,272
Allowance for loan losses (711,088) (698,053)
Other assets 4,609,423 4,808,410
------------ ------------
Total assets $ 73,744,641 $ 71,435,352
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW $ 10,434,695 46,987 1.79% $ 10,577,334 56,866 2.13%
Money market deposit accounts 10,435,905 104,337 3.97 9,369,204 101,558 4.30
Time deposits 20,809,494 264,171 5.04 22,434,862 310,890 5.50
Short-term borrowings 8,842,015 106,455 4.78 7,030,651 94,513 5.33
Long-term debt 5,779,789 84,254 5.82 5,280,056 79,554 6.02
------------ ----------- ------------ -----------
Total interest-bearing
liabilities 56,301,898 606,204 4.28% 54,692,107 643,381 4.67%
Noninterest-bearing deposits 9,695,888 9,359,381
Other liabilities 1,079,081 948,885
Shareholders' equity 6,667,774 6,434,979
Total liabilities and
shareholders' equity $ 73,744,641 $ 71,435,352
------------ ------------
------------ ------------
Net interest revenue/margin $ 675,127 4.04% $ 648,337 4.02%
----------- -----------
----------- -----------
Interest rate spread 3.37 3.32
Note: Interest and average rate are presented on a fully-taxable equivalent basis Taxable equivalent amounts
are calculated utilizing marginal federal income tax rate of 35 percent The yield on available for sale
securities is based upon historical cost balances The total of nonaccruing loans is included in average
amounts outstanding
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
Year through September 30, 1999 Year through September 30, 1998
----------------------------------------- -----------------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
------------ ----------- ------ ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans $ 16,238,781 $ 932,638 7.68% $ 14,396,388 $ 898,504 8.34%
Real estate loans 21,394,572 1,255,643 7.84 21,504,904 1,310,361 8.13
Retail loans 11,492,094 764,892 8.90 10,359,660 742,590 9.58
------------ ----------- ------------ -----------
Total loans 49,125,447 2,953,173 8.03 46,260,952 2,951,455 8.52
Loans held for sale 1,449,800 78,289 7.20 1,022,149 55,725 7.27
Investment securities 15,145,429 738,983 6.51 15,603,961 785,162 6.71
Money market investments 636,848 24,824 5.21 648,130 28,438 5.87
------------ ----------- ------------ -----------
Total interest-
earning assets 66,357,524 3,795,269 7.64% 63,535,192 3,820,780 8.03%
Cash and due from banks 3,336,289 3,005,884
Allowance for loan losses (709,473) (684,570)
Other assets 4,838,128 4,453,565
Total assets $ 73,822,468 $ 70,310,071
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW $ 10,692,295 145,974 1.83% $ 10,502,776 169,499 2.16%
Money market deposit accounts 10,365,937 303,674 3.92 8,880,095 285,574 4.30
Time deposits 21,172,143 806,291 5.09 22,573,013 936,864 5.55
Short-term borrowings 7,806,144 268,852 4.60 7,393,801 294,404 5.32
Long-term debt 5,875,028 248,529 5.64 4,548,879 210,677 6.17
------------ ----------- ------------ -----------
Total interest-bearing
liabilities 55,911,547 1,773,320 4.24% 53,898,564 1,897,018 4.70%
Noninterest-bearing deposits 9,971,557 9,255,946
Other liabilities 1,182,425 950,880
Shareholders' equity 6,756,939 6,204,681
Total liabilities and
shareholders' equity $ 73,822,468 $ 70,310,071
------------ ------------
------------ ------------
Net interest revenue/margin $ 2,021,949 4.07% $ 1,923,762 4.04%
----------- -----------
----------- -----------
Interest rate spread 3.40 3.33
Note: Interest and average rate are presented on a fully-taxable equivalent basis Taxable equivalent amounts
are calculated utilizing marginal federal income tax rate of 35 percent The yield on available for sale
securities is based upon historical cost balances The total of non accruing loans is included in average
amounts outstanding
</TABLE>
-19-
<PAGE>
Firstar's major market risk exposure is to changing interest rates.
To minimize the volatility of net interest income to adverse changes
in interest rate, Firstar has established guidelines for its asset
and liability activities through its Assets/Liability Policy Committee.
This committee has the responsibility for approving and ensuring
compliance with policies including interest rate risk exposure,
off-balance-sheet activity and the investment portfolio position.
One of the primary tools to measure interest rate risk and the effect of
interest rate changes on net interest income is simulation analysis.
This earnings simulation model estimates net interest income under a
variety of scenarios that incorporate changes in the shape of the yield
curve, changes in interest rate relationships, changes in the direction
of rates, and changes in the mix and levels of balance sheet accounts.
The most recent simulation projected the impact of a 300 basis point
upward or downward gradual change of market interest rates over a one
year time period. The results of this simulation indicate that a
declining interest rate scenario would increase net interest revenue
by 1.6% from a base case, while an increasing rate scenario would increase
net interest revenue by 1.7%. The impact of such interest rate movements
on diluted earnings per share would be approximately three cents.
The loan loss provision charged to earnings in the third quarter of 1999
was $55.3 million, down slightly from the $55.9 million last year. For
the first nine months of the year the provision for loan losses was
$143.6 million, or $18.7 million higher than the same period of 1998.
Merger related provisions were $31.9 million in the third quarter of
1998 and $7.5 million in the current quarter. Net loan charge-offs were
$133.9 million in the first nine months of 1999 compared to $110.8 a
year earlier. In addition to replenishing the reserve for loan
charge-offs, loan growth and changes in loan mix during the period
required an increased loan loss provision to maintain adequate reserve
levels. Year-to-date 1999 net charge-offs are .36% of average loans
compared with .32% in 1998. Management anticipates the level of
charge-offs to trend higher over the remainder of 1999.
Noninterest income is a significant source of revenue for Firstar,
representing 34.1% of tax equivalent net revenue in the third quarter
of 1999 and 34.0% for the first nine months of 1999. This compares
with 33.9% in the third quarter of last year and 33.6% in the first
three quarters of last year when the $48.1 million non-recurring gain
is excluded from noninterest income. Noninterest income increased by
$16.5 million, or 5.0%, to a level of $348.6 million in the third
quarter of 1999 when compared to the same quarter of last year. For
the nine months noninterest income increased by $66.6 million, or
6.8% to a level of $1.04 billion.
-20-
<PAGE>
Trust income is the largest source of noninterest income for Firstar
and for the three quarters of 1999 it increased $34.8 million, or 12.5%
due to new business, significant growth in mutual fund custody revenues
and higher stock market values. Additionally, this year's trust income
benefited from the transfer of Firstar managed Stellar Funds to in-house
processing. Retail deposit income of $133.4 million was up $2.5 million
or 1.9% due to new customers and higher transaction volume. Mortgage
banking revenue declined by $36.3 million or 23.4% as servicing income
was flat, amortization of servicing rights increased and substantially
lower gains were recorded on the sales of both originated loans and
servicing rights. Mercantile recorded a $23.2 million gain on the sale
of $1.9 billion in servicing rights in the first quarter of 1998 to
lower its prepayment risk. Corporate cash management income increased
$17.9 million, or 20.9%, due to new business development, an expanded
product line and higher customer transaction volumes. Credit card
revenue rose $14.6 million, or 21.8% due to an expanded customer base
and card usage. Merchant revenues declined due to the sale of the
merchant processing business in the second and third quarters of 1999.
The revenue from corporate owned life insurance increased by $7.2
million, or 65.3%, with the purchase of additional policies. Brokerage
revenue declined as a result of the outsourcing of that product to a
third party broker. International fees grew by $4.4 million or 18.0%.
Other income in 1998 included $4.7 million in gains Mercantile recognized
on the sale of two non-strategic businesses and 1999 other income included
a $6 million gain on the sale of credit card merchant processing. Table 3
shows the components of noninterest income.
Noninterest expense, excluding merger-related expenses, totaled $478.1
million, a decrease of $67.6 million, or 12.4% from the third quarter of
1998. For the first nine months of 1999 noninterest expense, excluding
merger-related charges, totaled $1.49 billion, a decrease of $108.2
million, or 6.8% from the same period of last year. Staff expense
year-to-date 1999 decreased $78.8 million, or 9.3%. This decrease
resulted from staff reductions in support and back room operations as a
result of the merger of Star and Firstar, as well as declines in Mercantile
from prior acquisition synergies, branch sales, a higher employee turnover
rate and the company's previously announced restructuring program. In
addition staff expenses were reduced through the consistent capitalization
of loan origination costs, reduced temporary staffing costs and the
outsourcing of the brokerage business. Lower incentive pay on decreased
residential mortgage loan originations reduced salary expenses. Employee
benefits expense also declined in 1999 due to lower headcount and salary
levels, the merger of the Star and Firstar employee benefit plans and
lower amortization of retirement plan costs. Partially offsetting these
decreases were increases in staff as a result of opening new branches
and in-store locations as well as growth in the consumer finance company,
Firstar Finance, Inc.
Year-to-date equipment expenses declined by $8.6 million, or 7.3%, due
largely to savings resulting from the Star and Firstar merger. Occupancy
expenses increased $952,000 or .8%, due to both the opening of new branches
and acquisitions offset by increased rental income. Amortization of
intangible assets increased $7.6 million, or 9.1%, due primarily to new
core deposit intangible amortization. All other operating expenses declined
an aggregate $29.0 million, or 6.9%, reflecting various cost saving
initiatives and synergies, as well as Mercantile branch sale gains of $5.9
million in 1999 versus $1.2 million in 1998. Table 4 shows the components
of noninterest expenses.
-21-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 3 NONINTEREST INCOME
(dollars in thousands)
% Increase/ % Increase/
Third Quarter (decrease) Year Through September 30 (decrease)
------------------------- ----------------------------
1999 1998 1999/1998 1999 1998 1999/1998
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust income $ 105,705 $ 95,833 10.3 % $ 314,005 $ 279,211 12.5 %
Mortgage banking 37,490 44,618 (16.0) 118,963 155,252 (23.4)
Cash management income 36,574 30,552 19.7 103,808 85,860 20.9
Retail deposit fees 45,689 45,389 0.7 133,357 130,886 1.9
Credit card income 28,793 24,307 18.5 81,248 66,695 21.8
ATM income 10,147 10,100 0.5 28,080 27,230 3.1
Insurance commissions 6,514 6,607 (1.4) 21,202 20,216 4.9
International income 10,556 8,553 23.4 28,918 24,511 18.0
Corporate owned life
insurance 7,500 4,326 73.4 18,262 11,046 65.3
Brokerage revenue 10,365 10,650 (2.7) 31,533 34,006 (7.3)
All other income 50,780 48,534 4.6 147,014 128,937 14.0
--------- --------- ------- --------- --------- -------
350,112 329,469 6.3 1,026,390 963,850 6.5
Gain on sale of banks 348,621 380,127 (8.3) 1,041,143 1,022,591 1.8
Investment securities
gains/(losses)--net (1,491) 2,607 n/m 14,753 10,690 n/m
--------- --------- ------- --------- --------- -------
Total noninterest
income $ 348,621 $ 380,127 (8.3)% $ 1,041,143 $ 1,022,591 1.8 %
--------- --------- ------- --------- --------- -------
--------- --------- ------- --------- --------- -------
n/m = not meaningful
</TABLE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 4 NONINTEREST EXPENSE
(dollars in thousands)
% Increase/ % Increase/
Third Quarter (decrease) Year Through September 30 (decrease)
------------------------- ----------------------------
1999 1998 1999/1998 1999 1998 1999/1998
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $ 214,578 $ 248,487 (14.2)% $ 656,210 $ 717,580 (9.1)%
Pension and other
employee benefits 32,742 40,284 (15.5) 113,572 131,211 (10.4)
Equipment expense 36,484 39,640 (8.0) 110,367 119,008 (7.3)
Occupancy expense--net 41,092 43,088 (4.6) 124,901 123,949 0.8
Amortization of goodwill
and other intangible
assets 30,139 30,012 0.4 90,862 83,290 9.1
Outside services 26,139 24,156 8.2 83,777 70,297 19.2
Postage and courier 17,875 16,207 10.3 53,519 47,656 12.3
Marketing expense 9,867 9,853 0.1 31,323 34,496 (9.2)
Professional services 5,480 10,073 (45.6) 19,323 28,531 (32.3)
Travel and entertainment 6,146 6,410 (4.1) 18,602 19,511 (4.7)
Stationery and supplies 8,849 11,009 (19.6) 28,322 33,143 (14.5)
All other noninterest
expense 48,699 66,489 (26.8) 159,200 189,481 (16.0)
--------- --------- ------- --------- --------- -------
478,089 545,708 (12.4) 1,489,979 1,598,153 (6.8)
Merger related expenses 362,500 119,162 n/m 407,600 119,162 n/m
--------- --------- ------- --------- --------- -------
Total noninterest
expense $ 840,589 $ 664,870 26.4 % $ 1,897,579 $ 1,717,315 10.5 %
--------- --------- ------- --------- --------- -------
--------- --------- ------- --------- --------- -------
n/m = not meaningful
</TABLE>
-22-
<PAGE>
Before merger-related costs, Firstar's efficiency ratio was 46.70% in the
third quarter of 1999, a significant improvement over the 55.66% of the
third quarter of last year. For the first nine months of 1999 the
efficiency ratio was 48.64% compared to 55.14% in the same period of
last year.
Asset Quality
As of September 30, 1999, the allowance for loan losses was $714.5 million,
or 1.47% of loans outstanding compared to 1.47% at December 31, 1998 and
1.51% a year earlier. The decrease from the prior year resulted from a
change in the management of problem loans as a result of the Firstar
merger when a more aggressive charge-off policy had been adopted. The
allowance as a percentage of nonperforming loans was 326% at September
30, 1999 compared to 330% at December 31, 1998 and 295% a year earlier.
Table 5 provides a summary of activity in the allowance for loan losses
by type of loan. Net charge-offs totaled $55.2 million in the third
quarter of 1999 compared with $46.1 million in the same period of last
year. One time conforming charge-offs related to recent mergers were
$7.5 million in 1999 and $31.9 million in 1998. For the first three
quarters of 1999 net charge offs were $133.9 million compared to $110.8
million a year earlier. Annualized net charge-offs as a percent of
average loans increased from .39% in the third quarter of 1998 to .44%
in the third quarter of this year. Adjusted net charge-offs were .38%
of average loans in the current quarter compared with .24% last year.
For the first nine months of this year annualized net charge-offs were
.36% compared to .32% last year. Credit card net charge-offs decreased
from 4.29% of average outstandings in 1998 to 4.23% in the first three
quarters of 1999. Commercial loan net charge-offs increased from a
level of .29% of loans in 1998 to.35% in the same period of 1999. Other
retail lending net charge-offs increased slightly form .48% of average
outstandings in 1998 to .50% in the current period. Management
anticipates the level of net charge-offs to trend higher over the
remainder of 1999.
Nonperforming assets, as shown in Tables 6 and 7, were $240.3 million
at September 30, 1999. This is an increase of $2.8 million from December
31, 1998 and a $29.1 million reduction from a year earlier. Measured
as a percent of loans and other real estate, nonperforming assets have
decreased from .56% at September 30, 1998 to .49% at September 30, 1999.
The placement of one large commercial loan into nonaccrual status during
the second quarter of 1999 added $16.5 million to nonperforming loans,
and it was substantially charged down in the third quarter of 1999. The
largest decline in non-performing loans occurred in residential mortgage
loans. As part of the Mercantile balance sheet restructuring, Firstar
disposed of all $45.5 million of impaired investment securities at a
slight gain. Such gain was netted in the merger charge.
Capital Resources
Total shareholders' equity was $6.44 billion at September 30, 1999, a
decrease of $168.0 million from December 31, 1998 and $130.0 million
from a year earlier. These declines are the result of strong core
earnings offset by dividend payments, the merger-related charges and
the stock repurchase program. The tangible common ratio was 7.03% at
September 30, 1999, compared to 6.84% at September 30, 1998. The
ratio of total shareholders' equity to total assets was 9.02% at
September 30, 1999, compared to 9.05% at September 30, 1998.
-23-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 5 SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
Third Quarter Nine Months
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average loans $ 49,814,529 $ 46,773,325 $ 49,125,447 $ 46,260,952
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Allowance for loan losses:
Balance - beginning of period $ 714,430 $ 688,555 $ 704,846 $ 657,098
Charge-offs:
Commercial (31,082) (24,327) (63,347) (52,136)
Commercial real estate (3,289) (4,418) (7,273) (6,220)
Residential real estate (3,832) (1,927) (10,425) (5,338)
Credit card (16,246) (16,642) (52,622) (53,663)
Other retail (21,925) (17,966) (55,706) (49,760)
------------ ------------ ------------ ------------
Total charge-offs (76,374) (65,280) (189,373) (167,117)
------------ ------------ ------------ ------------
Recoveries:
Commercial 9,063 7,651 20,302 21,508
Commercial real estate 1,160 670 4,074 3,780
Residential real estate 170 432 394 1,800
Credit card 5,104 4,119 13,050 11,790
Other retail 5,669 6,275 17,702 17,464
------------ ------------ ------------ ------------
Total recoveries 21,166 19,147 55,522 56,342
------------ ------------ ------------ ------------
Net charge-offs (55,208) (46,133) (133,851) (110,775)
Provision charged to earnings 55,325 55,909 143,552 124,885
Allowances of banks purchased - 20,570 - 47,693
------------ ------------ ------------ ------------
Balance - end of period $ 714,547 $ 718,901 $ 714,547 $ 718,901
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Ratio of net charge-offs to average
loans:
Commercial 0.52% 0.45% 0.35% 0.28%
Commercial real estate 0.08% 0.15% 0.04% 0.03%
Residential real estate 0.14% 0.05% 0.13% 0.04%
Credit card 3.50% 3.94% 4.23% 4.29%
Other Retail 0.60% 0.50% 0.50% 0.48%
Total loans 0.44% 0.39% 0.36% 0.32%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 6 NONPERFORMING ASSETS
(dollars in thousands)
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Loans on nonaccrual status:
Commercial $ 87,133 $ 82,386 $ 81,284
Residential mortgage 56,562 52,072 77,687
Commercial mortgage 53,381 49,877 50,907
Construction and land
development 4,290 11,177 8,745
Retail loans 16,300 19,647 18,821
---------- ---------- ----------
Total nonaccrual loans 217,666 215,159 237,444
Loans which have been
renegotiated 1,605 1,501 6,545
---------- ---------- ----------
Total nonperforming loans 219,271 216,660 243,989
Other real estate owned 21,017 20,835 25,393
---------- ---------- ----------
Total nonperforming
assets $ 240,288 $ 237,495 $ 269,382
---------- ---------- ----------
---------- ---------- ----------
Percentage of nonperforming
loans to loans 0.45% 0.45% 0.51%
Percentage of nonperforming
assets to loans and other
real estate owned 0.49% 0.49% 0.56%
Loans past due 90 days
or more $ 122,047 $ 146,121 $ 159,422
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 7 COMPOSITION OF NONPERFORMING LOANS
(dollars in thousands)
September 30, 1999
-----------------------------------------------------------------
Nonperforming Loans 90 Days
--------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
--------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Commercial loans:
Corporate $ 73,705 $ 92 $ 73,797 0.50% $ 16,535
Commercial leasing 13,428 - 13,428 0.84 375
--------- ------- --------- ---------
Total commercial loans 87,133 92 87,225 0.53 16,910
--------- ------- --------- ---------
Real estate loans:
Residential 56,562 - 56,562 0.64 48,006
Commercial mortgage 53,381 - 53,381 0.60 9,734
Construction/land
development 4,290 - 4,290 0.22 4,084
--------- ------- --------- ---------
Total real estate loans 114,233 - 114,233 0.58 61,824
--------- ------- --------- ---------
Retail loans:
Other retail 11,813 1,513 13,326 0.14 22,221
Credit cards 3,957 - 3,957 0.30 19,555
Retail leasing 530 - 530 0.03 1,537
--------- ------- --------- ---------
Total retail loans 16,300 1,513 17,813 0.14 43,313
--------- ------- --------- ---------
Total loans $ 217,666 $ 1,605 $ 219,271 0.45% $ 122,047
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
December 31, 1998
-----------------------------------------------------------------
Nonperforming Loans 90 Days
--------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
--------- ------- --------- ------- ---------
Commercial loans:
Corporate $ 75,970 $ 66 $ 76,036 0.54% $ 26,400
Commercial leasing 6,416 - 6,416 0.48 -
--------- ------- --------- ---------
Total commercial loans 82,386 66 82,452 0.53 26,400
--------- ------- --------- ---------
Real estate loans:
Residential 52,072 - 52,072 0.46 65,548
Commercial mortgage 49,877 1,435 51,312 0.61 10,444
Construction/land
development 11,177 - 11,177 0.52 2,979
--------- ------- --------- ---------
Total real estate loans 113,126 1,435 114,561 0.53 78,971
--------- ------- --------- ---------
Retail loans:
Other retail 16,528 - 16,528 0.20 21,000
Credit cards 2,629 - 2,629 0.21 18,280
Retail leasing 490 - 490 0.03 1,470
--------- ------- --------- ---------
Total retail loans 19,647 - 19,647 0.18 40,750
--------- ------- --------- ---------
Total loans $ 215,159 $ 1,501 $ 216,660 0.45% $ 146,121
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
September 30, 1998
-----------------------------------------------------------------
Nonperforming Loans 90 Days
--------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
--------- ------- --------- ------- ---------
Commercial loans:
Corporate $ 72,596 $ 66 $ 72,662 0.52% $ 41,119
Commercial leasing 8,688 - 8,688 0.70 1,345
--------- ------- --------- ---------
Total commercial loans 81,284 66 81,350 0.54 42,464
--------- ------- --------- ---------
Real estate loans:
Residential 77,687 - 77,687 0.67 53,983
Commercial mortgage 50,907 1,813 52,720 0.62 25,596
Construction/land
development 8,745 - 8,745 0.45 856
--------- ------- --------- ---------
Total real estate loans 137,339 1,813 139,152 0.63 80,435
--------- ------- --------- ---------
Retail loans:
Other retail 15,952 4,666 20,618 0.25 19,711
Credit cards 2,515 - 2,515 0.21 15,705
Retail leasing 354 - 354 0.03 1,107
--------- ------- --------- ---------
Total retail loans 18,821 4,666 23,487 0.18 36,523
--------- ------- --------- ---------
Total loans $ 237,444 $ 6,545 $ 243,989 0.50% $ 159,422
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
</TABLE>
-26-
<PAGE>
Banking industry regulators define minimum capital requirements for
bank holding companies. At September 30, 1999, the corporation's Tier
I and Total Risk-Based Capital ratios amounted to 8.60% and 10.70%,
respectively well above the minimum requirements of 4.00% for Tier I
and 8.00% for Total Risk-Based Capital. This compares to Tier I and
Total Risk-Based Capital ratios of 9.58% and 12.06% at September 30,
1998. Regulatory authorities have also established a minimum leverage
ratio of 3.00%, which is defined as Tier I equity to average quarterly
assets. For the third quarter of 1999, the corporation's average
leverage ratio was 7.43% compared to 7.47% in the same quarter of 1998.
The decline since 1998 was due to the stock repurchase program and
changes in balance sheet mix of earning assets. These regulatory
ratios continue to be in excess of stated "well capitalized"
requirements.
In March 1999, the Board of Directors approved a three-for-one stock
split and a 15 million share common stock repurchase program. The
repurchase of these shares was completed in the third quarter of 1999.
On October 12, 1999, the Board of Directors approved an additional
repurchase program of 17 million shares to be completed during the
next two years. The reacquired common shares will be held as treasury
shares for reissuance for various corporate purposes, including employee
stock option plans.
Year 2000
Firstar's Year 2000 ("Y2K) project is directed by a committee
that provides oversight of the Y2K initiative. Firstar has completed
its assessment of Y2K issues, developed a plan, and arranged resources
to complete the necessary remediation efforts. Firstar is utilizing
both internal and external resources to reprogram, or replace, and
test the software and hardware for Y2K modifications. Currently Firstar
has remediated and tested 100% of its mission critical applications.
A separate test environment had been established to accommodate testing
activity and the anticipated need to test with customers and other third
parties during the remainder of the year.
Firstar relies on several third party service providers for key business
processes and works closely to monitor their Y2K efforts. Firstar has
obtained written and verbal verification from significant third party
service providers and vendors of their Y2K readiness. While Firstar
continues to discuss, obtain written certification from and test the
systems of critical vendors and third party service providers as to
Y2K compliance, no assurance exists that any impact associated with
incompatible systems after December 31, 1999 will not have a material
adverse effect on Firstar's business, financial condition or results
of operations.
-27-
<PAGE>
Firstar previously established business continuity plans for its various
lines of business and is assessing these plans for the possible impact of
Y2K anticipated failures. Existing business continuity plans will be
adjusted where appropriate for those scenarios that may have the most
severe impact on its operations.
Major risks associated with the Y2K issue as it applies to external
parties include, but are not limited to, failure of voice and data
communications systems due to loss of satellites or problems at
communication companies; ATM shutdowns; non-availability or delays
in cash couriers/shipments; failure of government systems; and
shutdowns of government facilities or power companies. Major risks
associated with internal systems include, but are not limited to,
inability to complete transactions or properly process customer data;
inability to process electronic transactions; failure of time locks or
security systems and inability to meet customer demands for cash.
The costs of the Y2K project are primarily staff related and expensed
as incurred. Currently, Firstar estimates that the total cost of the
Y2K project will be approximately $63 million of which $13 million was
expensed in 1997; $32 million in 1998; and $11 million in the first
nine months of 1999.
This discussion may contain forward-looking statements with respect
to the financial condition, results of operations and business of
Firstar. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ
materially from those contemplated include among other things, the
following possibilities: (i)expected cost savings from recent
acquisitions cannot be fully realized or realized within the expected
time; (ii)revenues are lower than expected; (iii)competitive
pressure among depository institutions increases significantly;
(iv)changes in the interest rate environment reduce interest margins;
(v)general economic conditions are less favorable than expected; and
(vi)legislation or regulatory requirements adversely affect the
business that Firstar is engaged in.
-28-
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
ITEM 6. Exhibits and Reports on Form 8-K
- -------
(A) Exhibits filed:
Exhibit 27. Financial Data Schedule
(B) Reports on Form 8-K
Form 8-Ks dated September 30, 1999 reported the merger of
Firstar Corporation and Mercantile Bancorporation Inc. and
included pro forma financial statements of the combined
companies.
SIGNATURES
----------
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 in the capacities and on the dates indicated.
FIRSTAR CORPORATION
November 15, 1999 /s/ Jerry A. Grundhoffer
- ----------------- ------------------------------------------
Date Jerry A. Grundhoffer
President and Chief Executive Officer
November 15, 1999 /s/ David M. Moffett
- ----------------- ------------------------------------------
Date David M. Moffett
Vice Chairman and Chief Financial Officer
November 15, 1999 /s/ James D. Hogan
- ----------------- ------------------------------------------
Date James D. Hogan
Executive Vice President and Controller
-29-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,824,575
<INT-BEARING-DEPOSITS> 128,695
<FED-FUNDS-SOLD> 217,923
<TRADING-ASSETS> 101
<INVESTMENTS-HELD-FOR-SALE> 12,719,317
<INVESTMENTS-CARRYING> 254,005
<INVESTMENTS-MARKET> 255,781
<LOANS> 48,700,847
<ALLOWANCE> 714,547
<TOTAL-ASSETS> 71,345,344
<DEPOSITS> 50,709,135
<SHORT-TERM> 7,457,294
<LIABILITIES-OTHER> 1,145,188
<LONG-TERM> 5,597,854
<COMMON> 9,833
0
0
<OTHER-SE> 6,426,040
<TOTAL-LIABILITIES-AND-EQUITY> 71,345,344
<INTEREST-LOAN> 2,944,213
<INTEREST-INVEST> 706,310
<INTEREST-OTHER> 103,114
<INTEREST-TOTAL> 3,753,637
<INTEREST-DEPOSIT> 1,255,939
<INTEREST-EXPENSE> 1,773,320
<INTEREST-INCOME-NET> 1,980,317
<LOAN-LOSSES> 143,552
<SECURITIES-GAINS> 14,753
<EXPENSE-OTHER> 1,897,579
<INCOME-PRETAX> 980,329
<INCOME-PRE-EXTRAORDINARY> 980,329
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607,273
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 4.07
<LOANS-NON> 217,600
<LOANS-PAST> 122,047
<LOANS-TROUBLED> 1,605
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 704,846
<CHARGE-OFFS> 189,373
<RECOVERIES> 55,522
<ALLOWANCE-CLOSE> 714,547
<ALLOWANCE-DOMESTIC> 714,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,025,546
<INT-BEARING-DEPOSITS> 175,118
<FED-FUNDS-SOLD> 139,090
<TRADING-ASSETS> 106,501
<INVESTMENTS-HELD-FOR-SALE> 13,448,247
<INVESTMENTS-CARRYING> 2,544,400
<INVESTMENTS-MARKET> 2,621,122
<LOANS> 47,716,820
<ALLOWANCE> 718,901
<TOTAL-ASSETS> 72,553,500
<DEPOSITS> 52,054,513
<SHORT-TERM> 7,394,169
<LIABILITIES-OTHER> 1,191,301
<LONG-TERM> 5,347,846
<COMMON> 9,835
0
0
<OTHER-SE> 6,555,836
<TOTAL-LIABILITIES-AND-EQUITY> 72,553,500
<INTEREST-LOAN> 2,941,683
<INTEREST-INVEST> 744,479
<INTEREST-OTHER> 90,101
<INTEREST-TOTAL> 3,776,263
<INTEREST-DEPOSIT> 1,391,937
<INTEREST-EXPENSE> 1,897,018
<INTEREST-INCOME-NET> 1,879,245
<LOAN-LOSSES> 124,885
<SECURITIES-GAINS> 10,690
<EXPENSE-OTHER> 1,717,315
<INCOME-PRETAX> 1,059,636
<INCOME-PRE-EXTRAORDINARY> 1,059,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702,280
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 4.04
<LOANS-NON> 237,444
<LOANS-PAST> 159,422
<LOANS-TROUBLED> 6,545
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 657,098
<CHARGE-OFFS> 167,117
<RECOVERIES> 56,342
<ALLOWANCE-CLOSE> 718,901
<ALLOWANCE-DOMESTIC> 718,901
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,110,168
<INT-BEARING-DEPOSITS> 391,982
<FED-FUNDS-SOLD> 103,334
<TRADING-ASSETS> 129,294
<INVESTMENTS-HELD-FOR-SALE> 15,641,934
<INVESTMENTS-CARRYING> 233,014
<INVESTMENTS-MARKET> 236,623
<LOANS> 48,019,685
<ALLOWANCE> 704,845
<TOTAL-ASSETS> 74,276,016
<DEPOSITS> 54,312,162
<SHORT-TERM> 6,645,968
<LIABILITIES-OTHER> 1,257,015
<LONG-TERM> 5,457,203
<COMMON> 8,157
0
0
<OTHER-SE> 6,595,511
<TOTAL-LIABILITIES-AND-EQUITY> 74,276,016
<INTEREST-LOAN> 3,928,140
<INTEREST-INVEST> 994,077
<INTEREST-OTHER> 129,971
<INTEREST-TOTAL> 5,052,188
<INTEREST-DEPOSIT> 1,843,674
<INTEREST-EXPENSE> 2,516,567
<INTEREST-INCOME-NET> 2,535,621
<LOAN-LOSSES> 164,790
<SECURITIES-GAINS> 16,530
<EXPENSE-OTHER> 2,529,816
<INCOME-PRETAX> 1,206,366
<INCOME-PRE-EXTRAORDINARY> 1,206,366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805,450
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 4.04
<LOANS-NON> 215,159
<LOANS-PAST> 146,121
<LOANS-TROUBLED> 1,501
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 657,098
<CHARGE-OFFS> 235,704
<RECOVERIES> 72,219
<ALLOWANCE-CLOSE> 704,846
<ALLOWANCE-DOMESTIC> 704,846
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
