Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File Number 1-2981
FIRSTAR CORPORATION
Wisconsin 39-1940778
(State of Incorporation) (I.R.S. Employer Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Telephone Number (414) 765-4321
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $0.01 par value New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
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 is not contained herein, and will not be
contained, to the best of the 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]
As of March 1, 1999, 220,250,656 shares of common stock were outstanding,
and the aggregate market value of the shares (based upon the closing
price) held by nonaffiliates was approximately $17.3 billion.
Documents Incorporated by Reference:
Portions of the 1999 Notice of Annual Meeting and Proxy Statement are
incorporated by reference into Part III of the Form 10-K.
<PAGE>
FORM 10-K TABLE OF CONTENTS
Part I Page
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Item 1 - Business.........................................................1
Item 2 - Properties.......................................................2
Item 3 - Legal Proceedings................................................2
Item 4 - Submission of Matters to a Vote of Security Holders..............2
Part II
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Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters..........................................................2
Item 6 - Selected Financial Data..........................................3
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................3
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.......3
Item 8 - Financial Statements and Supplementary Data......................3
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................3
Part III
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Item 10 - Directors and Executive Officers of the Registrant...............3
Item 11 - Executive Compensation...........................................5
Item 12 - Security Ownership of Certain Beneficial Owners
and Management...................................................5
Item 13 - Certain Relationships and Related Transactions...................5
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Part IV
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Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................................5
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SIGNATURES.................................................................7
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<PAGE>
PART I
ITEM 1. BUSINESS
General
Firstar Corporation ("Firstar") is the organization created by
the merger of Star Banc Corporation and Firstar Corporation("old
Firstar Corporation") on November 20, 1998. Firstar is a
regional, multi-state bank holding company headquartered in
Milwaukee, Wisconsin. Firstar owns 100 percent of the capital
stock of eight bank subsidiaries having over 700 banking offices
in Wisconsin, Ohio, Iowa, Minnesota, Illinois, Indiana,
Kentucky, Tennessee and Arizona. Firstar also owns various
nonbank and limited purpose bank subsidiaries engaged in related
financial services.
Firstar provides banking services throughout the midwestern
United States. Firstar's bank subsidiaries provide a broad
range of financial services for companies based in its market
region, national business organizations, governmental entities
and individuals. These commercial and consumer banking
activities include accepting demand, time and savings deposits;
making both secured and unsecured business and personal loans;
and issuing and servicing credit cards. The bank subsidiaries
also engage in correspondent banking and provide a full range of
trust and investment management services to individual and
corporate customers. International banking services consisting
of foreign trade financing, issuance and confirmation of letters
of credit, funds collection and foreign exchange transactions
are conducted. Nonbank subsidiaries provide retail brokerage
services, trust and investment management services, residential
mortgage banking activities, consumer financing, title
insurance, business insurance, consumer and credit related
insurance, and corporate operational services.
Firstar's operations include three primary business segments:
consumer banking, wholesale banking, and trust and private
banking. Information on these lines of business are included in
Note 25 of the Notes to Consolidated Financial Statements
included in Firstar's 1998 Annual Report to Shareholders which
is incorporated herein by reference.
Competition
Banking and bank-related services are highly competitive.
Firstar's subsidiaries compete primarily in the Midwestern
United States with numerous competitors, some of which are
larger and have greater financial resources. Firstar competes
with other commercial banks and financial intermediaries, such
as savings banks, savings and loan associations, credit unions,
mortgage companies, leasing companies and a variety of financial
services and advisory companies located throughout the country.
Supervision
Firstar's business activities as a bank holding company are
regulated by the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. The activities of Firstar and
those of its banking and nonbanking subsidiaries are limited to
the business of banking and activities closely related or
incidental to banking.
The business of banking is highly regulated, and there are
various requirements and restrictions in the laws of the United
States and the states in which the subsidiary banks operate
including the requirement to maintain reserves against deposits
and adequate capital to support their operations, restrictions
on the nature and amount of loans which may be made by the
banks, restrictions relating to investment (including loans to
and investments in affiliates), branching and other activities
of the banks.
Firstar's subsidiary banks with national charters are
supervised and examined by the Comptroller of the Currency. The
subsidiary banks with state charters are supervised and
examined by their respective state banking agencies and either
by the Federal Reserve if a member bank of the Federal Reserve
or by the Federal Deposit Insurance Corporation("FDIC") if a
nonmember. All of the Firstar subsidiary banks are also subject
to examination by the FDIC.
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<PAGE>
In recent years Congress has enacted significant legislation
which has substantially changed the federal deposit insurance
system and the regulatory environment in which depository
institutions and their holding companies operate. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Comprehensive Thrift and Bank Fraud Prosecution
and Taxpayer Recovery Act of 1990 and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") have
significantly increased the enforcement powers of the federal
regulatory agencies having supervisory authority over Firstar
and its subsidiaries. FIRREA also provides that all commonly
controlled FDIC insured depository institutions may be held
liable for any loss incurred by the FDIC resulting from a
failure of, or any assistance given by the FDIC, to any of such
commonly controlled institutions. Federal regulatory agencies
have implemented provisions of FDICIA with respect to taking
prompt corrective action when a depository institution's capital
falls to certain levels. Under the rules, five capital
categories have been established which range from "critically
undercapitalized" to "well capitalized". Failure of a
depository institution to maintain a capital level within the
top two categories will result in specific actions from the
federal regulatory agencies. These actions could include the
inability to pay dividends, restricting new business activity,
prohibiting bank acquisitions, asset growth limitations and
other restrictions on a case by case basis.
In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and credit
availability in order to influence the economy. Changes to such
monetary policies have had a significant effect on operating
results of financial institutions in the past and are expected
to have such an effect in the future; however, the effect of
possible future changes in such policies on the business and
operations of Firstar cannot be determined.
ITEM 2. PROPERTIES
On December 31, 1998, Firstar had 705 banking locations, of
which 370 were owned and 335 were leased. All of these offices
are considered by management to be well maintained and adequate
for the purpose intended. See Note 8 of the Notes to
Consolidated Financial Statements included in Firstar's 1998
Annual Report to Shareholders which is incorporated herein by
reference for further information on properties.
ITEM 3. LEGAL PROCEEDINGS
Firstar and its subsidiaries are subject to various legal
actions and proceedings in the normal course of business, some
of which involve substantial claims for compensatory or punitive
damages. Although litigation is subject to many uncertainties
and the ultimate exposure with respect to these matters cannot
be ascertained, management does not believe that the final
outcomes will have a material adverse effect on the financial
condition of Firstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special meetings of shareholders of old Firstar Corporation and
Star Banc Corporation were held on October 27, 1998 to approve
the merger of the two companies. The result of this vote was
previously reported in the Form 10Q of Firstar for the period
ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
See Note 28 of the Notes to the Consolidated Financial
Statements included in Firstar's 1998 Annual Report to
Shareholders which is incorporated by reference for information
on stock price ranges and dividends. The principal markets for
the quotations of stock prices is the New York Stock Exchange.
There were 21,558 holders of record of Firstar's $0.01 par value
Common Stock on March 1, 1999.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included on page 15 of
Firstar's 1998 Annual Report to Shareholders which is
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is included on pages 16
to 33 of Firstar's 1998 Annual Report to Shareholders which is
incorporated by reference.
ITEM 7A. QUATITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included on pages 19
to 21 of Firstar's 1998 Annual Report to Shareholders which is
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Firstar, the
accompanying Notes to Consolidated Financial Statements and the
Report of Independent Auditors contained in Firstar's 1998
Annual Report to Shareholders are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Form 8-K of Firstar dated March 9, 1999 is incorporated by
reference. This filing reported the dismissal of Arthur
Anderson LLP and the appointment of PricewaterhouseCoopers LLP
as Firstar's independent public accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Notice of the 1999 Annual Meeting and Proxy Statement filed
pursuant to Regulation 14A is incorporated by reference.
Executive Officers of the Registrant
The following is a list of the twenty executive officers of
Firstar as of December 31, 1998. All of these officers are
elected annually by their respective boards of directors. All
of the officers have been employed by Firstar or Star Banc
Corporation and/or one or more of its subsidiaries during the
past five years with the exceptions of Messrs Arrigoni and Berta
who were previously employed by banking organizations acquired
by Firstar. There are no family relationships between any of
the executive officers.
Name Age Position
Jerry A Grundhofer 54 President and Chief Executive Officer
(Since June 1993)
Daniel A Arrigoni 48 Executive Vice President, Mortgage
Banking (Since December 1998)
John A Becker 56 Vice Chairman and Chief Operating Officer
(Since January 1990)
Kathy P. Beechem 47 Executive Vice President, Metro and
In-Store Banking (Since December 1998)
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<PAGE>
Daniel B. Benhase 39 Executive Vice President, Trust and
Investments (Since 1994)
Vince A. Berta 40 Executive Vice President, Western
Kentucky Region (Since December 1998)
Joseph A. Campanella 56 Executive Vice President, Community
Banking (Since June 1991)
Richard K. Davis 40 Vice Chairman, Consumer
Banking (Since November 1993)
Roger L. Fitzimonds 60 Chairman of the Board
(Since February 1991)
Timothy J. Fogerty 41 Executive Vice President, Operations
(Since 1995)
Kenneth R. Griffith 51 Executive Vice President, Retail
Lending and Finance Company
(Since December 1998)
John R. Heistad 52 Executive Vice President, Credit
Administration (Since January 1992)
Jerome C. Kohlhepp 53 Executive Vice President, Specialized
Lending (Since 1994)
Mark J.Masuhr 55 Executive Vice President,
Commercial Products (Since December 1998)
David M. Moffett 46 Vice Chairman and Chief Financial Officer
(Since September 1993)
Ronald E. Roder 50 Executive Vice President, Information
Services (Since December 1988)
Stephen E. Smith 51 Executive Vice President, Human Resources
(Since 1995)
Mary Ellen Stanek 42 President and Chief Executive Officer,
Firstar Investment Research and Management
Company (Since April 1994)
Patricia A. Wesner 45 Executive Vice President, Credit Card/
Debit Card (Since December 1998)
Jay B. Williams 47 Executive Vice President, Sales and
Marketing (Since December 1998)
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Notice of the 1999 Annual Meeting and Proxy Statement filed
pursuant to Regulation 14A is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Notice of the 1999 Annual Meeting and Proxy Statement filed
pursuant to Regulation 14A is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Notice of the 1999 Annual Meeting and Proxy Statement filed
pursuant to Regulation 14A is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)1. Financial Statements
The following financial statements of Firstar are incorporated
by reference from pages 34 to 58 of the 1998 Annual Report to
Shareholders.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)2. Financial Statement Schedules
All financial statement schedules have been included in the
consolidated financial statements or are either not applicable
or not significant.
(a)3. Exhibits
3.1 Articles of Incorporation of Firstar Corporation
(incorporated by reference to Exhibit 3.1 of the
Registration Statement No. 333-64099 of Firstar)
3.2 By-Laws of Firstar Corporation (incorporated by
reference to Exhibit 3.2 of the Registration
Statement No. 333-64099 Firstar)
4.1 Preferred Shares Purchase Rights Plan of Firstar
Corporation (incorporated by reference to Exhibit 4.1
of Form 8-K/A dated November 20, 1998 of Firstar)
10.1 1986 Stock Incentive Plan(previously filed as an
exhibit to Star Banc Corporation's Registration
Statement No. 33-9494 and incorporated by reference)
10.2 Amended 1991 Stock Incentive Plan (previosly filed
as an exhibit to Star Banc Corporation's 1993 Proxy
Statement and incorporated by reference)
10.3 1987 Deferred Compensation Plan (previously filed as an
exhibit to Star Banc Corporation's Registration Statement
No. 33-10085 and incorporated by reference)
10.4 1996 Stock Incentive Plan (previously filed as an exhibit
to Star Banc Corporation's 1996 Proxy Statement and
incorporated by reference)
10.5 Severence and Employment Agreements of Messrs. Fitzsimonds
and Becker (incorporated by reference to Exhibits 10.1
and 10.2 of the Registration Statement No. 333-64099
of Firstar)
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<PAGE>
10.6 Severence and Employment Agreements of Mr. Grundhofer
13. 1998 Annual Report to Shareholders
21. Subsidiaries of Firstar Corporation
23. Consent of Independent Auditors
24. Powers of Attorney
27. Financial Data Schedule
Firstar will file with the Commission its long-term debt
indentures as exhibits upon request. Copies of exhibits
may be obtained at a cost of 30 cents per page upon
written request to the chief financial officer.
(b) A Form 8-K dated November 20, 1998 was filed relating to
the completed merger of Star Banc Corporation and Firstar
Corporation.
A Form 8-K/A dated November 20, 1998 was filed relating to the
adoption of the Preferred Shares Purchase Plan of Firstar
A Form 8-K dated March 9, 1999 was filed relating to the change
of Firstar's independent public accountants, the announcement of
a three-for-one stock split and the announcement of a stock
buyback plan.
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<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, duly authorized as
of March 22, 1999.
FIRSTAR CORPORATION
/s/ Jerry A. Grundhofer
------------------------
Jerry A. Grundhofer
President, Chief Executive
Officer and Director
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 indicated as of March 22, 1999.
/s/ Jerry A. Grundhofer /s/ Roger L. Fitzsimonds
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Jerry A. Grundhofer Roger L. Fitzsimonds
President, Chief Executive Chairman and Director
Officer and Director
/s/ David M. Moffett /s/ James D. Hogan
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David M. Moffett James D. Hogan
Vice Chairman and Chief Senior Vice President
Financial Officer and Controller
DIRECTORS
Paul M Baker*
Michael E. Batten*
James R. Bridgeland, Jr.*
Laurance L. Browning, Jr.*
Victoria B. Buyniski*
Robert C. Buchanan*
Samuel M. Cassidy*
George M. Chester, Jr*
V. Anderson Coombe*
John C. Dannemiller*
James L. Forbes*
David B. Garvin*
J. P. Hayden, Jr*
Joe F. Hladky*
Roger L. Howe*
Thomas J. Klinedinst, Jr.*
William H. Lacy*
Sheldon B. Lubar*
Kenneth P. Manning*
Daniel F. McKeithan, Jr.*
Charles S. Mechem, Jr.*
Daniel J. Meyer*
David B. O'Maley*
Robert J. O'Toole*
O'dell M. Owens, M.D.,M.P.H.*
Thomas E. Petry*
Judith D. Pyle
John J. Stollenwerk*
Oliver W. Waddell*
William W. Wirtz
*By: /s/ Jerry A. Grundhofer
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Jerry A. Grundhofer
Attorney-in-fact
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EXHIBIT 10.6
EMPLOYMENT AGREEMENT
AGREEMENT by and between Firstar Corporation (f/k/a Firstar
(WI) Corporation), a Wisconsin corporation (the "Company") and Jerry A.
Grundhofer (the "Executive"), dated as of the 20th day of November,
1998.
1. Certain Definitions. The "Effective Date" shall mean
the first date after the date hereof on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the
contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date
on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i)
was at the request of a third party who has taken steps reasonably
calculated to effect a Change of Control or (ii) otherwise arose in
connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
2. Change of Control. For the purpose of this Agreement, a
"Change of Control" shall mean:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 35% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisi-
tion directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incum-
bent Board shall be considered as though such individual were a member
of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board; or
<PAGE>
(c) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Out-
standing Company Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of the Company
or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 35% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement,
or of the action of the Board, providing for such Business Combination;
or
(d) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to
continue the Executive in its employ, and the Executive hereby agrees to
remain in the employ of the Company subject to the terms and conditions
of this Agreement, for an initial period commencing on the date hereof
and ending on the third annual anniversary of such date (the "Employment
Period"). On the first annual anniversary of the date of this Agreement
and on each annual anniversary of the date of this Agreement thereafter,
the Employment Period shall be extended automatically for an additional
one-year period unless either party gives written notice to the other
(the "Non-Renewal Notice") not less than 30 days prior to any such
anniversary that the Employment Period shall not thereafter renew or be
extended automatically, in which case the Employment Period shall expire
on the annual anniversary of the date of this Agreement that is the
scheduled date of expiration of the Employment Period on the date such
Non-Renewal Notice is given; provided, however, that the Employment
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Period shall not extend beyond, and shall in all events expire on the
day immediately following the date of the Executive's 65th birthday.
Notwithstanding the above, upon a Change of Control, if the Executive is
still employed by the Company, the Employment Period shall be extended
until the third anniversary of the Effective Date, or if the Executive
is still employed by the Company but the Employment Period has
terminated prior to the Change of Control, a new three year Employment
Period shall commence upon a Change of Control; provided, however, that
the Employment Period shall not extend beyond, and shall in all events
expire on the day immediately following the date of the Executive's 65th
birthday.
4. Terms of Employment. (a) Position and Duties. (i)
During the Employment Period, the Executive shall be President and Chief
Executive Officer of the Company and, in such capacity, the Executive
shall be responsible for the strategic direction and operations of the
Company, and shall serve on the Company's Board of Directors and shall
have such other duties, responsibilities and authority as shall be
consistent therewith. The Executive shall also be Chairman, President
and Chief Executive Officer of Star Bank, National Association and
Firstar Bank, Milwaukee, N.A. and shall serve on their respective Boards
of Directors. In addition to the above, the Executive shall become
Chairman of the Company upon the earlier of June 1, 2000 or termination
of Mr. Roger Fitzsimonds' employment with the Company.
(ii) During the Employment Period, and excluding any
periods of vacation and sick leave to which the Executive is entitled,
the Executive agrees to devote full attention and time during normal
business hours to the business and affairs of the Company and to use the
Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it
shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance
with this Agreement. It is expressly understood and agreed that to the
extent that any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such activities
(or the conduct of activities similar in nature and scope thereto)
subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Executive's responsibilities to
the Company.
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(b) Compensation. (i) Base Salary. During the Employment
Period, the Executive shall receive an annual base salary ("Annual Base
Salary") of $800,000 until December 31, 1998 and $850,000 commencing
January 1, 1999 and thereafter until adjusted following any review of
the Annual Base Salary as hereinafter provided. The Annual Base Salary
shall be paid in equal monthly installments. During the Employment
Period, the Annual Base Salary shall be reviewed at least every 12
months. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement.
Annual Base Salary shall not be reduced below $850,000 or after any such
increase and the term Annual Base Salary as utilized in this Agreement
shall refer to Annual Base Salary as so increased.
(ii) Annual Bonus. In addition to Annual Base Salary,
the Executive shall be awarded, for each fiscal year ending during the
Employment Period, an annual bonus (the "Annual Bonus") pursuant to the
Company's annual incentive plans, pro rated in the case of a bonus for
any year during which the Executive was employed for less than 12
months; provided, however, after the Effective Date, the Annual Bonus
shall be no less than 100% of the Executive's Annual Base Salary (the
"Minimum Bonus"). Each such Annual Bonus shall be paid no later than
the end of the third month of the fiscal year next following the fiscal
year for which the Annual Bonus is awarded, unless the Executive shall
elect to defer the receipt of such Annual Bonus. For the 1999 fiscal
year, the Executive's target bonus for achieving target performance
levels under the Company's 1999 Executive Bonus Plan shall be 100% of
his 1999 Annual Base Salary, and his maximum bonus under such plan shall
be 200% of his 1999 Annual Base Salary. During the Employment Period,
the target and maximum Annual Bonus levels shall be reviewed at least
every 12 months. Any increase in such levels shall not serve to limit
or reduce any other obligation to the Executive under this Agreement and
the target and maximum Annual Bonus levels shall not be lowered after
any such increase and shall not be less than 100% and 200% of the
Executive's Annual Base Salary, respectively.
(iii) Stock Awards. On the date hereof, as part of
the Executive's compensation for the 1999 fiscal year, the Executive and
the Company shall enter into a separate written agreement providing for
the immediate grant to the Executive of a nonqualified stock option to
acquire 180,000 shares of the Company's common stock pursuant to the
terms of the Company's Stock Incentive Plan (the "Initial Option"), and
further providing that the Initial Option generally shall vest and
become exercisable in four equal annual installments on each of the
first four anniversaries of its date of grant, all as more particularly
provided in such agreement. On the date hereof, the Executive and the
Company shall enter into a separate written agreement providing for the
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immediate grant to the Executive of an additional nonqualified stock
option to acquire 200,000 shares of the Company's common stock pursuant
to the terms of the Company's Stock Incentive Plan (the "Performance
Option"), and further providing that the Performance Option generally
shall vest and become exercisable upon the fifth anniversary of the date
of grant of the Performance Option, all as more particularly provided in
such agreement. The agreement granting and governing the Initial Option
and the agreement granting and governing the Performance Option shall
also include provisions for accelerated vesting in the event of (1)
Executive's death or Disability, (2) any termination of Executive's
employment other than a termination by the Company for Cause or a
termination by Executive without Good Reason, or (3) a Change of
Control.
For each of the 2000 fiscal year and the 2001 fiscal year of
the Employment Period, the Executive shall be granted additional stock
incentive awards so that Executive's total direct compensation (Annual
Base Salary plus target Annual Bonus plus long-term incentives) is
maintained at approximately the 75th percentile of the total direct
compensation of chief executive officers at peer financial institutions
(which peers shall be selected based on comparable market capitalization
or comparable asset size or both, as determined by the Company's
independent compensation consultants and accepted by the Company's Board
of Directors). In each year of the Employment Period subsequent to the
2001 fiscal year, the Board of Directors shall have the discretion to
grant additional stock incentive awards commensurate with its assessment
of the Executive's and the Company's performance and prevailing levels
of market compensation.
(iv) Incentive, Savings and Retirement Plans. During
the Employment Period, the Executive shall be eligible to participate in
all incentive, savings and retirement plans, practices, policies and
programs applicable generally to other peer executives of the Company
and its affiliated companies. The Executive shall participate in, and
shall be fully vested in his benefit under the Company's Non-Qualified
Retirement Plan (the "NQRP") under which the Executive shall be given
service credit for his service with BankAmerica Corporation, Security
Pacific Corporation and Wells Fargo N.A. (together, the "Prior
Employers"), provided that the Company's obligation under the NQRP shall
be offset by any pension benefits to which the Executive is entitled
from the Prior Employers, provided further that after the Effective Date
in no event shall such plans, practices, policies and programs provide
the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any,
that such distinction is applicable), savings opportunities and
retirement benefit opportunities, in each case, less favorable, in the
aggregate, than the most favorable of those provided by the Company and
its affiliated companies for the Executive under such plans, practices,
- 5 -
<PAGE>
policies and programs as in effect at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the Effective Date
to other peer executives of the Company and its affiliated companies,
after taking into account the difference in age between the Executive
and the peer executives. For purposes of calculating the Executive's
supplemental pension benefit under the Company's NQRP, the amount of the
Annual Bonus used in computing final average pay under such plan shall
be the greater of (i) the Executive's target bonus under the Company's
Executive Bonus Plan, or (ii) the Annual Bonus actually earned by the
Executive.
(v) Welfare Benefit Plans. During the Employment
Period, the Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies and programs provided
by the Company and its affiliated companies including, without
limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable gener-
ally to other peer executives of the Company and its affiliated
companies, provided that after the Effective Date in no event shall such
plans, practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for
the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive,
those provided generally at any time after the Effective Date to other
peer executives of the Company and its affiliated companies. For
purposes of determining eligibility for retiree medical benefits
provided by the Company, the Executive shall be treated as though he is
at least age 55 and has at least 10 years of service with the Company.
(vi) Expenses. During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable business expenses incurred by the Executive.
(vii) Fringe Benefits. During the Employment Period,
the Executive shall be entitled to fringe benefits, including, without
limitation, tax and financial planning services, payment of club dues,
and a monthly car allowance of $1,000, net to the Executive after giving
effect to (x) all income taxes payable by Executive that are
attributable to such allowance, and (y) any benefits that result from
the deductibility by the Executive of any such taxes.
(viii) Vacation. During the Employment Period, the
Executive shall be entitled to four weeks of paid vacation.
5. Termination of Employment. (a) Death or Disability.
The Executive's employment shall terminate automatically upon the
Executive's death during the Employment Period. If the Company
determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of
Disability set forth below), it may give to the Executive written notice
in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's
employment with the Company shall terminate effective on the 30th day
after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" shall
mean the absence of the Executive from the Executive's duties with the
Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is
determined to be total and permanent by a physician selected by the
Company or its insurers and acceptable to the Executive or the
Executive's legal representative.
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive
to perform substantially the Executive's duties with the
Company or one of its affiliates (other than any such
failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance
is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically
identifies the manner in which the Board or Chief Executive
Officer believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal
conduct or gross misconduct which is materially and
demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's action or omission was in the best interests
of the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by the Executive in good faith and in the
best interests of the Company. The cessation of employment of the
Executive shall not be deemed to be for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of a majority of the entire membership
of the Board at a meeting of the Board called and held for such purpose
(after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii)
above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be
terminated by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's position (including
status, offices, titles and reporting requirements), au-
thority, duties or responsibilities as contemplated by
Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position,
authority, duties or responsibilities;
(ii) any failure by the Company to comply with any of
the provisions of Section 4(b) of this Agreement;
(iii) the Company's requiring the Executive to be
based at any office or location after the Effective Date
other than where the Executive was located immediately prior
to the Effective Date other than in connection with a change
of the Company's headquarters if the Executive is relocated
to such headquarters, or, after the Effective Date, the
Company's requiring the Executive to travel on Company
business to a substantially greater extent than required
immediately prior to the Effective Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted
by this Agreement; or
(v) any failure by the Company to comply with and
satisfy Section 11(c) of this Agreement.
Notwithstanding the above, "Good Reason" shall exclude an isolated,
insubstantial and inadvertent action or failure to act not taken or
occurring in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the
Executive for any reason during the 30-day period immediately following
the first anniversary of the Effective Date shall be deemed to be a ter-
mination for Good Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company
for Cause, or by the Executive for Good Reason, shall be communicated by
Notice of Termination to the other party hereto given in accordance with
Section 12(b) of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) to
the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt
of such notice, specifies the termination date (which date shall be not
more than thirty days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination
any fact or circumstance which contributes to a showing of Good Reason
or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or by
the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date
on which the Company notifies the Executive of such termination and
(iii) if the Executive's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good
Reason; Other Than for Cause, Death or Disability. If, during the
Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall
terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump
sum in cash within 30 days after the Date of Termination the
aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base
Salary through the Date of Termination to the extent
not theretofore paid, (2) the product of (x) the
higher of (I) the Minimum Bonus and (II) the Annual
Bonus paid or payable, including any bonus or portion
thereof which has been earned but deferred (and
annualized for any fiscal year consisting of less than
twelve full months or during which the Executive was
employed for less than twelve full months), for the
most recently completed fiscal year during the
Employment Period, if any (such higher amount being
referred to as the "Highest Annual Bonus") and (y) a
fraction, the numerator of which is the number of days
in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and
(3) any compensation previously deferred by the
Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1), (2), and (3)
shall be hereinafter referred to as the "Accrued
Obligations"); and
B. the amount equal to the product of (1) three
and (2) the sum of (x) the Executive's Annual Base
Salary and (y) the Highest Annual Bonus; and
C. if the Date of Termination is on or after
the Effective Date, an amount equal to the difference
between (a) the actuarial equivalent of the benefit
(utilizing actuarial assumptions no less favorable to
the Executive than those in effect under the Company's
qualified defined benefit retirement plan (the
"Retirement Plan") immediately prior to the Effective
Date) under the Retirement Plan and any excess or
supplemental retirement plan in which the Executive
participates (together, the "SERP") which the
Executive would receive if the Executive's employment
continued for three years after the Date of
Termination assuming for this purpose that all accrued
benefits are fully vested, and, assuming that the
Executive's compensation in each of the three years is
that required by Section 4(b)(i) and Section 4(b)(ii),
and (b) the actuarial equivalent of the Executive's
actual benefit (paid or payable), if any, under the
Retirement Plan and the SERP as of the Date of Ter-
mination;
(ii) all stock options, restricted stock and other
stock-based compensation shall become immediately exer-
cisable or vested, as the case may be;
(iii) for three years after the Executive's Date of
Termination, or such longer period as may be provided by the
terms of the appropriate plan, program, practice or policy,
the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would
have been provided to them in accordance with the plans,
programs, practices and policies described in Section
4(b)(v) of this Agreement if the Executive's employment had
not been terminated or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated
companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other wel-
fare benefits described herein shall be secondary to those
provided under such other plan during such applicable period
of eligibility. For purposes of determining eligibility
(but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be
considered to have remained employed until three years after
the Date of Termination and to have retired on the last day
of such period;
(iv) the Company shall, at its sole expense as
incurred, provide the Executive with outplacement services
the scope and provider of which shall be selected by the
Executive in his sole discretion; and
(v) to the extent not theretofore paid or provided,
the Company shall timely pay or provide to the Executive any
other amounts or benefits required to be paid or provided or
which the Executive is entitled to receive under any plan,
program, policy or practice or contract or agreement of the
Company and its affiliated companies (such other amounts and
benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this
Agreement shall terminate without further obligations to the Executive's
legal representatives under this Agreement, other than for payment of
Accrued Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the Executive's estate
or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other
Benefits after the Effective Date, the term Other Benefits as utilized
in this Section 6(b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive,
benefits at least equal to the most favorable benefits provided by the
Company and affiliated companies to the estates and beneficiaries of
peer executives of the Company and such affiliated companies under such
plans, programs, practices and policies relating to death benefits, if
any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive's
estate and/or the Executive's beneficiaries, as in effect on the date of
the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated
by reason of the Executive's Disability during the Employment Period,
this Agreement shall terminate without further obligations to the
Executive, other than for payment of Accrued Obligations and the timely
payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination. With respect to the provision of Other Benefits after
the Effective Date, the term Other Benefits as utilized in this Section
6(c) shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at
least equal to the most favorable of those generally provided by the
Company and its affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices and policies
relating to disability, if any, as in effect generally with respect to
other peer executives and their families at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to
the Executive and/or the Executive's family, as in effect at any time
thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's
employment shall be terminated for Cause during the Employment Period,
this Agreement shall terminate without further obligations to the
Executive other than the obligation to pay to the Executive (x) his
Annual Base Salary through the Date of Termination, (y) the amount of
any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the
Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other
Benefits. In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of
Termination. Upon a termination of the Executive's employment for Cause
by the Company or by the Executive without Good Reason, the Executive
shall forfeit all stock options that are not vested on the Date of
Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future
participation in any plan, program, policy or practice provided by the
Company or any of its affiliated companies and for which the Executive
may qualify nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with
the Company or any of its affiliated companies. Amounts which are
vested benefits or which the Executive is otherwise entitled to receive
under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance
with such plan, policy, practice or program or contract or agreement
except as explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others. In no event shall
the Executive be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Executive
under any of the provisions of this Agreement and such amounts shall not
be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law,
all legal fees and expenses which the Executive may reasonably incur as
a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee of
performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"); provided that the Company
shall have no such obligation if it is determined by a court that the
Company was not in breach of the Agreement and that the Executive's
claims were not made in good faith.
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary not-
withstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive
(whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 9) (a "Payment")
would be subject to the excise tax imposed by Section 4999 of the Code
or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
the Executive of all taxes and any benefits that result from the
deductibility by the Executive of such taxes (including, in each case,
any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all
determinations required to be made under this Section 9, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by KPMG Peat Marwick or such other
certified public accounting firm as may be designated by the Executive
(the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business
days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the Change of Control, the
Executive shall appoint another nationally recognized accounting firm to
make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be
paid by the Company to the Executive within five days of the receipt of
the Accounting Firm's determination. Any determination by the Account-
ing Firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code
at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have
been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the
event that the Company exhausts its remedies pursuant to Section 9(c)
and the Executive thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by
the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in
order effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim; provided, however,
that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and ex-
penses. Without limitation on the foregoing provisions of this Section
9(c), the Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim and sue for
a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis from any Excise Tax or income
tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable year
of the Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect
to which a Gross-Up Payment would be payable hereunder and the Executive
shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(a) or 9(c), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 9(c)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
10. Confidential Information; Covenant Not to Compete.
(a) Confidential Information. The Executive shall hold in
a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or
any of its affiliated companies, and their respective businesses, which
shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which
shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone
other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a
basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement.
(b) Covenant Not to Compete.
A. Executive agrees that for a period of one (1)
year following his termination of employment with the
Company for Cause or other than Good Reason, he will not in
any way engage in, represent, furnish consulting services
to, be employed by, or have any interest in any "Banking
Institution" (as hereinafter defined) that has headquarters
in Ohio or Wisconsin or states contiguous to Ohio or
Wisconsin. Further, Executive shall not (1) induce or
attempt to induce any person or entity which is a customer
of the Company or any of its affiliates as of the date of
termination of Executive's employment to cease or reduce
doing business with the Company or any of its affiliates, or
(2) solicit or endeavor to cause any employee of the Company
or its affiliates to leave the employ of the Company or any
of its affiliates. Notwithstanding the foregoing, the
Executive shall not be prevented from owning up to three
percent (3%) of the outstanding stock of any publicly traded
company which is a Banking Institution.
B. As used herein, the term "Banking Institution"
means any national or state chartered bank, bank holding
company, any other institution that engages as its principal
activity in taking deposits or making loans, or any
affiliates of any such institutions.
C. Executive agrees that this covenant is
reasonable with respect to its duration, geographic area and
scope, and acknowledges that compliance with Section 10(b)
is necessary to protect the business and goodwill of the
Company.
11. Successors. (a) This Agreement is personal to the
Executive and without the prior written consent of the Company shall not
be assignable by the Executive otherwise than by will or the laws of
descent and distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by
and construed in accordance with the laws of the State of Ohio, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no force
or effect. This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Jerry A. Grundhofer
c/o Wachtell, Lipton, Rosen & Katz
51 W. 52 Street
New York, New York 10019
Attention: Adam D. Chinn, Esq.
If to the Company:
Firstar Corporation
777 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Director-Human Resources
or to such other address as either party shall have furnished to the
other in writing in accordance herewith. Notice and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability off any
other provision of this Agreement.
(d) The Company may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of
the Executive to terminate employment for Good Reason pursuant to
Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of
this Agreement.
13. No Prohibited Payments. Notwithstanding anything in
this Agreement to the contrary, the Company shall not make any payment
to the Executive which, according to the opinion of the Company's
outside counsel, would violate Section 2523(k) of the Comprehensive
Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990
(codified at 12 U.S.C. 1828(k)), or any rules or regulations
promulgated thereunder.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of
Directors, the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
JERRY A. GRUNDHOFER
/s/ Jerry A. Grundhofer
FIRSTAR CORPORATION
By /s/ Laurance L. Browning, Jr.
---------------------------------------
Laurance L. Browning, Jr.
Chairman, Compensation Committee
By /s/ Jennie P. Carlson
---------------------------------------
Jennie P. Carlson
Senior Vice President, General
Counsel, and Secretary
EXHIBIT 13
FIRSTAR
SERVICE GUARANTEED
ANNUAL REPORT 1998
FIRSTAR
<PAGE>
CONTENTS
EARNINGS GROWTH STRATEGIES
2 Graphs of Selected Financial Results
3 Financial Highlights
4 Letter to Shareholders
6 1998 Highlights
15 Consolidated Six-Year Selected Financial Data
FINANCIAL SECTION
16 Management's Discussion and Analysis
17 Results of Operations
24 Balance Sheet
34 Consolidated Financial Statements
38 Notes to Consolidated Financial Statements
58 Responsibility for Financial Statements
of Firstar Corporation
58 Report of Independent Public Accountants
59 Corporate Directors
60 Office of the CEO and Managing Committee
61 Corporate Information
THE FIVE STAR SERVICE GUARANTEE
Firstar guarantees we will deliver on core service standards which are
most important to our customers, such as quick response; questions
answered promptly; accurate and timely statements and other information;
availability of ATM machines; timely loan application decisions....plus
many others. Each line of business has a customized Five Star Service
Guarantee for its customers. If Firstar ever fails to deliver on any part
of its guarantee, the customer's account is credited with the specified
amount of payment, from a minimum of $5.00 up to $250.00.
<PAGE>
SOME BANKS PROMISE GREAT SERVICE . . .
FIRSTAR GUARANTEES IT!
All Firstar employees wear a Firstar "service guaranteed" lapel pin
everyday to tell our customers that quality service is paramount at
Firstar.
FIRSTAR
SERVICE GUARANTEED
<PAGE>
THE NEW FIRSTAR
On November 20, 1998, Star Banc Corporation and Firstar Corporation
announced that their merger of the two bank holding companies had been
completed. The combined company is now called Firstar Corporation and
its common stock trades on the New York Stock Exchange under the ticker
symbol FSR.
FIRSTAR
1998: Star and Firstar merge to form the new Firstar.
1998: Star Banc
:Acquisition of Great Financial in Kentucky
:Acquisition of 49 Bank One branches in Ohio
:Acquisition of Trans Financial in Kentucky and Tennessee
1997: Star Banc
:Internet Banking introduced
1996: Firstar
:American Bancorporation of St. Paul acquisition
Star Banc
:Merge Ohio, Kentucky, and Indiana banks into one
:Five Star Service Guarantee introduced
1995: Firstar
:First Colonial Bankshares acquisition
Star Banc
:Household Bank acquisition in Columbus, Ohio
:Star Banc Finance consumer finance subsidiary founded
:24-Hour Banking System launched
1994: Firstar
:Investor's Bank acquisition
Star Banc
:TransOhio acquisition expands presence in Cleveland
1993: Star Banc
:Ameritrust acquisition in Cleveland
1991: Firstar
:Banks of Iowa acquisition
1989: Firstar
:Name changed to Firstar Corporation
Star Banc
:Corporation reincorporated as Star Banc Corporation
1988: Firstar
:First Wisconsin expands into Minnesota and Arizona
Star Banc
:All subsidiary banks renamed Star Bank
1987: Firstar
:Purchase of first non-Wisconsin bank, DuPage Bank & Trust in
Glen Ellyn, Illinois
1986: Star Banc
:Expansion into Kentucky and Indiana
1974: Firstar
:First Wisconsin builds the tallest office building in the state,
(42 floors), on E. Wisconsin Avenue. Now known as Firstar Center
1973: Star Banc
:Holding company was formed as First National Cincinnati
Corporation
1969: Firstar
:Wisconsin Charge Card is forerunner of MasterCard International;
Firstar is one of four MasterCard founders
1951: Star Banc
:First branches opened
1928: Firstar
:First Wisconsin merges with the historic Second Ward Savings Bank
founded by August Uihlein, CEO of Schlitz Brewery
1919: Firstar
:First National Bank and Wisconsin National Bank combine. Name
is changed to First Wisconsin Bank of Milwaukee
1914: Firstar
:New 16-story building at N. Water and E. Mason Streets becomes
new home to First National Bank
1863: Firstar
:Farmers and Millers Bank becomes the first bank in Wisconsin to
apply for a national charter
:Farmers and Millers Bank reorganizes as the First National Bank
of Milwaukee. Organizers include brewing tycoon Frederick Pabst
Star Banc
:The First National Bank of Cincinnati founded on July 13, 1863,
under National Charter Number 24, with $1 million in
capitalization
1853: Firstar
:Farmers and Millers Bank opens in Milwaukee with $50,000 in
capital
<PAGE>
FSR
CORPORATE PROFILE
Firstar Corporation, a multi-state bank holding company, incorporated
in Wisconsin, is the largest publicly held company headquartered in
Wisconsin.
Through its subsidiary full-service banks, Firstar offers a comprehensive
line-up of banking and related financial services to individuals,
businesses, financial institutions, non-profit organizations and
government entities in its primary market areas. Firstar currently
operates more than 710 banking offices in Ohio, Kentucky, Indiana,
Tennessee, Wisconsin, Iowa, Minnesota, Illinois, Arizona and Florida.
In addition, Firstar offers other financial services through its non-
bank subsidiaries, including its wholly owned consumer finance company,
Firstar Finance, Inc. The corporation's FIRMCO subsidiary provides
investment vehicles and investment management services
IN 1998, STAR BANC CORPORATION OF CINCINNATI AND FIRSTAR OF MILWAUKEE
MERGED TO FORM THE NEW FIRSTAR.
Firstar Corporation is the fourth largest banking company in the Midwest
and the 21st largest in the nation. The corporation was founded in 1853
and operates under National Bank Charter Number 24, granted in 1863. In
1973, the bank holding company was formed. In 1998, Star Banc Corporation
of Cincinnati and Firstar of Milwaukee merged to form the new Firstar.
<PAGE>
EXPECTATIONS OF THE MERGER
Enhance return to shareholders
Achieve immediate and meaningful accretion to earnings
Accelerate earnings-per-share growth rate
Provide greater value and increased levels of service to our customers
Improve operating performance in all key measurements
Accelerate proven revenue growth strategies across expanded Midwestern
footprint
Achieve substantial operating efficiencies
Strenthen loan mix
Strengthen capital position
EARNINGS GROWTH STRATEGIES
The new Firstar's earnings growth strategies do not change from year to
year; they are fundamental to our continued success, and we have
committed ourselves to managing long-term in the context of these
strategies. They have worked for Firstar and mirror strengths of the
corporation. In 1998, we used our mergers and acquisitions strategy
to implement the other four growth strategies.
- - Profitable Growth of Business Lines
- - Balance Sheet Management
- - Capital Management
- - Cost Management
- - Mergers and Acquisitions
<PAGE>
FIVE YEAR BAR CHARTS OF NET INCOME, EPS, DIVIDENDS, AVERAGE
BALANCES AND VARIOUS RATIOS:
1994 1995 1996 1997 1998
Net Income* $370.8 $408.5 $459.8 $499.2 $604.6
(in millions of dollars)
Diluted Earnings Per Share* $1.70 $1.86 $2.14 $2.36 $2.74
(in dollars)
Common Dividends Declared Per Share $0.47 $0.53 $0.63 $0.80 $0.99
(in dollars)
Average Shareholders' Equity to
Average Total Assets 8.52% 8.27% 8.28% 8.25% 9.25%
(in percents)
Return on Average Common Equity* 16.64% 16.93% 18.16% 19.16% 17.89%
(in percents)
Return on Average Assets* 1.41% 1.39% 1.50% 1.58% 1.66%
(in percents)
Net Interest Margin 4.77% 4.52% 4.63% 4.66% 4.46%
(in percents)
Efficiency Ratio* 60.66% 59.05% 56.64% 55.44% 55.19%
(in percents)
Market Capitalization $2.6 $4.2 $6.5 $11.8 $20.3
(in billions of dollars)
Average Shareholders' Equity $2.25 $2.43 $2.54 $2.61 $3.38
(in billions of dollars)
Average Total Assets $26.39 $29.33 $30.67 $31.63 $36.52
(in billions of dollars)
Dividend Payout Ratio* 35.68% 37.79% 37.50% 39.17% 44.88%
(in percents)
* Excluding merger-related charges and nonrecurring items; see Financial
Highlights on facing page. All financial results are pooled results.
FIRSTAR CORPORATION 2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(amounts in thousands except per share data) 1998 % change 1997 % change 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net income $ 430,147 (16.3)% $ 513,894 23.7% $ 415,418
Net interest income, fully taxable equivalent 1,456,075 8.4 1,342,726 4.0 1,291,324
Noninterest income 860,148 20.8 712,043 14.6 621,415
Net revenue 2,316,223 12.7 2,054,769 7.4 1,912,739
Noninterest expenses 1,521,192 35.0 1,126,506 (2.2) 1,152,252
- --------------------------------------------------------------------------------------------------------------
PER SHARE
Basic earnings per common share $ 1.99 (19.8)% $ 2.48 26.5% $ 1.96
Diluted earnings per common share 1.95 (19.8) 2.43 25.9 1.93
Common dividends declared (a) 0.99 23.8 0.80 27.0 0.63
Book value per common share 16.14 21.0 13.34 5.2 12.68
Period-end market value (a) 93.00 62.1 57.38 87.3 30.63
- --------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Total assets $36,524,976 15.5% $31,625,258 3.1% $30,666,581
Earning assets 32,618,681 13.2 28,817,754 3.3 27,885,728
Loans, net of unearned interest 25,027,756 10.9 22,569,767 6.0 21,291,977
Total deposits 26,830,998 13.1 23,723,890 1.3 23,423,081
Total shareholders' equity 3,379,195 29.5 2,609,363 2.7 2,540,314
- --------------------------------------------------------------------------------------------------------------
AT YEAR END
Common shares issued and
outstanding 218,747 205,690 211,252
- --------------------------------------------------------------------------------------------------------------
RATIOS
Return on average assets 1.18% 1.62% 1.35%
Return on average common equity 12.73 19.73 16.40
Average shareholder's equity
to average total assets 9.25 8.25 8.28
Regulatory capital ratios:
Tier 1 risk-based capital 8.92 9.60 10.01
Total risk-based capital 11.01 12.03 12.75
Leverage ratio--average assets 7.52 8.23 7.80
Net interest margin 4.46 4.66 4.63
Noninterest income to net revenue 37.14 34.65 32.49
Efficiency ratio 65.68 54.82 60.24
Net profit margin 18.57 25.01 21.72
- --------------------------------------------------------------------------------------------------------------
EXCLUDING MERGER RELATED CHARGES AND OTHER NONRECURRING ITEMS (b)
Net income $ 604,564 21.1% $ 499,152 8.6% $ 459,769
Noninterest expense 1,278,222 13.5 1,126,506 4.0 1,083,463
Diluted earnings per common share 2.74 16.1 2.36 10.3 2.14
Return on average assets 1.66% 1.58% 1.50%
Return on average common equity 17.89 19.16 18.16
Efficiency ratio 55.19 55.44 56.64
Net profit margin 26.10 24.57 24.04
Net charge-offs $ 103,351 9.1 $ 94,731 19.3 $ 79,379
Net charge-offs to average loans 0.41% 0.42% 0.37%
(a) Per share amount based on historical Star Banc Corporation amounts.
(b) Amounts and ratios are calculated excluding the following nonrecurring items:
Merger-related charges and additional loan loss provision recorded in 1998 for the merger of Star Banc
and Firstar, and the acquisition of Trans Financial, Inc.
A one-time gain on the sale of merchant processing contracts in 1997.
Restructuring charges related to Firstar Forward and the one-time SAIF special assessment in 1996.
</TABLE>
BANK WITHOUT BOUNDARIES 3
<PAGE>
FELLOW SHAREHOLDERS:
We are pleased to report that 1998 was an excellent year financially, as
well as a year of great change within your corporation. With change comes
opportunity, and the new Firstar is positioned to maximize the
opportunities of the evolving financial services industry.
CORPORATION GROWS THROUGH ACQUISITIONS
The size of your corporation has doubled through internal growth and
important acquisitions in growth markets. We made several important
acquisitions in Ohio, Kentucky and Tennessee and completed
the strategic merger that created the new Firstar, the nation's 21st
largest banking company with assets of $38.5 billion and operations in 10
states.
On November 20, 1998, we completed the largest merger in the company's
history, combining Star Banc Corporation, headquartered in Cincinnati, and
Firstar Corporation of Milwaukee.
EXPECTATIONS OF THE NEW FIRSTAR
We have the highest expectations for this new corporation. The merger pact
was struck for all the right reasons - for the benefit of our
shareholders, our customers and our communities. Chief among these reasons
is our certainty that as a combined organization, the new Firstar will
perform better than either the former Star Banc Corporation or the former
Firstar could have done alone.
The merger is built on a combination of revenue enhancements and cost
synergies. The benefits of the merger are not predicated on cost savings
alone, but also on building our businesses.
BAR CHART OF TOTAL SHAREHOLDERS RETURNS
3 years 2 years 1 year
Firstar 70.3% 77.1% 64.4%
S&P Regional Bank Index 28.0 28.7 10.4
S&P 500 28.1 30.9 28.5
We can now export a highly developed Consumer Banking business across ten
states. Our asset management businesses together will position us among the
leaders in the industry. And both Star and Firstar had the premier
Commercial Banking businesses in their respective markets for small and
middle market companies. In all lines of business, we will introduce
innovations in delivery, enhancements to products and extensions of our
Five Star Service Guarantee.
Our earnings growth strategies have not changed during this year. During
1998, the spotlight was on executing our strategy of mergers and
acquisitions, while pursuing our other strategies as well. There is nothing
mysterious or secretive about the way we manage this business. In fact, it
is pretty basic: we will continue to increase earnings and earnings per
share through increased revenues from our major lines of business; we will
continue to reduce and control expenses; our balance sheet management and
capital management policies are directed at earnings growth and shareholder
value.
OPPORTUNITY TO GROW OUR BUSINESSES
This merger provides the opportunity to expand a franchise that was already
among the industry's premier performers. We have said many times, and it
remains true through the building of the new Firstar, that bigger for the
sake of size alone is not better; only growing to become a better company
is better. The Firstar transaction meets that criteria on all fronts.
The new Firstar is now the fourth largest banking company in the Midwest
with substantial market share in several states. Those are excellent
positions from which to strengthen our businesses even further. Our
internal operating momentum is strong, and the energy and excitement
generated by the recent merger will only accelerate that momentum.
FINANCIAL RESULTS FOR 1998
The year 1998 was a good year for the new Firstar in terms of our first
reported combined financial results. Although the results are good, they
are not yet nearly good enough. During 1999 we will increase revenues and
reduce and control expenses, the keys to success in this business and the
key to increasing value to our shareholders.
FIRSTAR CORPORATION 4
<PAGE>
Before merger-related charges, net income for the year 1998 reached a
record $604.6 million, a 21.1 percent increase over 1997. Diluted earnings
per share, before merger-related charges, was $2.74 per share, compared to
$2.36 per share in 1997, a 16.1 percent increase. Other financial
highlights and key results can be found on pages 2 and 3 of this report.
Although we have achieved some cost savings in the short time since the
merger of Star Banc and Firstar, significant additional savings are
expected during 1999 as the integration of the two organizations continues.
Firstar's combined financial results were very good. But they do not
reflect the level of performance that Star Banc achieved as a separate
organization, and we will be managing the new Firstar to bring results into
line with past Star Banc Corporation results, and then exceed them. The
year 1999 will be spent improving results in all key measurement areas.
We are expanding our incentive compensation Pay for Performance program
throughout the new combined corporation. Pay for Performance mirrors our
increasing earnings and earnings per share philosophy, and the program is
tied to sales, service and other objective measurements. Only when the
corporation meets its goals in terms of earnings per share for our
shareholders is Pay for Performance activated.
PROGRESS ON THE MERGER
The management of the merger process is on track, and it is proceeding as
we anticipated. A very strong management structure is in place and all
major staffing decisions have been made and filled with top quality experts
who know their businesses. We have selected the critical information
systems required to support all of our operations with an eye to future
capabilities as well as today's needs. Systems conversions are being made
now and will continue through the summer until the new Firstar is operating
as a single, unified company. Credit policies and procedures have been
standardized and incorporated across the new corporation, and we have
effective customer retention and customer growth sales and marketing
programs already in progress.
SHAREHOLDER RETURNS
During the year 1998, Firstar was recognized by the investment community
for our performance in generating total shareholder returns, which reached
64.4% in 1998, the highest among all banks. You can see a selection of
these rankings and awards on page 14 of this report. We are very proud of
every one; each is another indication that we are fulfilling our promise to
you to manage this company for your benefit.
In December, Firstar Corporation increased the company's quarterly dividend
on common stock by seven cents to $0.30 per share, payable January 15, 1999
to shareholders of record December 31, 1998. The increase in the quarterly
dividend boosted Firstar's total current annual dividend to $1.20 per
common share, compared to the previous annual dividend of $0.92 per common
share. Firstar Corporation has increased its quarterly stock dividend for
27 consecutive years.
Our focus on our shareholders and increasing the return on their investment
in this company has not changed during this year of growth. All of our
strategies and our operational decisions are predicated on increasing
shareholder value.
In this first letter to the shareholders of the new Firstar, we repeat what
has become our guiding principal of management: we put the highest priority
on increasing the value of your investment in Firstar Corporation. It is
the reason we come to work each day.
Sincerely,
/s/ Jerry A. Grundhofer /s/ Roger L. Fitzsimonds
Jerry A. Grundhofer Roger L. Fitzsimonds
President and Chief Chairman
Executive Officer
BANK WITHOUT BOUNDARIES 5
<PAGE>
COMMERCIAL BANKING
Firstar is recognized as a pre-eminent regional commercial bank which
builds long-term relationships with our business customers. Superior
customer service, knowledgeable bankers, market and industry expertise,
rapid response time, and solid credit standards combine to create client
satisfaction. Firstar operates in a broad region of healthy economic
diversity and Firstar's loan portfolios are well-diversified.
PRODUCTS AND SERVICES / DESCRIPTION OF BUSINESS
- -----------------------------------------------
CORPORATE AND MIDDLE MARKET BANKING
Firstar has been a leading commercial banking provider since its
founding in 1853. Firstar is able to meet the needs of all businesses in
our market areas, with a focus on building long-term relationships with
middle market and larger corporate customers.
STRUCTURED CAPITAL - ASSET BASED LENDING
Offers secured and monitored lending products, primarily for
manufacturers, distributors, select retail and service-related
companies. Financing is generally for leveraged buyouts, acquisitions,
growth financing and selective turnarounds.
COMMERCIAL REAL ESTATE
Firstar's Commercial Real Estate portfolio is primarily in-market and
divided evenly between income producing and investor-owned properties.
This is Firstar's largest secured lending business.
EQUIPMENT LEASE FINANCING
Provides secured equipment financing and leases for a wide range of
assets, with separate groups focusing on transportation equipment,
general assets and the high-tech sector. Target segments range from
small businesses to middle market to Fortune 500 companies.
GLOBAL SERVICES
Firstar's Global Services division provides to its clients incomparable
customer service, advanced technological delivery, international
strategic alliances and experienced managers with Firsthand worldwide
knowledge. Firstar's international trade services support the
import/export businesses of our commercial customers, and corporate
banking services are provided to U.S.A.-based subsidiaries of
foreign-owned companies.
TREASURY MANAGEMENT
Firstar Treasury Management offers a full line of cash management
services, competitive prices and superior technology-based delivery.
Services are customized to maximize client efficiency.
FIRSTAR CORPORATION 6
<PAGE>
1998 HIGHLIGHTS
- ---------------
CORPORATE AND MIDDLE MARKET BANKING
Firstar's highly regarded commercial lending capabilities, the expansion
of our markets, superior customer service, depth of experience and the
continued health of the U.S. and Midwest economies resulted in record
loans outstanding to a highly diversified customer base across all
industries.
STRUCTURED CAPITAL - ASSET BASED LENDING
Eclipsed $1 billion in senior secured credit facilities extended to a
variety of businesses. Market coverage now encompasses Midwest,
Southeast and Southwest states.
COMMERCIAL REAL ESTATE
Firstar's Commercial Real Estate Division achieved record loan
production during 1998. Moreover, it continued its solid record of
outstanding credit quality as it focused its lending in stable
Midwestern markets with its strong, relationship-driven borrowers.
EQUIPMENT LEASE FINANCING
The acquisition in August 1998 of Cargill Leasing Corporation expanded
the scope of our lease and equipment finance products, provided national
market presence and servicing capabilities and, together with existing
portfolios, created one of the 20 largest U.S. bank owned leasing and
equipment finance businesses. We reported record new business volumes.
GLOBAL SERVICES
Despite a worldwide volatile economy, we still achieved double digit
increases in revenue due to the successful import/export businesses of
our fine commercial customers in the Midwest. We also saw record foreign
exchange business and increased revenue in our International Corporate
Banking division.
TREASURY MANAGEMENT
Firstar introduced Online Banker, our internet, Java-based platform,
integrating all balance reporting and custom reports. Future phases
include transactions, ACH/wire transfer and image delivery. Treasury
Management revenue increased over 20 percent, including the near
doubling of retail lockbox revenue.
OUTLOOK
- -------
CORPORATE AND MIDDLE MARKET BANKING
As a larger organization due to the merger, with a franchise footprint
across the Midwest, we have the ability to service our customers and
prospects through enhanced products and services and expanded credit
limits, so we are able to accommodate and lead larger credit
relationships.
STRUCTURED CAPITAL - ASSET BASED LENDING
Outlook for this business is very strong given the division's historical
growth trend coupled with its now expanded geographic markets and
seasoned professional lenders.
COMMERCIAL REAL ESTATE
This portfolio now consists of $5.8 billion in loans. Approximately $2.5
billion is owner-occupied and the balance is developer and investor-type
loans. The merger positions the bank well for larger traditional
commercial real estate and construction lending opportunities in 14
significant Midwestern markets.
EQUIPMENT LEASE FINANCING
The ability to provide a broader range of products to our customer base,
the continued growth of business through direct sales to new prospects
and the continued expansion of the economy combine for an excellent
outlook for this business.
GLOBAL SERVICES
Our truly global reach through a network of over 1,000 banks around the
world, the knowledge and depth of our international staff and Firstar's
guaranteed service are effective competitive advantages as we market
international services in our strong Midwestern markets.
TREASURY MANAGEMENT
We will maximize the potential of our 700+ branch network, new vault
locations and wholesale and retail lockbox locations. Expansion of the
Online Banker features continues through 1999, and we will introduce
image delivery of lockbox items. Revenue will increase with our sales
synergy across 10 states.
BANK WITHOUT BOUNDARIES 7
<PAGE>
TRUST AND INVESTMENTS
Firstar offers comprehensive trust and investment management services to
companies and individuals. While the majority of our clients can be
found in the Midwest, Firstar is truly a national provider of trust
services as well.
Firstar Trust and Investments generated over $260 million in noninterest
income or about 30 percent of the corporation's total noninterest income
in 1998. With a three-year revenue growth rate of 15.4 percent, it is
clear that this line of business is meeting the demanding requirements
of our diverse client base.
PRODUCTS AND SERVICES / DESCRIPTION OF BUSINESS
- -----------------------------------------------
PERSONAL TRUST
Personal Trust takes a wealth management approach to meeting client
needs and includes traditional trusts, investment management, and
brokerage services. Personal Trust officers are located in 40 offices
throughout our market areas. Traditional products include portfolio
management and estate planning. Specialized products include off-shore
accounts, asset allocation services and unique services for professional
athletes through our Pro Sports division.
MUTUAL FUND SERVICES/CUSTODY SERVICES
Includes administration, accounting, transfer agent and custody service
to 173 families of funds, second in the nation. We also service 517
funds placing us eighth nationally. Clients can choose full turnkey or
specialized custody services.
INVESTMENT MANAGEMENT
Manages $41 billion in assets for our clients. Our FIRMCO group is a
nationally recognized investment adviser and a top bond manager; its
equity focus is on growth stocks at reasonable valuations. Our Firstar
Capital Management group specializes in both value and growth stocks, as
well as specialized income-oriented investment products. FIRMCO and
Firstar Capital Management are the advisers to the Firstar Funds with $7
billion in 18 funds and the Firstar Stellar Funds with $3 billion in 12
funds.
INSTITUTIONAL TRUST
Focuses on managing pensions, 401(k) retirement plans, endowments and
foundations. Our services include daily valuation internet access and
fund selections from both proprietary funds and national funds.
BROKERAGE
Firstar Investment Services offers investment products through a third
party partnership. 140 investment representatives market mutual funds,
annuities and many other investment products through our branches.
CORPORATE TRUST/STOCK TRANSFER
Acts as Bond Trustee for municipal and corporate bond issues. Our
specialized businesses include structured finance (Student Loans),
mortgage document custody and stock transfer services for our corporate
clients.
PRIVATE BANKING
Works with each client on a one-to-one basis to orchestrate a customized
wealth management plan to meet the client's specific needs and financial
goals. Acts as client's confidential envoy to the bank's full scope of
credit, deposit, international, trust and asset management services.
FIRSTAR CORPORATION 8
<PAGE>
1998 HIGHLIGHTS
- ---------------
PERSONAL TRUST
Record new business, new offices and a strong investment market fueled a
14 percent revenue increase. Traditional personal trust services showed
strong results, as did our more specialized services including LifeCycle
asset allocation. Pro Sports represents clients who play for 23 of the
30 teams in the NFL, nine of the 29 teams in the NBA and nine of the 30
teams in MLB.
MUTUAL FUND SERVICES/CUSTODY SERVICES
Record new business and cross-sell opportunities as a result of the
merger drove revenue 24 percent higher. This business again was the
fastest growing segment of our Trust and Investment group due to
superior technology and outstanding service.
INVESTMENT MANAGEMENT
Assets under management increased 20 percent to $41 billion, and nine
mutual funds, advised by FIRMCO or Firstar Capital Management, are
currently rated either 4- or 5-Star by Morningstar. FIRMCO-managed bond
accounts exceeded their benchmark index for the 13th consecutive year.
INSTITUTIONAL TRUST
Enhanced automation, including internet access, and a wide variety of
investment choices led to record sales and revenue in our retirement
plan services. Foundation and Endowment income increased 20 percent with
outstanding investment performance and attentive service.
BROKERAGE
Sales volume increased 24 percent compared to 1997. Repeat business from
our client base combined with record referrals to create success in
1998.
CORPORATE TRUST/STOCK TRANSFER
Our specialized businesses, including Student Loan debt administration
and mortgage document custody grew at a 25 percent rate and combined
with our traditional stock transfer and bond administration business
lines to achieve another record year.
PRIVATE BANKING
As the market of high-income, high net worth individuals needing
specialized service continued to grow, we reported total loans
increasing 18.9 percent and total deposits increasing 39.1 percent,
reflecting Firstar's superior customer service and commitment to our
clients.
OUTLOOK
- -------
PERSONAL TRUST
We anticipate continued growth as evidenced by record sales volume,
significant prospects and continuing generational wealth transfer
opportunities. Our strong staff and broad distribution channels are
competitive advantages.
MUTUAL FUND SERVICES/CUSTODY SERVICES
This outstanding business should only continue its growth rate, as
underscored by Firstar's increasing market share in an expanding market,
as well as significant growth within our client base.
INVESTMENT MANAGEMENT
Our broad variety of fund offerings designed to meet a wide range of
investment goals, combined with excellent performance records, is now
available throughout all markets of the expanded franchise. The higher
visibility of the funds, with increased resources and a broader market,
make the outlook very favorable.
INSTITUTIONAL TRUST
Excellent outlook as evidenced by record sales in 1998. Our established
reputation for superior on-site training and service, enhanced
automation and a broader investment menu will enable Firstar Trust to
continue our leadership position in this business.
BROKERAGE
The investment program grows in concert with our expanding branch
network. Enhanced products, expanded marketing programs, and more
efficient delivery in 1999 further improve the outlook.
CORPORATE TRUST/STOCK TRANSFER
Firstar's dominant market share allows us to grow and succeed in this
specialized business. Improved automation will enhance both client
service and efficiency during 1999.
PRIVATE BANKING
Future Private Banking strategy remains consistent; we differentiate
ourselves and our service through our "banking privately" approach,
which has resulted in a growing network of clients and referrals in
eight states.
BANK WITHOUT BOUNDARIES 9
<PAGE>
CONSUMER BANKING
At Firstar, customer service and convenience set the standard for the
industry. Firstar delivers on its commitment to define convenience and
service in our market areas. Among the rewards for banking with Firstar
is our multiple distribution channel system; financial products and
services that are easy to use and understand; our exclusive Five Star
Service Guarantee; and new products that meet changing customer needs.
Firstar delivers on its promise as the Bank Without Boundaries through
our exclusive 24-Hour Banking System.
PRODUCTS AND SERVICES / DESCRIPTION OF BUSINESS
- -----------------------------------------------
METROPOLITAN CONSUMER BANKING
In large urban markets, Consumer Banking products and services are
delivered through the coordinated management of major, independent lines
of business, including Consumer Banking, Commercial Banking and Trust &
Investments.
COMMUNITY BANKING
Regional Presidents manage smaller and non-urban markets with local
autonomy in resource allocation, community affairs, business
development, loan approvals and pricing. Firstar's full line of products
and services are made available in these markets.
SMALL BUSINESS BANKING
Provides specialized services for businesses with annual sales up to $5
million throughout all Firstar markets, primarily to businesses with
fewer than 50 employees and borrowing needs less than $500,000.
MORTGAGE BANKING
Provides loan origination services for first mortgages for purchase and
refinancing. Also acts as wholesale buyer of first mortgages from
brokers, smaller banks and credit unions. In addition, provides
originations, processing and loan closings for banks and credit unions
and provides relocation financing for corporate transfers. Among the top
25 mortgage companies in the U.S. with 1998 production exceeding $8
billion.
FIRSTAR CORPORATION 10
<PAGE>
1998 HIGHLIGHTS
- ---------------
METROPOLITAN CONSUMER BANKING
With the Star/Firstar merger, we had the opportunity to extend our
successful Consumer Banking business across a franchise which has
doubled in size. Our In-Store banking network grew by 40 additional
locations.
COMMUNITY BANKING
We introduced our successful Community Banking concept into new markets
in Ohio, Wisconsin and Iowa, plus central and southern Kentucky and
Northern Tennessee following mergers and acquisitions in those areas.
SMALL BUSINESS BANKING
With more than 80 dedicated Small Business banking officers and two
Business Loan Express Centers, Firstar is well positioned to become the
industry leader in a business that provides specialized products and
services to this growing segment. Firstar serves more than 80,000 Small
Business customers.
MORTGAGE BANKING
During 1998, we combined the operations of four strong mortgage
businesses into the new Firstar Mortgage Banking business: those of Star
Banc Corporation, Great Financial, Trans Financial and Firstar
Corporation. This combination created a powerful line of business
operating in 16 states with a loan servicing portfolio of $20 billion
and more than 300 thousand loans.
OUTLOOK
- -------
METROPOLITAN CONSUMER BANKING
Our successful Metropolitan Consumer Banking business has been a
competitive advantage, and it will be a primary focus of the new
Firstar's growth strategy of building our lines of business.
COMMUNITY BANKING
Our Community Banking concept of delivering all Firstar's products and
services in smaller towns and non-urban areas through locally managed
banks, personal attention and community involvement are generating new
business and customer loyalty in these valuable markets.
SMALL BUSINESS BANKING
The potential in our combined markets is virtually limitless, as this is
an underserved segment, and Firstar has the line up of products and
services that can support small business growth and profitability. Our
1999 initiatives will include launching a leasing vendor program,
offering a new PC Banking service and new marketing efforts.
MORTGAGE BANKING
We will maximize the potential of this large mortgage company with an
emphasis on production, exacting management of the profitability
equation and the leadership of an outstanding management team. Our
production strategy is grounded in a sales culture which features
incentive-based compensation; an integrated approach among production
offices, closing and underwriting, and multiple production channels.
BANK WITHOUT BOUNDARIES 11
<PAGE>
EXPANDED DISTRIBUTION SYSTEM
Traditional branches remain the foundation of our growing branch network
where experienced bankers are the link between the customer and all the
services of Firstar. We use the "concierge concept" in which the
branch acts as the liaison between the customer and specialized banking
services.
Non-traditional branches are increasingly important. Non-traditional
branches account for more than 15 percent of our total branches, and
this will grow. Non-traditional branches include In-Store branches in
supermarkets and corporate on-site branches at Procter & Gamble
facilities, hospitals and even world famous Churchill Downs. We also
have branches at retirement centers and at convenience stores or
"C-Stores."
Traditional Branches 595
In-Store Branches 93
Corporate On-Site Branches 12
Retirement Centers 9
C-Stores 2
Video Banking Centers 2
ATMs 1,400+
Internet/PC Banking 50,000
Mobile ATMs 2
ALTERNATIVE DELIVERY
Firstar offers a network of specialized delivery points utilizing some
of the most advanced automated features and functions available in the
industry.
The industry's most fully functional ATMs dispense stamps, account
statements, phone minutes, stop payment orders, check reorders and more.
Express Call Centers provide customer service and sales, fielding more
than 20 million calls a year.
Workplace Banking is a customized package of financial services
especially for the employees of Firstar business customers.
Student Banking meets the specialized needs of college students, as well
as faculty and staff, through specialized packages, campus card programs
and convenient ATMs.
Internet Banking continues to expand through Firstar's website,
firstar.com, for banking transactions, bill payment, financial planning
and account information.
Telesales Solutions informs customers of additional products and
services which can enhance their financial well being.
PRODUCTS AND SERVICES / DESCRIPTION OF BUSINESS
- -----------------------------------------------
CREDIT/DEBIT CARD
Under the trade name Elan, Firstar provides payment options in the form
of credit and debit services through MasterCard(r) and Visa(r) brands to
roughly 1 million cardholders. Firstar also works with companies and
incentive firms to offer custom incentive programs.
RETAIL LENDING
Indirect Lending provides loans and leases for autos, plus loans for
recreational vehicles, boats, motorcycles and home improvement through
dealership networks. Floor-plan Lending provides financing to auto, RV,
marine, motorcycle and heavy truck dealers, primarily for inventory, but
also for real estate and other capital needs. Student Lending provides
loans for college tuition.
FIRSTAR FINANCE (FORMERLY STAR BANC FINANCE)
Through branch sales, direct customer contact and broker channels,
provides financing for real estate, home improvement, auto and
installment loans and a special Memorial Loan funeral financing program.
INSURANCE SERVICES
Chartered as one of 16 bank holding companies in the country
"grandfathered" to sell unrestricted lines of insurance, Firstar
insurance services sells a complete line of life, health, property and
casualty insurance to individuals and businesses.
FIRSTAR CORPORATION 12
<PAGE>
1998 HIGHLIGHTS
- ---------------
CREDIT/DEBIT CARD
Firstar issues a full roster of cards including regular, platinum, young
adult, college and secured. For businesses: platinum travel, business
travel and purchasing cards. We provide services for merchant acquiring
(both paper and electronic) and service over 900 correspondent financial
institutions.
RETAIL LENDING
Firstar grew indirect loans and leases by more than 21 percent in 1998,
while improving market penetration to first or second position in all
markets. Loan application quality improved across all categories.
FIRSTAR FINANCE (FORMERLY STAR BANC FINANCE)
Now operating in 20 states, outstandings for 1998 exceeded $378 million,
nearly an 80 percent increase over 1996. With an efficiency ratio of
31.8 percent, this continues to be an outstanding business for Firstar.
INSURANCE SERVICES
We saw measurable results from increased referrals by our investments
specialists, trust officers, direct mail and point-of-sale merchandising
in our branches. Customers and prospects can now get insurance quotes
through our web site.
OUTLOOK
- -------
CREDIT/DEBIT CARD
Firstar will increase credit card account production through our large
branch network, successfully merge the card portfolios of Star Bank and
Firstar and utilize strong marketing support for sales efforts and
product enhancements. New incentive programs to support increased sales
goals will be established.
RETAIL LENDING
With the expansion of our sales and service culture into new markets,
the conversion to a single loan system, the streamlining of our credit
approval process, new product offerings and competitive rates and terms,
we expect to exceed substantial growth goals.
FIRSTAR FINANCE (FORMERLY STAR BANC FINANCE)
We will introduce this alternative business in Wisconsin, Illinois, Iowa
and Minnesota, modify some loan offerings to meet customer needs and
increase sales opportunities, while developing even more effective
collection systems.
INSURANCE SERVICES
Specialized insurance for small family businesses is a good fit in
conjunction with our Small Business lending. We continue to partner with
strong insurance company partners in expanding our insurance sales to
the former Star customer base. We are increasing referral incentive
programs, and our branch network is a potent distribution system to
reach middle market businesses, individuals and families.
BANK WITHOUT BOUNDARIES 13
<PAGE>
CORPORATE INITIATIVES
The new Firstar Corporation is in a very competitive position within
eight Midwestern states to compete for customers and deliver
state-of-the-art products and services.
Our strategic acquisitions this year in Ohio, Kentucky and Tennessee,
combined with the merger between Star Banc and Firstar, have created a
powerful financial services franchise. Firstar focuses on shareholder
value; customer convenience, service and satisfaction; employee growth
and performance; and support of the communities in which we do business.
MERGERS AND ACQUISITIONS
During 1998, a number of strategic acquisitions added to the value of
the corporation.
NOV 1998 : Star Banc Corporation/Firstar Corporation merger
AUG 1998 : Trans Financial, Inc. acquisition
Cargill Leasing Corporation acquisition
JUN 1998 : Acquisition of 49 Bank One branches in Ohio
FEB 1998 : Great Financial Corporation acquisition
FIRSTAR JOINS THE S&P 500 INDEX
After the closing bell on December 31, 1998, Firstar of_cially joined
other leading companies in becoming part of the S&P 500 stock index.
This prestigious index is widely regarded as the standard of measure for
large cap U.S. stock performance.
SOUND CAPITAL AND BALANCE SHEET MANAGEMENT
Managing capital for the benefit of the corporation and our shareholders
is a primary goal. We have a very disciplined approach to managing
capital, evaluating and balancing capital allocation among investments
in the corporation, adequate capital cushion to weather any potential
economic downturns, the industry's regulatory requirements, dividends
and other corporate needs.
Firstar's balance sheet management continues to focus on curtailing
low-return assets, such as lower-yield securities and residential
mortgages through securitization and sales. Core funding for
higher-yielding loans, particularly consumer loans, comes from our
deposit base rather than higher-cost purchased funds.
COMMUNITY DEVELOPMENT
In 1998, we announced an unprecedented five-year, $5.15 billion
Community Development initiative in the former Star markets. The
initiative extended our excellent record of investing in our
communities, and we believe it was the largest commitment, as a
percentage of total assets, of any bank. In its first year, the
initiative is significantly ahead of plan in funding home mortgages,
small business loans, community loans and grants, small farm loans and
other community needs for low to moderate income individuals and
communities. We are pleased to announce that we are expanding this
initiative into our new markets across the combined corporation.
RECOGNITION OF FIRSTAR PERFORMANCE
Firstar was named to the Lehman Brothers, Inc. "10 Uncommon Values"
list which features stocks which Lehman Brothers believes will
outperform the market in the coming year.
American Banker, a national daily financial newspaper, named Firstar
Corporation as the top performing bank in the country for 1998.
Firstar was ranked as the number one stock in the U.S. in the category
of "Defensive Stocks" according to "CNBC's TOP 100" September 7,
1998 program.
Firstar was one of only 31 public companies named to The Wall Street
Journal's 1998 Shareholder Scoreboard Honor Roll.
In the November 1998 issue of Money Magazine, Firstar was named to the
"Steady Climbers" list of stocks which offer proven performance, solid
prospects and reasonable prices.
Forbes magazine's annual "The Forbes Platinum 400" edition, dated
January 11, 1999, listed Firstar as one of "1999's Winners" and named
Jerry A. Grundhofer Banker of the Year.
FIRSTAR CORPORATION 14
<PAGE>
FIRSTAR CORPORATION SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(amounts in thousands except per share data) 5 Year
Compound
1998 1997 1996 1995 1994 1993 Growth Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income $ 2,641,488 $ 2,377,099 $ 2,275,675 $ 2,192,418 $ 1,803,450 $ 1,649,040 9.9%
Interest expense 1,228,709 1,074,932 1,023,404 1,018,634 691,899 607,056 15.1
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 1,412,779 1,302,167 1,252,271 1,173,784 1,111,551 1,041,984 6.3
Taxable equivalent
adjustment(a) 43,296 40,559 39,053 38,490 39,630 37,278 3.0
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (Fte) 1,456,075 1,342,726 1,291,324 1,212,274 1,151,181 1,079,262 6.2
Noninterest income 860,148 712,043 621,415 554,732 504,804 522,840 10.5
- --------------------------------------------------------------------------------------------------------------------------
Net revenue 2,316,223 2,054,769 1,912,739 1,767,006 1,655,985 1,602,102 7.7
Noninterest expense 1,521,192 1,126,506 1,152,252 1,086,385 1,026,566 992,953 8.9
Provision for loan losses 113,636 117,772 97,334 67,117 50,475 64,892 11.9
Net income 430,147 513,894 415,418 380,831 357,684 342,261 4.7
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE:
Basic earnings per common share $ 1.99 $ 2.48 $ 1.96 $ 1.76 $ 1.66 $ 1.59 4.6%
Diluted earnings per common share 1.95 2.43 1.93 1.74 1.64 1.57 4.4
Common dividends declared (b) 0.99 0.80 0.63 0.53 0.47 0.39 20.5
Period-end market value (b) 93.00 57.38 30.63 19.83 12.13 11.67 51.5
Weighted average common shares 216,510 206,761 211,286 215,299 213,975 211,340 0.5
Weighted average diluted
common shares 221,018 211,383 214,880 219,161 218,642 217,900 0.3
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES:
Loans, net of
unearned interest $25,027,756 $22,569,767 $21,291,977 $19,981,634 $17,884,906 $16,187,945 9.2%
Loans held for sale 988,432 297,743 286,088 189,383 144,116 -- --
Investment securities 6,491,001 5,744,135 6,168,349 6,401,651 5,780,779 5,357,232 3.9
Short-term investments 111,492 206,109 139,314 234,360 323,226 549,043 (27.3)
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 32,618,681 28,817,754 27,885,728 26,807,028 24,133,027 22,094,220 8.1
Total assets 36,524,976 31,625,258 30,666,581 29,327,958 26,385,339 24,315,538 8.5
Noninterest-bearing deposits 5,614,373 4,893,322 4,733,197 4,188,735 4,071,936 3,974,983 7.2
Interest-bearing deposits 21,216,625 18,830,568 18,689,884 18,058,090 16,331,182 15,857,719 6.0
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 26,830,998 23,723,890 23,423,081 22,246,825 20,403,118 19,832,702 6.2
Short-term borrowings 4,075,149 3,547,654 3,354,009 3,378,162 2,664,178 1,521,488 21.8
Long-term debt 1,681,527 1,271,041 929,515 821,517 673,333 509,819 27.0
Shareholders' equity 3,379,195 2,609,363 2,540,314 2,425,113 2,248,238 2,074,482 10.3
- --------------------------------------------------------------------------------------------------------------------------
RATIOS:
Return on average assets 1.18% 1.62% 1.35% 1.30% 1.36% 1.41%
Return on average common equity 12.73 19.73 16.40 15.78 16.05 16.95
Net interest margin 4.46 4.66 4.63 4.52 4.77 4.88
Noninterest expense to net revenue 65.68 54.82 60.24 61.48 61.99 61.98
Noninterest income to net revenue 37.14 34.65 32.49 31.39 30.48 32.63
Dividend payout ratio 63.08 38.04 41.51 40.54 36.99 32.38
Average shareholders' equity
to average total assets 9.25 8.25 8.28 8.27 8.52 8.53
- --------------------------------------------------------------------------------------------------------------------------
EXCLUDING MERGER-RELATED CHARGES
AND OTHER NONRECURRING ITEMS: (c)
Net income $ 604,564 $ 499,152 $ 459,769 $ 408,464 $ 370,774 $ 342,261 12.1%
Diluted earnings per common share 2.74 2.36 2.14 1.86 1.70 1.57 11.7
Return on average assets 1.66% 1.58% 1.50% 1.39% 1.41% 1.41%
Return on average common equity 17.89 19.16 18.16 16.93 16.64 16.95
Noninterest expense to net revenue 55.19 55.44 56.64 59.05 60.66 61.98
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Taxable equivalent adjustment was calculated utilizing a marginal federal
income tax rate of 35 percent for 1993-1998.
(b) Per share amounts based on historical Star Banc Corporation amounts.
(c) Amounts and ratios are calculated excluding the following nonrecurring
items:
Merger-related charges recorded in 1998 for the merger of Star Banc and
Firstar, and the acquisition of Trans Financial, Inc.
A one-time gain on the sale of merchant processing contracts in 1997.
Restructuring charges related to Firstar Forward and the one-time SAIF
special assessment in 1996.
Merger-related charges recorded in 1995, and check kiting loss in 1994.
BANK WITHOUT BOUNDARIES 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
On November 20, 1998, Star Banc Corporation ("Star Banc") and Firstar
Corporation ("Firstar") merged through an exchange of shares to form
the new Firstar Corporation ("the Corporation"). The merger was a
tax-free stock exchange and was accounted for as a pooling-of-interests.
The combined company is a $38.48 billion regional bank holding company,
headquartered in Milwaukee, Wisconsin, with over 710 branch offices in
eight Midwest states and Arizona, in addition to trust operations in
Florida. Under the terms of the agreement, Firstar shareholders received
0.76 shares of common stock of the combined company for each share of
Firstar common stock and Star Banc shareholders received one share of
common stock in the combined company for each common share of Star Banc
Corporation. All prior period financial information has been restated to
include the historical results of Star Banc, Firstar and Trans
Financial, Inc. (discussed below).
The Corporation reported earnings before merger-related charges and
other nonrecurring items at record levels for 1998 with an increase of
21.1 percent to $604.6 million compared to $499.2 million in 1997 and
$459.8 million in 1996. Excluding merger-related charges and other
nonrecurring items, diluted earnings per share increased 16.1 percent to
$2.74, compared to $2.36 in 1997. Including merger-related charges, net
income was $430.1 million in 1998, compared to $513.9 million for 1997
and $415.4 million for 1996. Basic earnings per share declined 19.8
percent to $1.99 in 1998, compared to $2.48 in 1997 and $1.96 in 1996.
Diluted earnings per share was $1.95 in 1998, compared to $2.43 in 1997
and $1.93 in 1996. Table 1 provides a summary of significant items
affecting the change in diluted earnings per share for 1996 through
1998.
In connection with the merger, the Corporation expects to incur
approximately $325 million of restructuring and merger-related charges.
In 1998, the Corporation incurred pre-tax merger related charges of $243
million as a result of the merger and the acquisition of Trans Financial,
Inc. (discussed later). These charges included $87 million in severance
and employee related costs, $50 million in occupancy and equipment
charges, $34 million in conversion costs and contract terminations,
$23 million to establish or augment charitable foundations and
$49 million in other merger costs such as legal, investment banking
fees and other professional fees. In addition, an $18 million provision
for loan losses was charged to earnings on the merger dates, in
connection with a change in the management of Trans Financial and
Firstar problem loans.
Earnings results for 1998 reflected a 13.7 percent increase in tax
equivalized net revenues (excluding gains/(losses) on sales of
securities and the gain on sale of merchant processing contracts in
1997) fueled by a 23.9 percent increase in noninterest income. Tax
equivalized net interest income increased $113 million or 8.4 percent in
1998, as a result of a 13.2 percent increase in average earning assets.
Excluding merger-related charges and nonrecurring items, the
Corporation's return on average assets and return on average common
equity were 1.66 percent and 17.89 percent, respectively, in 1998. This
compares to a return on average assets of 1.58 percent in 1997 and 1.50
percent in 1996 and a return on average common equity of 19.16 percent
in 1997 and 18.16 percent in 1996.
FIVE YEAR BAR CHART OF DILUTED EARNINGS PER SHARE*
(in dollars)
1994 1995 1996 1997 1998
$1.70 $1.86 $2.14 $2.36 $2.74
*Excluding merger-related and non-recurring items.
Excluding gains/(losses) on sales of securities and a one-time gain on
the sale of merchant processing contracts in 1997, noninterest income
increased $166 million or 23.9 percent in 1998. Excluding merger-related
expenses, noninterest expenses were up $152 million or 13.5 percent
over 1997. The increase in noninterest income was due in part to a
113.9 percent increase in mortgage banking income. Noninterest
expenses were up due to the acquisitions of Great Financial Corporation,
Cargill Leasing Corporation and Bank One branch offices, in addition
to the opening of new retail facilities in 1998.
Total assets at December 31, 1998, were $38.48 billion, up $5.62 billion
or 17.1 percent from $32.86 billion a year earlier. Total loans, net of
unearned interest, were $25.87 billion at the end of 1998, an increase
of 11.4 percent compared to $23.22 billion at the end of 1997. Loan
growth was led by increases of 17.1 percent in commercial loans and
11.8 percent in retail loans for 1998. Deposits totaled $28.85 billion
at December 31, 1998, up 17.8 percent compared to $24.49 billion at
December 31, 1997. Deposits increased as a result of the Great
Financial and branch acquisitions, in addition to an increase in core
deposit levels, primarily demand deposits and money market deposit
accounts.
MERGERS AND ACQUISITIONS
In addition to the merger of Star Banc Corporation and Firstar
Corporation, the Corporation completed the following acquisitions:
On August 21, 1998, the Corporation acquired Trans Financial, Inc.
("Trans Financial"), a $2.4 billion financial services holding company
based in Bowling Green, Kentucky. The purchase of Trans Financial was a
tax-free stock exchange, which was accounted for as a
pooling-of-interests. Under the terms of the agreement, the Corporation
exchanged 0.9003 shares of Star Banc common stock for each share of
Trans Financial. A total of 10.7 million shares were issued in this
acquisition.
On July 31, 1998, the Corporation acquired Cargill Leasing Corporation
("Cargill") for a cash payment of $220 million. Cargill is a
commercial leasing company with approximately $600 million in assets.
This acquisition was accounted for as a purchase transaction with $64
million recorded as goodwill.
In June and August, 1998, Star Bank, N.A. ("Star Bank") acquired a
total of 57 branch offices located in 28 counties throughout Ohio and
Kentucky from Bank One, N.A. In this acquisition Star Bank acquired $1.2
billion in deposits and $155 million in loans for a premium of $137
million. The remaining cash received in this transaction was invested in
mortgage-backed securities.
On February 7, 1998, the Corporation completed its acquisition of Great
Financial Corporation ("Great Financial") for 70 percent stock and 30
percent cash. The 70 percent of Great Financial Corporation's shares was
exchanged for common shares of Star Banc, at an exchange ratio of 0.949
Star Banc shares for each share of Great Financial. The remaining 30
percent of Great Financial shares were exchanged for $44.00 in cash for
each share. The Corporation issued 9.5 million shares and the total
value of the acquisition was $648 million. This transaction was
structured as a tax-free
FIRSTAR CORPORATION 16
<PAGE>
TABLE 1 -- ANALYSIS OF DILUTED EARNINGS PER SHARE --
Dollar Change B/(W)
--------------------
1998 vs. 1997 vs.
1998 1997 1996 1997 1996
- -----------------------------------------------------------------------------
Interest income $11.95 $11.25 $10.59 $ 0.70 $ 0.66
Interest expense (5.56) (5.09) (4.76) (0.47) (0.33)
- -----------------------------------------------------------------------------
Net interest income 6.39 6.16 5.83 0.23 0.33
Provision for loan losses (0.51) (0.56) (0.45) 0.05 (0.11)
Noninterest income 3.89 3.37 2.89 0.52 0.48
Noninterest expense (6.88) (5.33) (5.37) (1.55) 0.04
Income taxes (0.94) (1.21) (0.97) 0.27 (0.24)
- -----------------------------------------------------------------------------
Diluted earnings per
common share $ 1.95 $ 2.43 $ 1.93 $(0.48) $ 0.50
- -----------------------------------------------------------------------------
exchange for shareholders receiving stock and was accounted for as a
purchase transaction. The Great Financial acquisition added
approximately $2.8 billion in assets and $2.0 billion in deposits, in
addition to 45 branch offices in Kentucky and Indiana.
The Corporation has continued to make acquisitions in order to enhance
its branch network. In 1997 and 1996, Star Bank completed purchases of
branch offices in southwestern Ohio from Amerifirst Bank and
Connersville, Indiana from National City Bank.
In January 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
This statement supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." This statement requires disclosure
on a business segment basis, as defined by the Corporation, a
description of products and services, interest income and expense,
profit and loss and assets as measured by the Corporation's management
in assessing performance of its business segments. Line of business
results and related disclosures are shown in Note 25 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of
earnings. The amount of net interest income is determined by the volume
of interest-earning assets, the level of rates earned on those
interest-earning assets, and the cost of supporting funds. The
difference between rates earned on interest-earning assets (with
an adjustment made to tax-exempt income to provide comparability with
taxable income) and the cost of supporting funds is measured by the
net interest margin.
Tax-equivalent net interest income increased $113 million or 8.4 percent
in 1998, following a 4.0 percent increase in 1997. The increase in 1998
was due to increased volumes from continued strong loan growth and the
earning assets added as a result of the Great Financial, Bank One branch
and Cargill acquisitions. This increase was partially offset by negative
earning asset mix changes and compression of interest spreads. As a
result of the acquisitions of Great Financial and Bank One branches, the
majority of the assets acquired were lower yielding residential
mortgages and mortgage-backed securities. The increase in 1997 was the
result of a three basis point improvement in net interest margin, as
discussed below, as well as a $932 million or 3.3 percent increase in
average earning assets.
The net interest margin was 4.46 percent in 1998, 4.66 percent in 1997
and 4.63 percent in 1996. The decrease in net interest margin in 1998
reflects the decline in rates on earning assets, as a result of the
prime rate decreases in 1998 and overall decline in loan rates. Yields
on commercial loans and retail loans decreased 29 basis points and 18
basis points, respectively, in 1998. Earning asset rates were also down
due to the increases of residential mortgages and mortgage-backed
securities associated with the bank and branch acquisitions discussed
above. Also contributing to the decline in net interest margin was a
four basis point increase in costs of supporting funds, related to a 17
basis point increase in money market deposit accounts and higher levels
of long-term debt. Net interest margin is expected to improve in 1999 as
reductions in lower yielding assets are used to fund commercial and
retail loan growth.
The increase in net interest margin in 1997 was due to an improvement in
the mix of earning assets as loan growth was partially funded by sales
and maturities of lower yielding investment securities. In addition,
real estate loan and investment security yields were up in 1997. These
factors were partially offset by an increase in funding costs.
FIVE YEAR BAR CHART OF NET INTEREST INCOME
(in millions of dollars)
1994 1995 1996 1997 1998
$1,151 $1,212 $1,291 $1,343 $1,456
BANK WITHOUT BOUNDARIES 17
<PAGE>
TABLE 2 -- AVERAGE BALANCE SHEETS AND AVERAGE RATES --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Daily Average Daily Average Daily Average
Average Interest Rate Average Interest Rate Average Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Commercial loans $ 9,054,440 $ 743,946 8.22% $ 7,974,788 $ 679,033 8.51% $ 7,351,108 $ 635,785 8.65%
Real estate loans 8,896,558 739,918 8.32 8,267,489 696,663 8.43 8,320,874 696,104 8.37
Retail loans 7,076,758 676,783 9.56 6,327,490 616,007 9.74 5,619,995 546,376 9.72
- ----------------------------------------------------------------------------------------------------------------------------
Total loans 25,027,756 2,160,647 8.63 22,569,767 1,991,703 8.82 21,291,977 1,878,265 8.82
Loans held for sale 988,432 70,808 7.16 297,743 20,878 7.01 286,088 20,454 7.15
Taxable investment
securities 5,017,636 340,080 6.78 4,419,626 297,967 6.74 4,936,054 318,059 6.44
Non-taxable invest-
ment securities 1,473,365 107,140 7.27 1,324,509 95,791 7.23 1,232,295 90,496 7.34
Trading securities 2,757 73 2.65 2,238 133 5.94 10,140 392 3.87
Money market
investments 108,735 6,036 5.55 203,871 11,186 5.49 129,174 7,062 5.47
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 32,618,681 2,684,784 8.23 28,817,754 2,417,658 8.39 27,885,728 2,314,728 8.30
Cash and due
from banks 1,762,970 1,504,094 1,548,174
Allowance for
loan losses (397,440) (361,538) (337,655)
Other assets 2,540,765 1,664,948 1,570,334
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $36,524,976 $31,625,258 $30,666,581
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings and
NOW deposits $ 5,720,515 $ 120,462 2.11% $ 5,395,516 $ 112,884 2.09% $ 5,422,981 $ 113,297 2.09%
Money market
deposit accounts 5,144,219 226,132 4.40 3,963,229 167,817 4.23 3,655,533 143,621 3.93
Time deposits $100,000
and over 1,836,702 99,605 5.42 1,738,467 95,962 5.52 1,735,364 96,810 5.58
Time deposits under
$100,000 8,515,189 465,759 5.47 7,733,356 427,743 5.53 7,876,006 434,295 5.51
Short-term borrowings 4,075,149 207,650 5.10 3,547,654 183,642 5.18 3,354,009 171,694 5.12
Long-term debt 1,681,527 109,101 6.49 1,271,041 86,884 6.84 929,515 63,687 6.85
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 26,973,301 1,228,709 4.56 23,649,263 1,074,932 4.55 22,973,408 1,023,404 4.45
Noninterest-bearing
deposits 5,614,373 4,893,322 4,733,197
Other liabilities 558,107 473,310 419,662
Shareholders' equity 3,379,195 2,609,363 2,540,314
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $36,524,976 $31,625,258 $30,666,581
- ----------------------------------------------------------------------------------------------------------------------------
Net interest
revenue/margin $1,456,075 4.46% $1,342,726 4.66% $1,291,324 4.63%
Interest rate spread 3.67 3.84 3.85
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Interest and average rate are presented on a fully-taxable equivalent
basis. Taxable equivalent amounts are calculated utilizing the marginal federal
income tax rate of 35 percent. The yield on available-for-sale securities
is computed based on historical cost balances. The total of nonaccrual loans
is included in the daily average balance.
FIRSTAR CORPORATION 18
<PAGE>
TABLE 3 -- VOLUME/RATE VARIANCE ANALYSIS --
<TABLE>
<CAPTION>
(dollars in thousands) Change from 1997 to 1998 Change from 1996 to 1997
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in: Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Commercial loans $ 91,963 $(27,050) $ 64,913 $ 54,089 $(10,841) $ 43,248
Real estate loans 56,175 (12,920) 43,255 (4,466) 5,025 559
Retail loans 64,646 (3,870) 60,776 68,972 659 69,631
- ----------------------------------------------------------------------------------------------------
Total loans 212,784 (43,840) 168,944 118,595 (5,157) 113,438
Loans held for sale 48,435 1,495 49,930 836 (412) 424
Investment securities 51,176 2,286 53,462 (28,174) 13,377 (14,797)
Money market instruments (5,174) (36) (5,210) 3,584 281 3,865
- ----------------------------------------------------------------------------------------------------
Total 307,221 (40,095) 267,126 94,841 8,089 102,930
- ----------------------------------------------------------------------------------------------------
Interest expense:
Savings and NOW deposits 5,542 2,036 7,578 (575) 162 (413)
Money market deposit accounts 49,978 8,337 58,315 12,122 12,074 24,196
Time deposits $100,000 and over 5,435 (1,792) 3,643 174 (1,022) (848)
Time deposits under $100,000 43,244 (5,228) 38,016 (7,888) 1,336 (6,552)
Short-term borrowings 30,242 (6,234) 24,008 9,940 2,008 11,948
Long-term debt 27,941 (5,724) 22,217 23,401 (204) 23,197
- ----------------------------------------------------------------------------------------------------
Total 162,382 (8,605) 153,777 37,174 14,354 51,528
- ----------------------------------------------------------------------------------------------------
Net variance $144,839 $(31,490) $113,349 $ 57,667 $ (6,265) $ 51,402
- ----------------------------------------------------------------------------------------------------
</TABLE>
Note: Interest on non-taxable loans and securities is computed on a
fully-taxable equivalent basis. Taxable equivalent amounts are calculated
utilizing the marginal federal income tax rate of 35 percent. The change in
interest due to both volume and rate has been allocated completely to changes
in rate.
In order to reduce the Corporation's exposure to adverse changes in
interest rates, the Corporation had entered into interest rate swaps and
floors in previous years. The notional amount of these interest rate
contracts was $795 million at December 31, 1998, down from $1.3 billion
at December 31, 1997. Interest rate swaps lowered net interest income
slightly in 1998 with no effect on net interest margin. Interest rate
swaps lowered net interest income $1.8 million and net interest margin
one basis point in 1997 and $4.4 million and two basis points in 1996.
Table 2 provides detailed information as to average balances, interest
income and expense, and rates earned or paid by major balance sheet
category for the years 1996 through 1998. Table 3 provides an analysis
of the changes in net interest income attributable to changes in volume
of interest-earning assets or interest-bearing liabilities and to
changes in rates earned or paid.
FIVE YEAR BAR CHART OF NET INTEREST MARGIN
(in percents)
1994 1995 1996 1997 1998
4.77% 4.52% 4.63% 4.66% 4.46%
Interest rate sensitivity and market risk
The Corporation's major market risk exposure is changing interest rates.
To minimize the volatility of net interest income and exposure to
economic loss, the Corporation manages its exposure to adverse changes
in interest rates through asset and liability management activities
within guidelines established by its Asset/Liability Policy Committee
("ALPC"). The ALPC has the responsibility for approving and ensuring
compliance with asset/liability management policies of the Corporation,
including interest rate risk exposure, off-balance-sheet activity and
the investment portfolio position.
In order to manage interest rate risk, the Corporation may utilize
interest rate swap agreements and interest rate floors. These interest
rate contracts are treated as hedges, and accordingly, the income and
expense related to these transactions is recognized on the hedged
instrument as an adjustment to interest income or expense. No new
interest rate contracts were added in 1997 or 1998. In 1998, three
interest rate swaps were terminated in order to reduce the Corporation's
interest rate sensitivity. In 1997, the Corporation terminated two of
its interest rate swaps in order to reduce its liability rate sensitive
position. Additional information on the Corporation's interest rate swap
contracts is presented in Note 20 of the Notes to Consolidated Financial
Statements.
One of the primary tools of management to measure interest rate risk and
the effect of interest rate changes on net interest income and net
interest margin is simulation analysis. Through these simulations,
management estimates the impact on net interest income of a 300 basis
point upward or downward gradual change of market interest rates over a
one year time period. Asset/liability policy guidelines state that a 300
basis point up or down change in interest rates cannot result in more
than a 7.5 percent change in net interest income, as compared to a
base case, without Board approval and a strategy in place to reduce
interest rate risk below the maxi-
BANK WITHOUT BOUNDARIES 19
<PAGE>
mum level. In simulations as of December 31, 1998, the 300 basis point
upward change resulted in a decrease in net interest income compared to
the base case, while the 300 basis point downward change resulted in an
increase in net interest income. Both of these changes were less than
one percent of net interest income in the base case. At December 31,
1998 the Corporation was well within policy guidelines.
Net interest income is also affected by the relationship between
different interest rates. For example, a 50 basis point narrower spread
between the prime rate and the federal funds rate is projected to cause
a four basis point decline in net interest margin and less than one
percent reduction in net interest income over a one year period. These
simulations include assumptions about how the balance sheet is likely to
change with loan and deposit growth assumptions. Assumptions are made to
project rates for new loans and deposits based on historical analysis
and management's outlook. Mortgage loan prepayment assumptions are
developed from industry median estimates of prepayment speeds. The
results of these simulations can be significantly influenced by
assumptions utilized for managed rate deposits.
The Corporation also manages its interest rate sensitivity position to
maintain a balance between the amounts of interest-earning assets and
interest-bearing liabilities which are expected to mature or reprice at
any point in time. The interest rate sensitivity ("Gap"), Table 4,
demonstrates the repricing characteristics of the Corporation's
interest-earning assets, liabilities and interest rate swap positions as
of December 31, 1998. Table 4 shows the Corporation in a liability
sensitive position through the one year repricing period in the amount
of $1.66 billion or 4.4 percent of total assets. Generally, a liability
sensitive position indicates that falling interest rates would
positively impact net interest margin, while raising interest rates
would negatively affect net interest margin. The Corporation calculates
a one-year risk equivalent position, which translates the earnings risk
for all periodic gap mismatches into an equivalent one-year risk
adjusted mismatched gap position.
Although the periodic Gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity
at a specific point in time. Gap analysis does not take into
consideration that assets and liabilities with similar repricing
characteristics may not reprice at the same time or to the same degree
and does not necessarily predict the impact of changes in general levels
of interest rates on net interest income.
The Corporation also utilizes market value of equity as a measurement
tool in managing interest rate sensitivity. The market value of equity
measures the degree at which the market values of the Corporation's
assets and liabilities will change given a change in interest rates.
Asset/liability policy guidelines state that a 200 basis point upward or
downward change in interest rates cannot result in more than a 15
percent change in equity as compared to the base case. At December 31,
1998, the Corporation was well within this guideline.
The Corporation enters into forward commitments related to residential
real estate loans which have interest rate risk. At December 31, 1998
the Corporation had committed to deliver $1.8 billion in residential
real estate loans during 1999. The Corporation has no forward
commitments that extend beyond one year.
The Corporation also enters into foreign exchange forward contracts
primarily to accommodate the business needs of its customers. Foreign
exchange-based forward contracts provide for the delayed delivery of a
purchase of foreign currency. The foreign exchange risk associated with
these contracts is mitigated by entering into offsetting foreign
exchange con-
TABLE 4 -- INTEREST RATE SENSITIVITY (GAP ANALYSIS) --
As of December 31, 1998 (dollars in thousands)
<TABLE>
<CAPTION>
0-30 31-90 91-180 181-365 1-5 Over 5
Total Days Days Days Days Years Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $25,868,057 $ 9,071,036 $ 1,532,283 $ 1,670,195 $ 2,905,118 $ 8,580,810 $ 2,108,615
Held for sale 1,539,892 1,539,892 -- -- -- -- --
Trading securities 2,754 2,754 -- -- -- -- --
Investment securities 6,356,309 398,210 262,410 518,914 593,097 3,241,772 1,341,906
Money market instruments 75,524 75,524 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total 33,842,536 11,087,416 1,794,693 2,189,109 3,498,215 11,822,582 3,450,521
- ------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Savings, NOW and MMDA 12,080,956 2,418,108 3,685,242 1,219,713 600,687 4,157,206 --
Other interest-bearing deposits 10,120,610 1,620,868 2,048,089 2,341,612 2,191,316 1,837,183 81,542
Short-term borrowings 3,643,308 3,215,729 6,681 29,908 196,686 192,897 1,407
Long-term debt 1,708,869 87,083 347,284 21,529 16,206 646,361 590,406
- ------------------------------------------------------------------------------------------------------------------------------
Total 27,553,743 7,341,788 6,087,296 3,612,762 3,004,895 6,833,647 673,355
Interest rate swap positions -- (50,000) (220,000) -- 90,000 180,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Total gap 6,288,793 3,695,628 (4,512,603) (1,423,653) 583,320 5,168,935 2,777,166
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ -- $ 3,695,628 $ (816,975) $(2,240,628) $(1,657,308) $ 3,511,627 $ 6,288,793
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Savings, NOW and money market deposit accounts (MMDA) are subject to
immediate withdrawal. However, for the purpose of the above analysis these
accounts are reported based on an historical analysis of Firstar Bank
accounts.
FIRSTAR CORPORATION 20
<PAGE>
tracts. The Corporation holds some foreign exchange spot contracts for
proprietary trading purposes, however the average amount of these
contracts was immaterial for the last three years. Additional
disclosures related to derivatives are shown in Note 20 of the Notes
to Consolidated Financial Statements.
Noninterest Income
Noninterest income is a growing source of revenue for the Corporation,
representing 37.1 percent of tax equivalized net revenue in 1998, up
from 34.7 percent in 1997 and 32.5 in 1996. Noninterest income increased
20.8 percent to $860 million in 1998, compared to $712 million in 1997
and $621 million in 1996. The increase in 1998 was led by mortgage
banking income, which increased $80 million or 113.9 percent, along with
a $28 million or 12 percent increase in trust income. Significant growth
also occurred in several other areas, with cash management income, ATM
income, and insurance commissions all increasing over 20 percent in
1998.
Included in 1997 was a $23 million gain on the sale of credit card
merchant processing contracts, related to the formation of a joint
venture with NOVA Information Systems, Inc. to provide payment
processing services to merchants. Excluding this one-time gain,
noninterest income increased $166 million or 23.9 percent in 1998.
Trust income, which is the Corporation's largest source of fee income,
increased 12.0 percent to $262 million in 1998, following an 18.9
percent increase in 1997. In both 1997 and 1998, the Corporation
realized significant increases in asset levels as a result of new
business in each trust area. Revenue growth was led by continued
expansion of mutual funds, for which the Corporation's subsidiaries
serve as investment advisors, increases in custodial assets and higher
market values of trust assets.
Managed trust assets increased 16.2 percent to $41 billion at the end of
1998, compared to $35 billion at the end of 1997. Trust showed strong
growth along all business lines with increases from new business and
higher market values. At year-end 1998, total trust assets (both
discretionary and non-discretionary) were $158.0 billion. In 1997 trust
assets in the custody division almost doubled and the Star Funds mutual
funds were up 28.4 percent.
Mortgage banking income increased $80 million or 113.9 percent to $151
million in 1998, following a 9.0 percent increase in 1997. The increase
in 1998 was due to the significant mortgage banking business acquired
(primarily in the Great Financial acquisition), in addition to higher
origination volumes and refinancing activity. Gains on sale of
mortgage loans increased 124.4 percent and servicing income was up
90.2 percent in 1998. Mortgages serviced for others increased to
$14.7 billion at December 31, 1998, from $7.9 billion at
December 31, 1997. The increase in 1997 was due to higher levels
of gains on sale of loans on the secondary market, in addition to
higher gains on the sale of mortgage servicing rights. Servicing income
declined slightly in 1997 as a result of the sale of servicing rights
originated in 1996 and the Corporation's decision to sell 1997 mortgage
originations on the secondary market servicing released. The Corporation
sold $6.40 billion of residential mortgage loans into the secondary
market in 1998, compared to $2.82 billion in 1997 and $2.30 billion in
1996.
Retail deposit fees and cash management income increased a combined $25
million or 16.1 percent following a 3.4 percent increase in 1997. The
growth in 1998 was led by increases in income from cash management
services, and the Great Financial and Bank One branch acquisitions. The
modest growth in 1997 was a result of increases in cash management
services, in addition to higher core deposit levels and transaction
volumes in Ohio. These increases were partially offset by the
standardization and reduction of deposit products across other Firstar
markets in 1997, which resulted in declines in certain consumer deposit
accounts.
Credit card fees declined $4 million or 4.2 percent in 1998, following
an 8.6 percent increase in 1997. The decline in 1998 is due to a $16
million decline in merchant revenue as a result of the transfer of
merchant processing income to the joint venture formed with NOVA
Information Systems Inc. in the fourth quarter of 1997. Excluding
merchant processing revenue, credit card income increased 20.2 percent
in 1998. The increase in 1997 was due to an increase in the credit card
customer base, in addition to higher levels of interchange income.
ATM income has had substantial growth in the last two years increasing
$6 million or 28.0 percent in 1998, following a 44.1 percent increase in
1997. The Corporation continues to add new automated teller machines as
a result of acquisitions and new installations with bank owned ATMs
increasing to 867 at December 31, 1998, compared to 535 ATMs at December
31, 1997.
All other income increased 5.1 percent to $155 million in 1998,
following a 25.7 percent increase in 1997. Excluding the one-time gain
on merchant processing in 1997, other income increased $30 million or
24.3 percent in 1998. This increase was due to higher income as a result
of additional investments in corporate owned life insurance programs and
strong growth in insurance commissions. Commissions from brokerage
services also showed strong growth in both 1998 and 1997 with increases
of 18.9 percent and 13.4 percent, respectively. Additional investments
in corporate owned life insurance programs also contributed to the
growth in 1997. Table 5 provides a summary of changes in noninterest
income for the last three years.
BANK WITHOUT BOUNDARIES 21
<PAGE>
TABLE 5 -- NONINTEREST INCOME --
<TABLE>
<CAPTION>
For the years ended December 31 (dollars in thousands)
% Increase/ % Increase/
(decrease) (decrease)
1998 1997 1996 1998/1997 1997/1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust income $262,259 $234,195 $196,891 12.0% 18.9%
Mortgage banking 151,096 70,644 64,811 113.9 9.0
Retail deposit fees 92,486 83,579 81,496 10.7 2.6
Cash management income 84,522 68,831 65,928 22.8 4.4
Credit card income 84,853 88,615 81,622 (4.2) 8.6
ATM income 28,672 22,397 15,547 28.0 44.1
Brokerage revenue 22,259 18,720 16,515 18.9 13.4
International income 17,213 15,059 14,031 14.3 7.3
Corporate owned life insurance 15,560 5,786 3,079 168.9 87.9
Insurance commissions 18,910 14,621 13,786 29.3 6.1
All other income 81,223 70,691 70,074 14.9 0.9
- ---------------------------------------------------------------------------------------------------
859,053 693,138 623,780 23.9% 11.1%
Gain on sale of merchant processing -- 22,821 -- n/m n/m
Investment securities gains/(losses)--net 1,095 (3,916) (2,365) n/m n/m
- ---------------------------------------------------------------------------------------------------
Total noninterest income $860,148 $712,043 $621,415 20.8% 14.6%
- ---------------------------------------------------------------------------------------------------
</TABLE>
n/m - not meaningful
Noninterest Expense
Total noninterest expense increased 35.0 percent to $1.52 billion in
1998, compared to $1.13 billion in 1997 and $1.15 billion in 1996. As a
result of the merger and the acquisition of Trans Financial, the
Corporation recorded $243 million in merger-related charges in 1998. In
1996, the Corporation recorded a $53 million charge in connection with
Firstar Forward, a corporate-wide restructuring program, and was charged
a special one-time assessment of $16 million to recapitalize the Savings
Association Insurance Fund ("SAIF").
Excluding merger-related charges, restructuring charges and the SAIF
special assessment, noninterest expense increased $152 million or 13.5
percent, following a 4.0 percent increase in 1997. The Corporation's
noninterest expense ratio improved to 55.2 percent in 1998, compared to
55.4 percent in 1997 and 56.6 percent in 1996. The increase in
noninterest expense in 1998 was due primarily to the Great Financial,
Cargill and Bank One branch acquisitions, in addition to new retail
facilities, higher incentive levels and additional costs related to Year
2000 system changes. Although expenses grew significantly due to the
acquisitions, significant cost savings and efficiencies are expected in
the future as a result of these acquisitions.
Salary expense increased 13.1 percent in 1998, following a 2.6 percent
increase in 1997. Pension and other employee benefits were up 6.5
percent in 1998, following a decline in 1997. Salaries increased in 1998
due to staff added as a result of the acquisitions, in addition to
higher staff levels in retail banking, related to new facilities, and
expansion in Firstar Finance, Inc. Higher incentive costs based on the
increase in staff levels and higher profit levels also contributed to
the increase in salaries. Pension and benefits expense was up as higher
staff levels increased healthcare and payroll tax costs.
Salaries were up in 1997, despite a reduction in headcount, due to
increases in temporary staff costs and performance based incentives. The
decline in FTE head count in 1997 was a result of the Firstar Forward
restructuring program. Benefit expenses were down slightly in 1997 due
to lower pension and postretirement benefit costs.
Equipment expense increased 9.9 percent in 1998, following an 8.5
percent increase in 1997. Equipment expense was up in 1998 due to higher
levels of depreciation, maintenance and repair expenses, related to the
additional offices acquired in the acquisitions of Great Financial and
Bank One branches. The increase in 1997 was the result of higher
depreciation expense as the Corporation continues to invest in and
upgrade personal computers, data processing and other automation
equipment.
Occupancy expense increased 12.2 percent to $102 million in 1998,
following a slight decline in 1997. The increase in 1998 was due to
additional facilities related to the acquisitions previously discussed
and the end of a deferred building gain amortization of $7 million,
which reduced expense in previous years. In 1997, increased occupancy
expenses related to branch acquisitions and new retail facilities were
offset by the amortization of a deferred gain on the sale of a building.
Intangible amortization, marketing, supplies and communication expenses
increased significantly in 1998 as a result of the acquisitions.
Professional services expense declined 11.9 percent in 1998 as a result
of a $3 million decline in outside legal expenses.
FIVE YEAR BAR CHART OF EFFICIENCY RATIO*
(in percents)
1994 1995 1996 1997 1998
60.66% 59.05% 56.64% 55.44% 55.19%
*Excluding merger-related and non-recurring items.
FIRSTAR CORPORATION 22
<PAGE>
Outside processing services increased 20.5 percent in 1998 as a result
of higher transaction volumes and additional contract programming costs.
Processing expenses were up due to additional volumes in the mutual
funds processing area and the outsourcing of payroll processing to a
third party provider. The additional contract programmers costs were due
primarily to Year 2000 system changes.
All other expenses increased 10.3 percent to $306 million in 1998,
following a 5.4 percent increase in 1997. The increase in 1998 was due
in part to higher levels of courier, FDIC, mortgage servicing, and state
taxes, as a result of the acquisitions. Other expenses also included
additional litigation costs in 1998.
Table 6 provides a summary of changes in noninterest expense for the
last three years.
TABLE 6 -- NONINTEREST EXPENSE --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
% Increase/ % Increase/
(decrease) (decrease)
1998 1997 1996 1998/1997 1997/1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries $ 540,977 $ 478,159 $ 466,133 13.1% 2.6%
Pension and other
employee benefits 97,025 91,114 97,089 6.5 (6.2)
Equipment expense 103,713 94,369 86,952 9.9 8.5
Occupancy expense--net 102,464 91,348 91,460 12.2 (0.1)
Amortization of goodwill
and other intangible assets 57,121 35,292 30,030 61.9 17.5
Outside services 70,938 58,871 48,682 20.5 20.9
Postage and courier 37,451 34,847 31,620 7.5 10.2
Marketing expense 32,467 29,527 31,285 10.0 (5.6)
Professional services 28,283 32,101 32,559 (11.9) (1.4)
Travel and entertainment 16,791 16,164 13,626 3.9 18.6
Stationery and supplies 27,664 24,884 32,627 11.2 (23.7)
All other noninterest
expense 163,328 139,830 121,400 16.8 15.2
- -----------------------------------------------------------------------------------------------
1,278,222 1,126,506 1,083,463 13.5 4.0
SAIF special assessment -- -- 15,522 n/m n/m
Merger and restructuring expenses 242,970 -- 53,267 n/m n/m
- -----------------------------------------------------------------------------------------------
Total noninterest expense $1,521,192 $1,126,506 $1,152,252 35.0% (2.2)%
- -----------------------------------------------------------------------------------------------
</TABLE>
n/m - not meaningful
Income Taxes
The Corporation's effective tax rate declined to 32.6 percent in 1998,
compared to 33.3 percent in 1997 and 33.4 percent in 1996.
The implementation of various tax planning strategies contributed to the
decline in the effective rate for 1998. Additional tax benefits received
from investments in corporate owned life insurance programs also
contributed to the decline in the effective tax rate.
Year 2000
The Corporation's Year 2000 ("Y2K") project is directed by a Year 2000
Project Management Office ("PMO") chaired by the Vice Chairman of
Consumer Banking. The PMO provides direct oversight of the Y2K
initiative and meets twice a month to review the project's progress. The
Corporation's Board of Directors receives project updates at every
regular meeting.
The Corporation has completed its assessment of Y2K issues, developed a
plan, and arranged for the required resources to complete the necessary
remediation efforts. The Corporation is utilizing both internal and
external resources to reprogram, or replace, and test the software and
hardware for Y2K modifications. Currently, the Corporation has
remediated, tested, and returned to production more than 97 percent of
its applications. Testing and remediation of all applications is
expected to be completed by March 31, 1999. The Corporation has
established a separate test environment to accommodate its Y2K testing
activity and the anticipated need to test with its customers and other
third parties during 1999.
The Corporation relies on several third party service providers for key
business processes and works closely to monitor their Y2K efforts. The
Corporation has obtained written and verbal verification from
significant third party service providers and vendors of their
Y2K readiness with focus on the vendors' readiness and alternatives,
where possible, for vendors that have been identified as critical.
While the Corporation 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 the Corporation's business,
financial condition or results of operations.
The Corporation 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. This activity is expected to be
completed by June 30, 1999.
BANK WITHOUT BOUNDARIES 23
<PAGE>
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
communications companies; ATM shutdowns; non-availability or delays in
cash couriers/shipments; failure of government systems; and shutdown of
government facilities or utility 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 are
expensed as incurred. Currently, the Corporation estimates that the
total cost of the Y2K project will be approximately $32 million. The
Corporation incurred approximately $18 million in expenses in 1998 and
$5 million in 1997.
BALANCE SHEET
Loans
Loans, net of unearned interest, increased $2.65 billion to $25.87
billion at December 31, 1998, compared to $23.22 billion at December 31,
1997. The Corporation experienced strong growth in the commercial and
retail loan areas with increases of 15.0 percent and 9.2 percent,
respectively in 1998, excluding the effect of the Great Financial
acquisition. Commercial loan growth was led by commercial leasing which
increased $667 million or 124 percent due primarily to the acquisition
of Cargill. In addition, asset-based lending increased $217 million or
33.8 percent. Retail loans were up due to a 34.7 percent increase in
retail leasing, in addition to strong growth in home equity and
installment lending. Commercial real estate and construction loans were
up a combined $716 million or 14.0 percent in 1998 with strong growth in
construction loans.
Table 7 provides a summary of loans by type at year-end for each of the
past five years. Table 8 provides maturity distribution data for
selected types of loans.
TABLE 7 -- LOANS BY TYPE --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands)
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 8,059,594 $ 7,372,246 $ 6,730,943 $ 6,320,863 $ 5,978,250
Commercial leasing 1,204,549 537,557 416,018 359,511 290,459
Real estate construction and development 1,213,682 965,226 772,567 703,481 557,596
Commercial real estate mortgage 4,611,442 4,144,214 4,085,373 3,876,116 3,788,563
Residential real estate mortgage 3,285,400 3,494,746 4,021,476 3,928,675 3,832,499
Credit card 1,220,240 1,182,703 1,109,168 961,776 807,412
Retail leasing 1,365,435 1,013,899 735,425 420,560 287,857
Other retail 4,907,715 4,505,434 4,184,704 3,871,480 3,713,855
- -----------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned interest $25,868,057 $23,216,025 $22,055,674 $20,442,462 $19,256,491
- -----------------------------------------------------------------------------------------------------------------
Percent of total loans by type
- -----------------------------------------------------------------------------------------------------------------
Commercial 31.2% 31.8% 30.5% 30.9% 31.0%
Commericial leasing 4.7 2.3 1.9 1.8 1.5
Real estate construction and development 4.7 4.2 3.5 3.4 2.9
Commercial real estate mortgage 17.8 17.9 18.5 19.0 19.7
Residential real estate mortgage 12.7 15.0 18.2 19.2 19.9
Credit card 4.7 5.1 5.0 4.7 4.2
Retail leasing 5.3 4.4 3.3 2.1 1.5
Other retail 18.9 19.3 19.1 18.9 19.3
- -----------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned interest 100.0% 100.0% 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 8 -- SELECTED LOAN MATURITY DISTRIBUTION --
As of December 31, 1998 (dollars in thousands)
Over One Over
One Year Through Five Five
or Less Years Years Total
- --------------------------------------------------------------------------
Commercial $ 3,707,771 $ 4,314,871 $1,241,501 $ 9,264,143
Real estate 2,343,475 1,541,199 5,225,850 9,110,524
Retail 616,813 5,691,873 1,184,704 7,493,390
- --------------------------------------------------------------------------
Total loans $ 6,668,059 $11,547,943 $7,652,055 $25,868,057
- --------------------------------------------------------------------------
Total of these selected loans due after one year with:
Predetermined interest rates $11,746,512
Floating interest rates 7,453,486
- --------------------------------------------------------------------------
FIRSTAR CORPORATION 24
<PAGE>
Residential mortgage loans declined $209 million or 6.0 percent in 1998,
following a 13.1 percent decline in 1997. Excluding the effect of the
Great Financial acquisition, residential mortgages declined 24.5 percent
in 1998. The decline in the residential mortgage portfolio reflects the
Corporation's strategy to reduce its level of residential mortgages and
the related adverse prepayment risk, with the proceeds from sales and
maturities being used to fund growth in higher yielding commercial and
retail loans.
Following this strategy, the Corporation sold approximately 80 percent
of residential mortgage originations on the secondary market in 1998.
The Corporation sells loans both with servicing retained and serviced
released. The Corporation expects to sell a larger percentage of loans
servicing released in 1999. In 1998 the Corporation sold $6.40 billion
of residential mortgage loans into the secondary market, compared to
$2.82 billion in 1997. As of December 31, 1998, the Corporation
serviced $14.7 billion in mortgage loans for outside investors, compared
to $7.8 billion at December 31, 1997.
Asset Quality
As of December 31, 1998, the allowance for loan losses was $396 million
or 1.53 percent of total loans, net of unearned interest. This compares
to $373 million or 1.61 percent of total loans, net of unearned
interest, as of December 31, 1997. The provision for loan losses totaled
$114 million in 1998, $118 million in 1997 and $97 million in 1996.
Table 9 provides a summary of activity in the allowance for loan loss
account by type of loan.
As shown in Table 9, net charge-offs increased in 1998 to 0.49 percent
of average outstanding loans, compared to 0.42 in 1997 and 0.37 in 1996.
As a result of a change in intent in the management of Trans Financial
and Firstar problem loans, approximately $18 million of loans were
charged off in conformity with Star Bank's policy of aggressively
eliminating problem credits. Excluding the merger-related charge-offs,
net charge-offs declined slightly in 1998 to 0.41 percent of average
outstanding loans.
The decrease in net charge-offs as a percent of average loans in 1998
was the result of slight declines in both commercial and retail loans.
The increase in net charge-off levels in 1997 was due to a higher level
of consumer charge-offs. Net charge-offs in the retail area increased
$19 million in 1997, resulting in an increase of 19 basis points as a
percentage of average loans. This increase was led by credit cards as
net charge-offs as a percent of average loans increased 30 basis points
to 4.22 percent. The increase in credit card net charge-offs was
consistent with national trends. Partially offsetting the increase in
retail charge-offs was a decline in commercial charge-off levels, as
commercial charge-offs as a percentage of average loans declined seven
basis points to 0.27 percent.
FIVE YEAR BAR CHART OF NET CHARGE-OFFS TO AVERAGE LOANS
(in percents)
1994 1995 1996 1997 1998
0.23% 0.25% 0.37% 0.42% 0.41%*
*Excluding additional merger-related charge-offs.
The Corporation continues to focus on growing consumer loans as a higher
percentage of the total loan portfolio and, as a result, would expect
higher charge-off levels. In addition, as demonstrated by the additional
merger-related charge-offs in 1998, the Corporation continues its
commitment to maintaining strict credit standards and addressing problem
credits at an early stage. Tables 10 and 11 provide information related
to nonperforming assets and loans 90 days or more past due.
Although the Corporation experienced increases in charge-off levels in
1997 and 1996, nonperforming loans and nonperforming assets as a
percentage of total loans remained at historically low levels.
Nonperforming loans as a percentage of total loans remained flat at 0.48
percent at December 31, 1998 and December 31, 1997, down from 0.59
percent at December 31, 1996. Nonperforming assets as a percentage of
total loans and other real estate owned remained at historically low
levels in 1998, up slightly to 0.53 percent at December 31, 1998,
compared to 0.52 percent a year earlier.
Nonaccrual loans increased $14 million at December 31, 1998 to $124
million following a $19 million decline in 1997. The increase in
nonperforming loans was led by increases in commercial loans, commercial
mortgages and construction loans. These increases were due in part to
the acquisition of Great Financial and were consistent with additional
loan volumes in these areas. The decrease in nonperforming loans for
1997 was led by declines in the commercial loan and commercial leasing
areas. Despite the increase in charge-off levels in 1997, nonaccrual
retail loans declined slightly in 1997. The Corporation's credit
exposure to foreign countries is not significant. Due to the uncertainty
of economic conditions, it is difficult to project future levels of
nonperforming loans.
Other real estate owned, which is carried at the lower of cost or fair
value less estimated selling costs, represents real estate of which the
Corporation has taken ownership in partial or total satisfaction of
loans, in addition to closed banking offices. Other real estate owned
was $12 million at December 31, 1998, a $2 million increase from
$10 million at December 31, 1997. This slight increase was primarily
due to the acquisition of Great Financial. Other real estate owned
has remained relatively flat in the $10 to $12 million range since
1996, down from historical levels.
BANK WITHOUT BOUNDARIES 25
<PAGE>
TABLE 9 -- SUMMARY OF LOAN LOSS EXPERIENCE --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans--net of unearned interest $25,027,756 $22,569,767 $21,291,977 $19,981,634 $17,884,906
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance--beginning of year $ 372,933 $ 349,892 $ 317,971 $ 299,060 $ 285,375
Acquired bank reserves 30,788 -- 13,966 865 4,714
Charge-offs:
Commercial (55,864) (32,268) (37,984) (25,504) (33,858)
Commercial real estate (7,133) (3,643) (5,405) (9,408) (3,959)
Residential real estate (3,099) (2,314) (3,715) (1,957) (1,642)
Credit card (59,643) (55,487) (45,439) (24,208) (19,253)
Other retail (45,099) (39,249) (26,785) (22,559) (16,377)
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs (170,838) (132,961) (119,328) (83,636) (75,089)
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 20,055 11,024 14,280 13,424 12,356
Commercial real estate 2,907 3,185 3,859 2,872 4,233
Residential real estate 265 435 2,065 486 837
Credit card 9,391 9,194 6,928 6,642 5,559
Other retail 16,819 14,392 12,817 11,141 10,600
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 49,437 38,230 39,949 34,565 33,585
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs (121,401) (94,731) (79,379) (49,071) (41,504)
Provision charged to earnings 113,636 117,772 97,334 67,117 50,475
- -------------------------------------------------------------------------------------------------------------------
Balance--end of year $ 395,956 $ 372,933 $ 349,892 $ 317,971 $ 299,060
- -------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans:
Commercial 0.40% 0.27% 0.34% 0.19% 0.37%
Commercial real estate 0.08 0.01 0.03 0.15 (0.01)
Residential real estate 0.08 0.05 0.04 0.04 0.02
Credit card 4.36 4.22 3.92 2.13 1.94
Other retail 0.48 0.48 0.31 0.28 0.16
- -------------------------------------------------------------------------------------------------------------------
Total loans 0.49 0.42 0.37 0.25 0.23
- -------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan
losses to end of year loans 1.53% 1.61% 1.59% 1.56% 1.55%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Loans past due 90 days or more increased slightly to $75 million at
December 31, 1998 compared to $74 million at December 31, 1997. The
increase in 1998 was primarily in the residential mortgage area, as a
result of the Great Financial acquisition, offset by declines in
commercial loans and commercial real estate. Management is not aware of
any material amounts of loans outstanding, not disclosed in Tables 10
and 11, where there is significant uncertainty as to the ability of the
borrower to comply with present payment terms. In addition, as of
December 31, 1998, there were no significant other interest-earning
assets classified as nonperforming or past due 90 days or more.
Certain accruing FHA/VA loans, in addition to insured FHA and guaranteed
VA loans which are contractually past due 90 days or more, are purchased
by the Corporation from GNMA pools it services or from third parties. By
purchasing delinquent loans out of pools, the Corporation is able to
retain the benefit of the net interest rate differential between the
coupon rate the Corporation (as servicer) would otherwise be obligated
to pay the GNMA security holder and the Corporation's cost of funds.
Most of the Corporation's investment in delinquent FHA and VA loans is
recoverable through claims made against FHA and VA. Any credit losses
incurred are no greater than if the FHA/VA loans remained in the GNMA
pools and the Corporation remained as servicer. The same risk from
foreclosure or loss of interest exists for the Corporation as servicer
or owner of the loan. At December 31, 1998, total loans included $130
million of these FHA/VA buyout loans.
Responsibility for the establishment of credit risk policies lies with
the Credit Policy Management Group. Composed of members of senior
management, this group approves these policies and reviews the results
once they have been implemented. To ensure that credit risk is
maintained at an appropriate level, the credit risk policies address
underwriting standards, internal lending limits and provide for
diversification and monitoring of credit within the portfolio on a
consolidated basis. In monitoring the level of credit risk within the
loan portfolio, the Corporation utilizes a variety of risk management
techniques. As part of these techniques, risk ratings are individually
assigned to each commercial and commercial real estate loan within the
portfolio and reported to management on a monthly basis. Risk ratings
are independently reviewed for propriety by the Corporation's loan
review department. The system provides for the proper measurement of the
level of risk within the portfolio and facilitates appropriate
management and control.
The specific valuation allowance recorded on impaired loans, as
prescribed by Statement of Financial Accounting Standards No. 114 (as
amended by
FIRSTAR CORPORATION 26
<PAGE>
SFAS No. 118), is included in the total allowance for loan losses. In
addition to the valuation for impaired loans, the adequacy of the total
allowance for loan losses is monitored on a continual basis and is based
on management's evaluation of several key factors, including: the
quality of the current loan portfolio, current economic conditions,
concentrations in loan types, geographic areas and industries,
evaluation of significant problem loans, an analysis of periodic loan
reviews, historical charge-off and recovery experience and other
pertinent information. These factors are taken in conjunction with a
mathematical analysis of the wholesale and retail portfolios to
determine identifiable losses. It is these identifiable losses for which
reserves are specifically allocated. These estimates are reviewed
continually and, as adjustments become necessary, they are reported in
earnings in the periods in which they become known. For 1999, management
expects net charge-offs of approximately 0.50 to 0.60 percent of
average loans. The estimated net charge-offs for the various loan
portfolios are as follows: commercial loans and leasing $44 million,
commercial real estate and construction $4 million, residential
mortgages $3 million, credit card loans $55 million and other retail
loans $34 million.
FIVE YEAR BAR CHART OF ALLOWANCE AS A % OF NONPERFORMING LOANS
(in percents)
1994 1995 1996 1997 1998
275 226 269 334 318
Management believes that the allowance for loan losses at December 31,
1998 was adequate to absorb all anticipated losses in the loan portfolio
as of that date. The allowance for loan losses is based on estimates and
ultimate losses may vary from current estimates.
The recorded investment in impaired loans at December 31, 1998 was $98
million, an increase of $16 million from December 31, 1997. The related
valuation allowance (as calculated under SFAS No. 114) on impaired loans
at December 31, 1998 was $9 million.
TABLE 10 - NONPERFORMING ASSETS --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status:
Commercial $ 60,567 $ 56,510 $ 66,802 $ 59,646 $ 52,936
Commercial mortgage 36,728 26,760 34,059 53,355 38,647
Residential mortgage 20,717 22,743 21,520 23,146 10,793
Retail 6,463 4,600 6,789 2,821 5,523
- -------------------------------------------------------------------------------------------
Total nonaccrual loans 124,475 110,613 129,170 138,968 107,899
- -------------------------------------------------------------------------------------------
Loans which have been renegotiated:
Commercial 6 11 84 141 362
Commercial mortgage 42 263 1,028 1,336 674
Residential mortgage -- 678 -- -- --
Retail -- 9 -- -- --
- -------------------------------------------------------------------------------------------
Total renegotiated loans 48 961 1,112 1,477 1,036
- -------------------------------------------------------------------------------------------
Total nonperforming loans 124,523 111,574 130,282 140,445 108,935
Other real estate owned 11,852 10,048 12,641 15,153 21,272
- -------------------------------------------------------------------------------------------
Total nonperforming assets $136,375 $121,622 $142,923 $155,598 $130,207
- -------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial $ 14,137 $ 22,522 $ 26,491 $ 22,682 $ 9,876
Commercial mortgage 11,802 17,295 29,796 9,331 7,665
Residential mortgage 16,473 5,141 8,599 11,864 5,044
Retail 32,682 29,237 27,544 17,900 16,094
- -------------------------------------------------------------------------------------------
Total loans past due 90 days
or more $ 75,094 $ 74,195 $ 92,430 $ 61,777 $ 38,679
- -------------------------------------------------------------------------------------------
Percentage of nonperforming loans
to loans 0.48% 0.48% 0.59% 0.69% 0.57%
- -------------------------------------------------------------------------------------------
Percentage of nonperforming assets
to loans and other real estate owned 0.53 0.52 0.65 0.76 0.68
- -------------------------------------------------------------------------------------------
Percentage of allowance for loan
losses to nonperforming loans 318 334 269 226 275
- -------------------------------------------------------------------------------------------
</TABLE>
BANK WITHOUT BOUNDARIES 27
<PAGE>
TABLE 11 - COMPOSITION OF NONPERFORMING LOANS --
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------------------------------- ----------------------------------------------------
Nonperforming Loans Nonperforming Loans
------------------------------------------ ------------------------------------------
90 Days 90 Days
or or
Non- Percentage More Non- Percentage More
accrual Restructured Total of Loans Past Due accrual Restructured Total of Loans Past Due
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans:
Corporate $ 54,151 $ 6 $ 54,157 0.67% $ 14,137 $ 55,431 $ 11 $ 55,442 0.76% $ 22,432
Commercial
leasing 6,416 -- 6,416 0.53 -- 1,079 -- 1,079 0.15 90
- -------------------------------------------------------------------------------------------------------------------------------
Total
commercial
loans 60,567 6 60,573 0.65 14,137 56,510 11 56,521 0.71 22,522
- -------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Residential 20,717 -- 20,717 0.63 16,473 22,743 678 23,000 0.67 5,141
Commercial
mortgage 28,962 42 28,004 0.75 8,823 24,097 263 24,781 0.61 14,908
Construction/
land
development 7,766 -- 7,766 0.17 2,979 2,663 -- 2,663 0.16 2,387
- -------------------------------------------------------------------------------------------------------------------------------
Total real
estate loans 57,445 42 57,487 0.63 28,275 49,503 941 50,444 0.59 22,436
- -------------------------------------------------------------------------------------------------------------------------------
Retail loans:
Other retail 3,344 -- 3,344 0.07 13,604 1,998 9 2,007 0.04 12,769
Credit cards 2,629 -- 2,629 0.22 17,608 2,092 -- 2,092 0.18 15,603
Retail leasing 490 -- 490 0.04 1,470 510 -- 510 0.05 865
- -------------------------------------------------------------------------------------------------------------------------------
Total retail
loans 6,463 -- 6,463 0.09 32,682 4,600 9 4,609 0.07 29,237
- -------------------------------------------------------------------------------------------------------------------------------
Total loans $124,475 $48 $124,523 0.48% $75,094 $110,613 $961 $111,574 0.48% $74,195
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Securities
The Corporation's investment portfolio increased $756 million to $6.36
billion at December 31, 1998, compared to $5.60 billion a year earlier.
This increase was due to the Great Financial acquisition and securities
purchased with the cash received from the Bank One branch acquisition.
In addition the Corporation securitized $615 million in residential
mortgages which were transferred to investment securities in 1998. These
increases were partially offset by scheduled maturities and paydowns of
mortgage-backed securities.
In 1998, the Corporation purchased $1.43 billion in securities, $784
million of which was purchased with the cash received from the Bank One
branch acquisition. The acquisition of Great Financial and the mortgage
swaps increased the investment portfolio $1.73 billion. The securities
added as a result of Great Financial and the mortgage swaps were all
classified as available-for-sale. As a result of the merger of Star Banc
Corporation and Firstar, Firstar's $2.29 billion held-to-maturity
portfolio was transferred to available-for-sale securities. This
transfer was done to conform the Firstar investment portfolio to the
combined company's interest rate risk and investment policies. The
Corporation sold $540 million in securities in 1998. All securities
sales were from the available-for-sale portfolio.
FIRSTAR CORPORATION 28
<PAGE>
It is anticipated the investment portfolio will decline in 1999 as the
funds received from maturities will be used to help fund expected loan
growth. However, if purchases of securities are made, the Corporation is
expected to invest in similar types of securities as have been held in
the portfolio. Credit risk has been minimized by restricting purchases
of mortgaged-backed securities to U.S. Agency backed or AAA rated
securities. To reduce interest rate risks associated with these
securities, purchases are restricted to securities with relatively
short maturities and/or durations.
The investment portfolio is primarily made up of GNMA adjustable rate
mortgages, FNMA and FHLMC pass-through securities (primarily balloons
and 15 year fixed rates), CMOs, U.S. Treasuries and "bank qualified"
municipal securities. The CMOs consist of planned amortization classes
("PACs") and sequential pay bonds that are in the first or second
classes. Table 12 provides information as to the composition of the
Corporation's investment securities portfolio as of December 31, 1998.
As of December 31, 1998, the Corporation's investment securities
portfolio included $6.22 billion in securities classified as
available-for-sale and $135 million classified as held-to-maturity. As
of December 31, 1998, the Corporation reported a net unrealized gain of
$156 million on investment securities, resulting in an increase to
shareholders' equity of $100 million (net of tax). In 1998, the
unrealized net gain reported as a separate component of equity increased
from $33 million to $100 million, increasing equity $67 million. This
change was primarily the result of the reclassification of Firstar's
held-to-maturity securities to available-for-sale and the recording of a
net unrealized gain for those securities.
TABLE 12 - INVESTMENT SECURITIES --
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------------------------ -----------------------------------------
Average Weighted Average Weighted
As of December 31, 1998 Amortized Market Maturity Average Amortized Market Maturity Average
(dollars in thousands) Cost Value -Years Yield Cost Value -Years Yield
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Within one year $ 321,378 $ 328,407 0.48 6.25% $ -- $ -- -- --%
One through five years 907,109 951,933 2.57 6.97 -- -- -- --
Five through ten years 28,995 30,041 3.10 6.85 -- -- -- --
Over ten years 6,286 6,451 2.85 6.94 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,263,768 1,316,832 2.05 6.79 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Within one year 21,240 22,176 0.25 8.85 15,489 15,377 0.50 6.77
One through five years 103,540 106,940 1.38 8.01 46,466 46,130 2.96 6.67
Five through ten years 371,932 389,590 3.03 7.63 -- -- -- --
Over ten years 2,545,299 2,587,819 4.45 6.89 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total 3,042,011 3,106,525 4.14 7.33 61,955 61,507 2.34 6.70
- ----------------------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions:
Within one year 173,569 176,898 0.41 6.65 16,552 16,618 0.52 7.09
One through five years 744,521 760,032 2.69 6.95 10,457 10,846 2.97 8.40
Five through ten years 509,022 525,648 6.55 7.10 13,364 14,517 7.07 9.66
Over ten years 40,529 44,454 8.05 11.51 33,079 33,799 16.43 8.92
- ----------------------------------------------------------------------------------------------------------------------------
Total 1,467,641 1,507,032 3.91 7.09 73,452 75,780 9.23 8.57
- ----------------------------------------------------------------------------------------------------------------------------
Other debt securities:
Within one year 1,005 1,044 0.50 6.92 -- -- -- --
One through five years 4,102 4,121 2.81 7.03 -- -- -- --
Five through ten years 3,069 2,981 6.75 6.84 -- -- -- --
Over ten years -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total 8,176 8,146 3.63 6.94 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock
and other equity securities 234,708 234,875 -- -- -- -- -- --
Money Market Funds 47,492 47,492 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities $6,063,796 $6,220,902 -- -- $135,407 $137,287 -- --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Information related to mortgage-backed securities included above is
presented based upon weighted average maturities anticipating future
prepayments. Average yields are presented on a fully-taxable equivalent
basis. Yields on available-for-sale securities are computed based on
historical cost balances.
BANK WITHOUT BOUNDARIES 29
<PAGE>
Deposits
Total deposits increased $4.36 billion to $28.85 billion at December 31,
1998, compared to $24.49 billion a year earlier. The increase in 1998
was the result of a $1.09 billion increase in noninterest-bearing
deposits and a $3.28 billion increase in interest-bearing deposits.
The acquisitions of Great Financial and Bank One branches added
$3.08 billion in deposits including $376 million in noninterest-
bearing deposits, $996 million in savings, NOW and money market
accounts and $1.71 billion in certificates of deposit. Excluding
these acquisitions, nonininterest-bearing deposits increased $712
million or 12.8 percent, led by strong growth in nonpersonal deposits.
Interest-bearing deposits increased $573 million or 3.0 percent, as NOW
and MMDA deposits increased 10.2 percent and 28.5 percent, respectively,
partially offset by declines in savings accounts and certificates of
deposit (CDs). With the increase in core deposits in 1998, the
Corporation reduced its level of national market funding with a $289
million decline in CDs $100,000 and over.
The declining rate environment over the last several years (particularly
for bank core deposits) has prompted many customers to increase their
liquidity by increasing funds in immediately accessible deposit vehicles
and reducing the amount in longer term instruments such as certificates
of deposit. As short-term market rates and savings rates remained low
in 1998, customers continued to transfer their funds out of certificates
of deposit and savings accounts into tiered rate money market accounts.
The Corporation has also noted a continued shift by customers out of
traditional bank products to other nonbank or nondeposit financial
instruments or investments.
Table 13 provides a summary of total deposits by type at year-end for
each of the last five years. Table 14 provides maturity distribution for
domestic time deposits $100,000 and over.
TABLE 13 - DEPOSITS BY TYPE --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 6,649,199 $ 5,561,341 $ 5,683,407 $ 5,040,075 $ 4,520,239
Interest-bearing deposits:
Savings 2,272,495 2,228,974 2,543,654 2,734,161 3,000,129
NOW accounts 3,848,752 3,221,349 2,886,959 2,888,617 2,965,530
Money market deposit accounts 5,959,710 4,243,790 3,880,328 3,277,297 2,792,731
Time deposits $100,000 and over - domestic 1,614,748 1,676,693 1,783,535 1,783,055 1,366,618
Foreign deposits $100,000 and over 343,574 185,682 207,642 166,352 356,550
All other time deposits 8,162,287 7,368,238 7,684,150 7,560,570 7,106,742
- ----------------------------------------------------------------------------------------------------------------------
Total deposits $28,850,765 $24,486,067 $24,669,675 $23,450,127 $22,108,539
- ----------------------------------------------------------------------------------------------------------------------
Percent of total deposits by type
- ----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 23.0% 22.7% 23.0% 21.5% 20.5%
Interest-bearing deposits:
Savings 7.9 9.1 10.3 11.7 13.6
NOW accounts 13.3 13.2 11.7 12.3 13.4
Money market deposit accounts 20.7 17.3 15.7 14.0 12.6
Time deposits $100,000 and over - domestic 5.6 6.8 7.2 7.6 6.2
Foreign deposits $100,000 and over 1.2 0.8 0.9 0.7 1.6
All other time deposits 28.3 30.1 31.2 32.2 32.1
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
FIRSTAR CORPORATION 30
<PAGE>
TABLE 14 - MATURITY OF DOMESTIC TIME DEPOSITS $100,000 AND OVER --
As of December 31, 1998 (dollars in thousands)
- -------------------------------------------------------------------
Three months or less $ 659,740
Over three months through six months 339,880
Over six months through twelve months 382,748
Over twelve months 232,380
- -------------------------------------------------------------------
Total $1,614,748
- -------------------------------------------------------------------
Liquidity
The Asset/Liability Policy Committee ("ALPC") establishes policies, as
well as analyzes and manages the Corporation's liquidity to ensure that
adequate funds are always available to meet normal operating
requirements in addition to unexpected customer demands for funds,
such as high levels of deposit withdrawals or loan demand. The most
important factor in the preservation of liquidity is the maintenance
of public confidence which facilitates the retention and growth of
a large, stable supply of core deposits and funds. Ultimately,
public confidence is generated through profitable operations and a
strong capital position. The Corporation's strong record in both of
these areas has enabled it to succeed in developing a large and reliable
base of core funding from within its market areas.
The ALPC's liquidity policies limit the amount the Corporation's
subsidiary banks can borrow, subject to the Corporation's ability to
borrow funds in the capital markets in an efficient and cost effective
manner. In addition, the Corporation's strategic liquidity and
contingent planning are subject to the amount of asset liquidity present
in the balance sheet. The ALPC periodically reviews the Corporation's
ability to meet funding deficiencies due to adverse business events.
These funding needs are then matched up with specific asset-based
sources to ensure sufficient funds are available. Also, strategic
liquidity policy requires the Corporation to diversify its national
market funding sources to avoid concentration in any one market. As of
December 31, 1998, the Corporation was 94.0 percent core funded from
customers within its market area.
The Corporation's subsidiary banks are members of the Federal Home Loan
Bank and maintain Grand Cayman offices for issuing eurodollar
certificates of deposit. At December 31, 1998, there was $344 million in
eurodollar deposits outstanding. Star Bank, N.A. and Firstar Bank,
Milwaukee also have established relationships with dealers to
issue national market retail certificates of deposit. At December 31,
1998, there were no deposits outstanding in this program. In 1996,
Star Bank, N.A. updated an offering circular in order to issue
senior or subordinated bank notes of up to $500 million, to be available
as an alternative funding source. In December 1997, Star Bank, N.A.
issued $100 million in subordinated notes, and Firstar Bank Milwaukee,
N.A. issued $250 million of five-year senior bank notes. In addition to
these funding alternatives, the Corporation's subsidiary banks have
maintained a presence in the national fed funds, repurchase agreements
and certificate of deposit markets. The following debt ratings assist
the Corporation and its subsidiary banks in their abilities to gather
funds from the capital markets.
TABLE 15 -- Debt Ratings --
As of December 31, 1998
- --------------------------------------------------------------------
Standard Thompson
& Poor's Moody's Bank Watch Fitch
- --------------------------------------------------------------------
Holding company
Senior debt A- A2 A+ A
Subordinated debt BBB+3 A3 -- A-
Commercial paper A-2 P-1 TBW-1 F-1
Bank
Senior debt A A1 AA- A+
Subordinated debt A- A2 A+ A
Short term CDs A-1 P-1 TBW-1 F-1
- --------------------------------------------------------------------
The parent company obtains cash to meet its obligations from dividends
collected from its subsidiaries. Federal banking laws regulate the
amount of dividends that may be declared by banking subsidiaries. During
1998, the Corporation's subsidiary banks could have provided an
additional $343 million in dividends to the parent company, without
additional regulatory approval, and still exceeded minimum regulatory
capital ratios.
BANK WITHOUT BOUNDARIES 31
<PAGE>
The Corporation issues commercial paper notes through a private
placement memorandum up to an aggregate amount of $200 million, with
maturities of up to 270 days. The Corporation also issues medium term
notes through a universal shelf registration statement up to an
aggregate amount of $250 million, with maturities of 12 to 60 months.
The proceeds from the commercial paper and medium term notes programs
are used to provide funding to Star Banc Finance, Inc. and other
nonbanking subsidiaries, and for general corporate purposes. At December
31, 1998, there was $131 million in commercial paper and $249 million in
medium term notes outstanding.
In the first quarter of 1999, the Corporation is expected to prepare a
new universal shelf registration statement for the issuance of various
debt instruments such as, unsecured senior or subordinated debt
securities, warrants to purchase debt securities, shares of common
stock, preferred stock, or depository shares. This shelf registration
will provide the parent company with an additional source of funding for
future investments in subsidiaries, acquisitions, repayment of maturing
obligations and other general corporate purposes. The parent company can
also obtain funding on a short-term basis through the issuance of
short-term notes.
The Corporation's consolidated long-term debt decreased $36 million to
$1.71 billion at December 31, 1998. This decrease was the result of
payoffs and maturities of Federal Home Loan Bank and subordinated notes,
partially offset by the issuance of medium term notes by the parent
company.
In December 1996 and again in June 1997, the Corporation issued $150
million of Corporation-obligated mandatorily redeemable Capital
Securities. The $299 million outstanding at December 31, 1998 qualifies
as tier 1 capital for regulatory capital purposes. The proceeds from the
sale of these securities were used for general corporate purposes.
Capital Resources
The Corporation's total shareholders' equity increased $780 million or
28.4 percent to $3.53 billion at December 31, 1998, compared to $2.75
billion at December 31, 1997. This increase was the result of the $458
million in equity added for the Great Financial acquisition, in
addition to the retention of earnings. Unrealized gains on
available-for-sale securities also increased equity $67 million
in 1998.
The Corporation increased its annual dividend rate per common share 23.8
percent from $0.80 in 1997 to $0.99 in 1998. Excluding merger-related
charges and other nonrecurring items, the dividend payout ratio for 1998
increased to 44.9 percent, following payout ratios of 39.1 percent in
1997 and 37.5 percent in 1996.
FIVE YEAR BAR CHART OF COMMON DECLARED DIVIDENDS*
(in percents)
1994 1995 1996 1997 1998
0.47 0.53 0.63 0.80 0.99
*Based on historical Star Banc amounts.
FIRSTAR CORPORATION 32
<PAGE>
Stock buyback programs which were in place at both Star Banc and the old
Firstar were rescinded in 1998 in connection with the acquisition of
Trans Financial and the merger of Star and Firstar. Repurchased shares
had been held as treasury shares primarily for reissue in connection
with the employee stock option plans and preferred stock conversions.
The Corporation had repurchased 664,000 shares in 1998 prior to the
programs being rescinded.
Banking industry regulators define minimum capital requirements for
banks and bank holding companies. The Corporation's tier 1 and total
risk-based capital ratios as of December 31, 1998 amounted to 8.92
percent and 11.01 percent, respectively, well above the minimum
requirements of 4.00 percent for tier 1 and 8.00 percent
for total risk-based capital. This compares to tier 1 and total
risk-based capital ratios of 9.60 percent and 12.03 percent at December
31, 1997. Regulatory authorities have also established a minimum
"leverage" ratio of 3.00 percent, which is defined as tier 1 equity to
average quarterly assets. At December 31, 1998, the Corporation's
leverage ratio was 7.52 percent, compared to 8.23 percent a year
earlier. The decline in the tier 1 and total risk-based capital ratios
in 1998 was due primarily to the intangible assets added as the result
of the Great Financial, Cargill and Bank One branch acquisitions.
The Corporation's subsidiary banks all maintain risk-based capital and
leverage ratios within the "well capitalized" category as defined by
the FDIC. The "well capitalized" category requires tier 1 and total
risk-based capital ratios of at least 6.00 percent and 10.00 percent,
respectively, and a minimum leverage ratio of 5.00 percent.
Table 16 provides a summary of the components of tier 1 and total
risk-based capital, the amounts of risk-weighted assets and capital
ratios as defined by the regulatory agencies as of December 31, 1998 and
1997.
TABLE 16 - REGULATORY CAPITAL RATIOS --
As of December 31 (dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------
Tier 1 capital:
Common shareholders' equity $ 3,529,913 $ 2,749,891
Trust preferred securities 298,629 298,581
Less: Unrealized gains
on securities 99,847 32,848
Goodwill and other adjustments 914,309 402,083
- ---------------------------------------------------------------------------
Total tier 1 capital 2,814,386 2,613,541
Tier 2 capital components:
Qualifying long-term debt 274,083 320,417
Allowance for loan losses 383,359 340,755
- ---------------------------------------------------------------------------
Total risk-based capital $ 3,471,828 $ 3,274,713
- ---------------------------------------------------------------------------
Risk-Weighted Assets:
Risk-weighted assets on-balance-sheet $26,401,134 $23,190,842
Risk-weighted assets off-balance-sheet 5,135,282 4,037,399
- ---------------------------------------------------------------------------
Net risk-weighted assets $31,536,416 $27,228,241
- ---------------------------------------------------------------------------
Fourth quarter average assets,
net of adjustments $37,411,036 $31,748,568
- ---------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 8.92% 9.60%
Total 11.01 12.03
Tier 1 leverage ratio 7.52 8.23
- ---------------------------------------------------------------------------
Forward-looking information
With the exception of historical information, the matters discussed or
incorporated by reference in this Annual Report may contain certain
forward-looking statements that involve risk and uncertainties
including, but not limited to, economic conditions, product demand
and industry capability, competitive products and pricing, new
product development, the regulatory and trade environment and
other risks indicated in filings with the Securities and Exchange
Commission.
FIVE YEAR LINE CHART OF COMMON STOCK PRICE & BOOK VALUE
(in dollars)
1994 1995 1996 1997 1998
High $14.92 $20.75 $31.38 $58.00 $93.94
Low 11.17 12.08 18.71 29.70 53.13
Book Value 10.73 11.66 12.68 13.34 16.14
BANK WITHOUT BOUNDARIES 33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As of December 31 (dollars in thousands) 1998 1997
- ------------------------------------------------------------------------
Assets:
Cash and due from banks $ 2,349,532 $ 1,902,542
Money market investments 75,524 326,378
Trading securities 2,754 2,293
Investment securities:
Available-for-sale 6,220,902 2,993,323
Held-to-maturity 135,407 2,606,673
- ------------------------------------------------------------------------
Total securities 6,356,309 5,599,996
Loans held for sale 1,539,892 453,332
Loans:
Commercial loans 9,264,143 7,909,803
Real estate loans 9,110,524 8,604,186
Retail loans 7,493,390 6,702,036
- ------------------------------------------------------------------------
Total loans, net of unearned interest 25,868,057 23,216,025
Allowance for loan losses (395,956) (372,933)
- ------------------------------------------------------------------------
Net loans 25,472,101 22,843,092
Premises and equipment 629,464 544,285
Acceptances--customers' liability 29,916 24,124
Other assets 2,020,347 1,164,400
- ------------------------------------------------------------------------
Total assets $38,475,839 $32,860,442
- ------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $ 6,649,199 $ 5,561,341
Interest-bearing deposits 22,201,566 18,924,726
- ------------------------------------------------------------------------
Total deposits 28,850,765 24,486,067
Short-term borrowings 3,643,308 3,414,330
Long-term debt 1,708,869 1,744,767
Acceptances outstanding 29,916 24,124
Other liabilities 713,068 441,263
- ------------------------------------------------------------------------
Total liabilities 34,945,926 30,110,551
- ------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock -- 5,308
Common stock:
Issued - 219,430,580 in 1998
- 210,919,576 in 1997 2,194 2,109
Surplus 1,176,537 783,209
Retained earnings 2,267,263 2,095,443
Employee stock ownership plan -- (1,846)
Treasury stock, at cost:
Held - 683,486 in 1998
- 5,229,270 in 1997 (15,928) (167,180)
Accumulated other comprehensive income 99,847 32,848
- ------------------------------------------------------------------------
Total shareholders' equity 3,529,913 2,749,891
- ------------------------------------------------------------------------
Total liabilities and
shareholders' equity $38,475,839 $32,860,442
- ------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
FIRSTAR CORPORATION 34
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 (amounts in thousands except per share data)
1998 1997 1996
- ----------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $2,152,359 $1,982,684 $1,869,407
Interest and fees on loans held for sale 70,808 20,878 20,454
Interest on investment securities:
Taxable 340,080 298,134 318,320
Non-taxable 72,132 64,090 60,088
Interest on money market investments 6,036 11,182 7,062
Interest on trading securities 73 131 344
- ----------------------------------------------------------------------------
Total interest income 2,641,488 2,377,099 2,275,675
- ----------------------------------------------------------------------------
Interest Expense:
Interest on deposits 911,958 804,406 788,023
Interest on short-term borrowings 207,650 183,642 171,694
Interest on long-term debt 109,101 86,884 63,687
- ----------------------------------------------------------------------------
Total interest expense 1,228,709 1,074,932 1,023,404
- ----------------------------------------------------------------------------
Net interest income 1,412,779 1,302,167 1,252,271
Provision for loan losses 113,636 117,772 97,334
- ----------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,299,143 1,184,395 1,154,937
- ----------------------------------------------------------------------------
Noninterest Income:
Trust income 262,259 234,195 196,891
Mortgage banking income 151,096 70,644 64,811
Retail deposit fees 92,486 83,579 81,496
Cash management income 84,522 68,831 65,928
Credit card income 84,853 88,615 81,622
ATM income 28,672 22,397 15,547
Investment securities gains/(losses)-net 1,095 (3,916) (2,365)
All other income 155,165 147,698 117,485
- ----------------------------------------------------------------------------
Total noninterest income 860,148 712,043 621,415
- ----------------------------------------------------------------------------
Noninterest Expense:
Salaries 540,977 478,159 466,133
Pension and other employee benefits 97,025 91,114 97,089
Equipment expense 103,713 94,369 86,952
Occupancy expense-net 102,464 91,348 91,460
All other expense 434,043 371,516 341,829
- ----------------------------------------------------------------------------
1,278,222 1,126,506 1,083,463
SAIF special assessment -- -- 15,522
Merger and restructuring expenses 242,970 -- 53,267
- ----------------------------------------------------------------------------
Total noninterest expense 1,521,192 1,126,506 1,152,252
- ----------------------------------------------------------------------------
Income before income tax 638,099 769,932 624,100
Income tax 207,952 256,038 208,682
- ----------------------------------------------------------------------------
Net income $ 430,147 $ 513,894 $ 415,418
- ----------------------------------------------------------------------------
Per Share:
Basic earnings per common share $ 1.99 $ 2.48 $ 1.96
Diluted earnings per common share 1.95 2.43 1.93
Dividends declared on common stock 0.99 0.80 0.63
- ----------------------------------------------------------------------------
Weighted average common shares 216,510 206,761 211,286
Weighted average diluted common shares 221,018 211,383 214,880
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
BANK WITHOUT BOUNDARIES 35
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Employee
Stock
Accumulated Ownership
Other Plan Shares
Preferred Common Retained Treasury Comprehensive Purchased Total
(dollars in thousands) Stock Stock Surplus Earnings Stock Income With Debt Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $15,625 $ 2,153 $ 833,564 $1,664,409 $ (77,639) $ 39,681 $ (3,029) $2,474,764
Net income -- -- -- 415,418 -- -- -- 415,418
Unrealized loss on securities
available for sale -- -- -- -- -- (23,003) -- (23,003)
Reclassification adjustment for
losses realized in net income -- -- -- -- -- 2,365 -- 2,365
Income taxes -- -- -- -- -- 7,182 -- 7,182
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 401,962
Cash dividends declared on
common stock -- -- -- (172,436) -- -- -- (172,436)
Cash dividends declared on
preferred Stock -- -- -- (872) -- -- -- (872)
Conversion of Preferred
stock into common stock (4,281) -- (1,726) -- 6,007 -- -- --
Issuance of common stock
and treasury shares -- -- (2,491) -- 257,400 -- -- 254,909
Purchase of treasury stock -- -- -- -- (270,578) -- -- (270,578)
Shares reserved to meet deferred
compensation obligations -- -- 1,903 -- (279) -- -- 1,624
Amortization of restricted
Stock -- -- 795 -- (311) -- -- 484
ESOP debt reduction, net -- -- -- -- -- -- 578 578
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 11,344 2,153 832,045 1,906,519 (85,400) 26,225 (2,451) 2,690,435
Net income -- -- -- 513,894 -- -- -- 513,894
Unrealized gain on securities
available for sale -- -- -- -- -- 8,412 -- 8,412
Reclassification adjustment for
gains realized in net income -- -- -- -- -- 3,916 -- 3,916
Income taxes -- -- -- -- -- (5,705) -- (5,705)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 520,517
Cash dividends declared on
common stock -- -- -- (195,497) -- -- -- (195,497)
Cash dividends declared on
preferred Stock -- -- -- (483) -- -- -- (483)
Conversion of Preferred
stock into common stock (6,036) -- (518) (3,780) 10,334 -- -- --
Issuance of common stock
and treasury shares -- 1 1,210 (2,601) 48,533 -- -- 47,143
Purchase of treasury stock -- -- -- -- (139,724) -- -- (139,724)
Purchase and retirement of
common stock -- (45) (52,828) (122,609) -- -- -- (175,482)
Shares reserved to meet deferred
compensation obligations -- -- 2,868 -- (923) -- -- 1,945
Amortization of restricted
stock -- -- 432 -- -- -- -- 432
ESOP debt reduction, net -- -- -- -- -- -- 605 605
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5,308 2,109 783,209 2,095,443 (167,180) 32,848 (1,846) 2,749,891
Net income -- -- -- 430,147 -- -- -- 430,147
Unrealized gain on securities
available for sale -- -- -- -- -- 105,724 -- 105,724
Reclassification adjustment for
gains realized in net income -- -- -- -- -- (1,095) -- (1,095)
Income taxes -- -- -- -- -- (37,630) -- (37,630)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 497,146
Cash dividends declared on
common stock -- -- -- (271,253) -- -- -- (271,253)
Cash dividends declared on
preferred stock -- -- -- (83) -- -- -- (83)
Conversion of preferred stock
into common stock (5,308) 3 4,721 492 64 -- -- (28)
Issuance of common stock
and treasury shares -- 84 384,767 12,517 185,878 -- -- 583,246
Purchase of treasury stock -- -- -- -- (39,008) -- -- (39,008)
Purchase and retirement of
common stock -- (2) (12,558) -- 12,251 -- -- (309)
Shares reserved to meet deferred
compensation obligations -- -- 9,126 -- (7,933) -- -- 1,193
Amortization of restricted
stock -- -- 7,272 -- -- -- -- 7,272
ESOP debt reduction, net -- -- -- -- -- -- 1,846 1,846
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ -- $ 2,194 $1,176,537 $2,267,263 $ (15,928) $ 99,847 $ -- $3,529,913
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
FIRSTAR CORPORATION 36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (dollars in thousands)
1998 1997 1996
- -----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 430,147 $ 513,894 $ 415,418
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 137,621 79,506 92,542
Intangible amortization 57,121 35,292 30,030
Provision for loan losses 113,636 117,772 97,334
Net (increase) decrease in trading securities (461) 11,196 (853)
Provision for deferred taxes 72,307 40,280 31,217
(Gain)/loss on sale of premises and
equipment-net (39) (1,179) 1,624
(Gain)/loss on sale of securites--and
other assets 2,614 2,197 1,106
(Gain)/loss on sale of mortgage loans (71,904) (24,411) (15,389)
Mortgage loans originated for sale on
the secondary market (7,502,234)(2,959,059)(2,132,975)
Proceeds from sale of mortgage loans 6,409,834 2,822,771 2,304,212
Net change in other assets and liabilities (67,160) (186,673) 16,083
- -----------------------------------------------------------------------------
Total adjustments (848,665) (62,308) 424,931
- -----------------------------------------------------------------------------
Net cash provided by(used in)
operating activities (418,518) 451,586 840,349
- -----------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity
securities 378,736 438,334 469,127
Proceeds from maturities of available-for-
sale securities 1,099,814 965,585 850,082
Proceeds from sales of available-for-sale
securities 539,961 216,028 406,077
Purchase of held-to-maturity securities (169,161) (630,958) (268,512)
Purchase of available-for-sale securities (1,255,768) (588,761) (744,134)
Net change in loans (1,421,887)(1,421,831) (739,685)
Proceeds from sales of loans 726,822 104,833 31,170
Proceeds from sales of premises and equipment 1,549 11,306 15,227
Purchase of premises and equipment (154,694) (102,513) (83,541)
Acquisitions, net of cash acquired (354,858) -- 64,718
Net change due to acquisitions of branch
offices 901,611 81,978 32,513
- -----------------------------------------------------------------------------
Net cash provided by/(used in)
investing activities 292,125 (925,999) 33,042
- -----------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net change in deposits 1,180,822 (260,419) 78,611
Net change in short-term borrowings (348,495) 497,528 (316,087)
Principal payments on long-term debt (789,223) (29,324) (229,395)
Proceeds from issuance of long-term debt 449,634 540,327 152,254
Proceeds from issuance of trust capital
securities -- 148,554 150,000
Proceeds from issuance of common stock 90,685 29,883 27,478
Purchase of treasury stock (39,317) (315,208) (277,905)
Shares reserved to meet deferred
compensation obligations 1,193 1,945 1,624
Dividends paid (222,770) (192,514) (171,661)
- -----------------------------------------------------------------------------
Net cash provided by/(used in)
financing activities 322,529 420,772 (585,081)
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents 196,136 (53,641) 288,310
Cash and cash equivalents at beginning
of year 2,228,920 2,282,561 1,994,251
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,425,056 $2,228,920 $2,282,561
- -----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands)
1998 1997 1996
- -----------------------------------------------------------------------------
Cash Paid During the Year for:
Interest $1,244,114 $1,070,493 $1,031,970
Income taxes 137,166 196,824 171,822
- -----------------------------------------------------------------------------
Noncash transfer of loans to other real
estate owned 19,427 11,388 10,963
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
BANK WITHOUT BOUNDARIES 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Firstar Corporation
("Firstar") and subsidiaries follow generally accepted accounting
principles and conform to general practices within the banking industry.
The following is a description of the more significant accounting
policies followed by Firstar.
Basis of Presentation
The consolidated financial statements include the accounts of Firstar
and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results may differ from those estimates.
Financial statements have been restated to include historical
information of acquisitions accounted for as pooling-of-interests.
Certain amounts within the consolidated financial statements from prior
years have been restated to conform to the current year's presentation.
Nature of Operations
Firstar Corporation is a multi-state bank holding company headquartered
in Milwaukee, Wisconsin. Financial services are provided through over
710 banking offices in Wisconsin, Ohio, Iowa, Minnesota, Illinois,
Kentucky, Tennessee, Indiana, Arizona, and Florida. These banking
services include accepting demand, time and savings deposits; making
both secured and unsecured business and personal loans; providing trust
and investment management services to individuals and corporate
customers; providing correspondent banking services to other financial
institutions; conducting mortgage banking activities; providing
international banking services; conducting retail brokerage services;
providing mutual fund custody services; and other related banking
activities.
Investment Securities
When securities are purchased, they are classified in the
held-to-maturity portfolio, the available-for-sale portfolio, or as
trading securities. Held-to-maturity securities are debt securities that
Firstar has the positive intent and ability to hold to
maturity. Held-to-maturity securities are reported at historical cost
adjusted for amortization of premiums and accretion of discounts.
Available-for-sale securities are debt and equity securities which will
be held for an indefinite period of time and may be sold from time to
time for asset/liability purposes, in order to manage interest rate risk
or for liquidity needs. Available-for-sale securities are reported at
fair value. Unrealized gains or losses for these securities are included
in comprehensive income as a separate component of shareholders' equity.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in current earnings. The cost of securities sold is determined
on a specific identification basis.
Loans
Loans are stated at the principal amount outstanding, net of unearned
interest and unamortized origination fees and costs. Interest income on
loans is recognized using the interest method or methods that
approximate the interest method. Loans held-for-sale are carried in the
aggregate at lower of cost or fair value after consideration of related
loan sale commitments.
Loans are placed on nonaccrual status when, in the opinion of
management, there is a reasonable doubt as to future collectibility of
interest or principal. Loans are generally placed on nonaccrual status
when they are past due 90 days as to either principal or interest.
However, loans that are well secured and in the process of collection
may not be placed on nonaccrual status, at the judgment of senior
management. All accrued interest receivable is reversed when loans are
put on nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level adequate to
absorb probable loan and lease losses inherent in the portfolio. The
allowance is based upon a continuing review of loans which includes
consideration of actual net loan loss experience, changes in the size
and character of the loan portfolio, identification of problem
situations which may affect the borrowers' ability to repay, estimated
value of underlying collateral and evaluation of current economic
conditions. With respect to loans which are deemed impaired, the
calculation of allowance levels is based upon the discounted present
value of expected cash flows to be received from the debtor or other
measures of value such as market prices or collateral values. Firstar
considers all nonaccrual commercial loans to be impaired. Loan losses
are recognized through charges to the allowance for loan losses. Any
subsequent recoveries are added to the allowance.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated
depreciation and amortization. Expenditures for major additions and
improvements are capitalized, and maintenance and repair costs are
charged to operating expense. Depreciation and amortization of premises
and equipment are computed on a straight-line basis over the estimated
useful lives of the individual assets.
Other Real Estate Owned
Other real estate owned represents real estate of which Firstar has
taken control in partial or total satisfaction of loans, in addition to
closed bank offices.
Other real estate owned is carried at the lower of cost or fair value,
less estimated costs to sell, and is included in other assets in the
consolidated balance sheets. Losses at the time property is classified
as other real estate owned are charged to the allowance for loan losses.
Subsequent gains and losses, as well as operating income or expense
related to other real estate owned, are recorded in noninterest expense.
Mortgage Servicing Rights
Mortgage servicing rights associated with loans sold, where servicing is
retained, are capitalized and included in other assets in the balance
sheet. The value of these capitalized servicing rights are amortized in
proportion to, and over the period of, estimated net servicing revenue
and recorded as a reduction of servicing income. The carrying value of
these rights are periodically reviewed for impairment based on fair
value, with any impairment recognized through a valuation allowance. For
purposes of measuring impairment, servicing rights are stratified based
on the underlying loan type and note rate and compared to a valuation
prepared based on a discounted cash flow methodology, current prepayment
speeds and discount rate. Impairment is recognized through a valuation
allowance for each impaired stratum.
FIRSTAR CORPORATION 38
<PAGE>
Intangible Assets
The excess of Firstar's cost of acquisitions over the fair value of net
assets acquired is being amortized on a straight-line basis over periods
of 12 to 25 years. Core deposit intangibles, which represent the net
present value of the future economic benefits related to deposits
purchased, are being amortized on a straight-line basis over periods
ranging from 8 to 17 years. Other identified intangible assets are being
amortized on a straight-line basis over 25 years.
Firstar reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Asset values and the related amortization expense are based
on estimated lives and significant changes in these lives could
significantly affect future amortization expense.
Income Taxes
Firstar and its subsidiaries file a consolidated federal income tax
return. Income taxes are accounted for using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. 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.
Derivative Financial Instruments
Firstar uses interest rate swaps, caps and floors to manage its interest
rate risks from recorded financial assets and liabilities. These
instruments are accounted for on an accrual basis when the instrument
can be demonstrated to effectively hedge the cash flows of a designated
asset or liability and such asset or liability exposes Firstar to
interest rate risk. Amounts to be paid or received under interest rate
swaps, caps and floors are recognized as interest income or expense of
the related asset or liability. Gains and losses on early termination of
these instruments are deferred and amortized as an adjustment to the
yield on the related asset or liability over the shorter of the
remaining contract life or the maturity of the related asset or
liability. If the related asset or liability is sold or otherwise
liquidated, the instrument is marked to market, with the resultant gains
and losses recognized in other income. Fees paid or received in
connection with caps or floors are deferred and amortized over the life
of the instrument.
Interest rate swaps, caps, floors and foreign exchange contracts are
offered to Firstar's customers. In these transactions, Firstar acts as
an intermediary and hedges its risk by entering into offsetting
positions with other counterparties. The fair value of these
transactions are included in other assets and liabilities and the
related gain or loss is recorded in other income.
Stock-Based Compensation
Firstar has various stock-based compensation plans that authorize the
granting of stock options, restricted stock, and other stock-based
awards to eligible employees. These plans are accounted for under the
intrinsic value based method as prescribed APB No. 25 "Accounting for
Stock Issued to Employees." Included in the Notes to Consolidated
Financial Statements are the pro forma disclosures required by Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation," which assumes the fair value based method of
accounting had been adopted.
Statement of Cash Flows
For purposes of reporting cash flows on the consolidated statements of
cash flows, cash and cash equivalents include cash on hand, amounts due
from banks, federal funds sold and securities purchased under agreements
to resell.
Earnings per Common Share
Basic earnings per share is computed by dividing net income applicable
to common stockholders by the weighted average number of shares of
common shares outstanding for the period. Diluted earnings per share is
computed by dividing an adjusted net income by the sum of the weighted
average number of shares and the potentially dilutive shares that could
be issued through stock award programs or convertible securities.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement established
standards for reporting the components of comprehensive income
prominently within the financial statements. Comprehensive income
includes net income plus certain transactions that are reported directly
within shareholders' equity, such as unrealized gains/(losses) on
available-for-sale securities. The adoption of this statement in 1998
did not have any impact on the financial position or results of
operations of Firstar.
In January 1998, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement
requires disclosure on a business segment basis, as defined by the
Corporation, a description of products and services, and financial
information as measured by Firstar's management in assessing performance
of its business segments. See Note 25 for line of business results and
related disclosures.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement revises disclosures about
pension and other postretirement benefit plans, but does not change the
measurement or recognition of these plans. The adoption of this
statement did not have any impact on the financial position or results
of operation of Firstar.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires the recognition of all derivatives as either
assets or liabilities on the balance sheet and the measurement of those
instruments at fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The statement is effective
in the first quarter of 2000. Firstar has not determined the impact, if
any, that this statement could have on its financial position or results
of operations.
BANK WITHOUT BOUNDARIES 39
<PAGE>
NOTE 2 - Mergers and Acquisitions
On November 20, 1998, Firstar Corporation and Star Banc Corporation
merged under a pooling of interests transaction and accordingly all
financial information has been restated to include the historical
information for both companies. As a result of the
merger, a new holding company was formed which retained the name
Firstar Corporation. Each share of Star Banc Corporation stock was
converted into and exchanged for one share of the new Firstar
Corporation common stock while each share of Firstar Corporation stock
was converted into and exchanged for 0.76 of a share of the new Firstar
Corporation common stock.
On August 21, 1998 Firstar acquired Trans Financial, Inc. under
a pooling-of-interests transaction and accordingly all financial
information has been restated to include the historical
information of Trans Financial.
The proforma effect of aquisitions accounted for as purchases was not
material.
Separate results of operation of the three companies for the periods
prior to the mergers were as follows:
Year Through
-----------------
Sept. 30 June 30
(dollars in millions) 1998 1998 1997 1996
- --------------------------------------------------------------
Net interest income
Firstar Corporation $ 561 $ 371 $ 760 $ 759
Star Banc Corporation 483 275 462 418
Trans Financial, Inc. -- 42 80 75
- --------------------------------------------------------------
Total $ 1,044 $ 688 $ 1,302 $ 1,252
- --------------------------------------------------------------
Net income
Firstar Corporation $ 231 $ 150 $ 295 $ 250
Star Banc Corporation 186 124 195 158
Trans Financial, Inc. -- 14 24 7
- --------------------------------------------------------------
Total $ 417 $ 288 $ 514 $ 415
- --------------------------------------------------------------
Total assets
Firstar Corporation $20,666 $19,972 $19,794 $19,705
Star Banc Corporation 17,291 14,849 10,959 10,094
Trans Financial, Inc. -- 2,237 2,107 1,144
- --------------------------------------------------------------
Total $37,957 $37,058 $32,860 $30,943
- --------------------------------------------------------------
The following table summarizes other acquisitions completed during the
past three years:
<TABLE>
<CAPTION>
Goodwill &
Intangibles Cash Shares Method of
(dollars in millions) Date Assets Loans Deposits Recorded Paid Issued Accounting
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trans Financial, Inc. August 1998 $2,409 $1,594 $1,620 $ -- $ -- 10,700,000 Pooling
Cargill Leasing Corporation July 1998 613 545 -- 64 220 n/a Purchase
Bank One branches June/August 1998 193 155 1,198 137 137 n/a Purchase
Great Financial Corporation February 1998 2,809 1,943 2,001 363 135 9,500,000 Purchase
American Bancorporation, Inc. July 1996 1,187 614 881 89 39 6,080,000 Purchase
Harvest Financial Corp. January 1996 353 297 247 17 -- 1,348,550 Purchase
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 3 - Merger and Restructuring Expenses
Firstar recorded merger, integration and restructuring charges of $243.0
million in 1998 and $53.3 million in 1996. Merger and integration
charges in 1998 were associated with the mergers of Firstar Corporation
and Star Banc Corporation in the fourth quarter of 1998 and the
acquisition of Trans Financial Inc. in the third quarter of 1998. The
restructuring charge recorded in 1996 was associated with a company-wide
reorganization effort. The components of the charges are shown below:
(dollars in thousands) 1998 1996
- ---------------------------------------------------
Severance and related costs $ 86,576 $27,129
Fixed asset write-downs 26,646 3,908
Lease termination charges 16,476 --
System conversions 34,026 --
Charitable contributions 23,000 --
Professional fees 45,700 20,000
Other merger-related expenses 10,546 2,230
- ---------------------------------------------------
Total $242,970 $53,267
- ---------------------------------------------------
The following table presents a summary of activity with respect to the
merger-related accrual.
(dollars in thousands) 1998
- -----------------------------------------
Balance January 1, 1998 $ --
Merger-related charge 242,970
Cash payments (102,120)
Noncash write-downs (11,652)
- -----------------------------------------
Balance December 31, 1998 $ 129,198
- -----------------------------------------
Firstar expects to incur additional merger-related expenses during 1999
in connection with the combining of operations of Firstar Corporation
and Star Banc Corporation.
FIRSTAR CORPORATION 40
<PAGE>
NOTE 4 - Reserve Balance Requirements
Banking regulations require the Firstar banking subsidiaries to maintain
cash reserves which are unavailable for investment. The amounts of such
reserves, which are included in cash and due from banks in the
consolidated balance sheets, were $369 million and $380 million at
December 31, 1998 and 1997, respectively.
NOTE 5 - Investment Securities
The table below summarizes unrealized gains and losses for
held-to-maturity and available-for-sale securities at December 31, 1998
and 1997.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
Mortgage-backed securities $ 61,955 $ -- $ 448 $ 61,507 $1,228,760 $32,038 $1,526 $1,259,272
Obligations of state and
political subdivisions 73,452 2,951 623 75,780 1,371,661 25,177 1,998 1,394,840
Other debt securities -- -- -- -- 6,252 -- 8 6,244
- --------------------------------------------------------------------------------------------------------------
Total held-to-maturity
securities $ 135,407 $ 2,951 $1,071 $ 137,287 $2,606,673 $57,215 $3,532 $2,660,356
- --------------------------------------------------------------------------------------------------------------
Available-for-Sale
U.S. Treasuries and agencies $1,263,768 $53,076 $ 12 $1,316,832 $1,579,024 $36,650 $ 903 $1,614,771
Mortgage-backed securities 3,042,011 66,666 2,152 3,106,525 1,055,321 16,705 455 1,071,571
Obligations of state and
political subdivisions 1,467,641 39,737 346 1,507,032 52,648 1,423 17 54,054
Other debt securities 8,176 1 31 8,146 14,333 79 16 14,396
Money market mutual funds 47,492 -- -- 47,492 38,773 -- -- 38,773
Federal Reserve/FHLB stock
and other equity securities 234,708 167 -- 234,875 200,747 8 997 199,758
- --------------------------------------------------------------------------------------------------------------
Total available-for-sale
securities $6,063,796 $159,647 $2,541 $6,220,902 $2,940,846 $54,865 $2,388 $2,993,323
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the amortized cost and fair value maturity
information of held-to-maturity and available-for-sale securities at
December 31, 1998.
Amortized Fair
(dollars in thousands) Cost Value
- -----------------------------------------------------------------------
Held-to-Maturity
One year or less $ 32,041 $ 31,995
After one year through five years 56,923 56,976
After five years through ten years 13,364 14,517
After ten years 33,079 33,799
- -----------------------------------------------------------------------
Total $ 135,407 $ 137,287
- -----------------------------------------------------------------------
Available-for-Sale
One year or less $ 517,192 $ 528,525
After one year through five years 1,759,272 1,823,026
After five years through ten years 913,018 948,260
After ten years 2,592,114 2,638,724
- -----------------------------------------------------------------------
Total 5,781,596 5,938,535
Equity securities 282,200 282,367
- -----------------------------------------------------------------------
Total $6,063,796 $6,220,902
- -----------------------------------------------------------------------
Note: Maturity information related to mortgage-backed securities included
above is presented based upon weighted average maturities anticipating future
prepayments.
As of December 31, 1998, Firstar reported a net unrealized gain of $157
million for available-for-sale securities. For 1998, the unrealized gain
reported as a separate component of equity (net of tax) changed from an
unrealized gain of $33 million to an unrealized gain of $100 million,
increasing shareholders' equity $67 million.
The following table provides information as to the amount of gross gains
and (losses) realized through the sales of available-for-sale investment
securities.
(dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------
Gross gains $ 2,514 $ 1,684 $ 175
Gross (losses) (1,419) (5,600) (2,540)
- ----------------------------------------------------------------------
Net securities gains/(losses) $ 1,095 $(3,916) $(2,365)
- ----------------------------------------------------------------------
Securities with a carrying value of $3,242 million at December 31, 1998
and $2,741 million at December 31, 1997, were pledged to secure deposits
and for other purposes. All securities pledged to secure deposits and
repurchase agreements are controlled solely by Firstar.
BANK WITHOUT BOUNDARIES 41
<PAGE>
NOTE 6 - Loans
The composition of loans is summarized below. Loans are presented net of
unearned interest which amounted to $455,913,000 and $227,200,000 at
December 31, 1998 and 1997 respectively.
As of December 31 (dollars in thousand) 1998 1997
- ---------------------------------------------------------------------
Commercial $ 8,059,594 $ 7,372,246
Commercial leasing 1,204,549 537,557
Real estate construction and development 1,213,682 965,226
Commercial real estate mortgage 4,611,442 4,144,214
Residential real estate mortgage 3,285,400 3,494,746
Credit card 1,220,240 1,182,703
Retail leasing 1,365,435 1,013,899
Other retail 4,907,715 4,505,434
- ---------------------------------------------------------------------
Total loans, net of
unearned interest $25,868,057 $23,216,025
- ---------------------------------------------------------------------
The following table lists information related to nonperforming loans as
of December 31.
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------
Loans on nonaccrual status $124,475 $110,613
Restructured loans 48 961
- ------------------------------------------------------------------
Total nonperforming loans $124,523 $111,574
- ------------------------------------------------------------------
Interest that would have been recognized
on nonperforming loans in accordance
with their original terms $ 13,474 $ 13,531
Actual interest recorded for nonaccrual
and restructured loans 6,741 3,851
- ------------------------------------------------------------------
Firstar evaluates the credit risk of each customer on an individual
basis and obtains collateral when it is deemed appropriate. Collateral
varies by individual loan customer, but may include accounts receivable,
inventory, real estate, equipment, deposits, personal and government
guaranties, and general security agreements. Access to collateral
is dependent on the type of collateral obtained. On an ongoing basis,
Firstar monitors its collateral and the collateral value related to
the loan balance outstanding.
NOTE 7 - Allowance for Loan Losses and Impaired Loans
A summary of the activity in the allowance for loan losses is shown in
the following table.
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------
Balance--beginning of year $372,933 $349,892 $317,971
Loans charged off (170,838) (132,961) (119,328)
Recoveries on loans
previously charged off 49,437 38,230 39,949
- ------------------------------------------------------------------
Net charge-offs (121,401) (94,731) (79,379)
Acquired reserves 30,788 -- 13,966
Provision charged
to earnings 113,636 117,772 97,334
- ------------------------------------------------------------------
Balance--end of year $395,956 $372,933 $349,892
- ------------------------------------------------------------------
A portion of the reserve for loan losses is allocated to loans deemed
impaired. All impaired loans are included in nonperforming assets.
Information on these loans and their related reserve for loan losses
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- --------------------------------- ---------------------- --------------------- ---------------------
Recorded Valuation Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance Investment Allowance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Impaired Loans:
Valuation allowance required $44,096 $9,042 $49,043 $6,933 $ 45,900 $6,513
No valuation allowance required 53,568 -- 32,278 -- 55,831 --
- -----------------------------------------------------------------------------------------------------
Total impaired loans $97,664 $9,042 $81,321 $6,933 $101,731 $6,513
- -----------------------------------------------------------------------------------------------------
Average balance of impaired
loans during year $86,054 $94,793 $110,468
Interest income recognized
on impaired loans during year 4,238 3,297 4,423
- -----------------------------------------------------------------------------------------------------
</TABLE>
FIRSTAR CORPORATION 42
<PAGE>
NOTE 8 - Premises and Equipment
Premises and equipment as of December 31 are summarized in the following
table.
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------
Land $ 74,431 $ 65,059
Bank buildings 481,568 451,499
Furniture, fixtures & equipment 475,694 455,486
Leasehold improvements 83,931 47,431
Construction in progress 22,022 17,844
- ------------------------------------------------------------------
Total premises and equipment 1,137,646 1,037,319
Less: Accumulated depreciation
and amortization 508,182 493,034
- ------------------------------------------------------------------
Net premises and equipment $ 629,464 $ 544,285
- ------------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment
amounted to $78,335,000 in 1998, $69,747,000 in 1997 and $67,856,000 in
1996.
Total rental expense was $57,805,000 in 1998, $60,679,000 in 1997 and
$54,071,000 in 1996.
Future minimum rental payments, net of sublease rental payments, related
to non-cancelable operating leases having initial terms in excess of one
year are $34,416,000 in 1999, $34,268,000 in 2000, $31,757,000 in 2001,
$30,632,000 in 2002, $30,645,000 in 2003 and $90,612,000 in later years.
NOTE 9 - Mortgage Servicing Rights
Mortgage servicing rights are capitalized based upon their fair value at
the time a loan is sold. Servicing assets are also established based on
the future sale commitment of these assets. 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 $199.8
million on December 31, 1998 and $86.2 million on December 31, 1997.
Firstar serviced $14.7 billion and $7.9 billion of mortgage loans for
other investors as of December 31, 1998 and 1997, respectively.
Changes in capitalized mortgage servicing rights are summarized
as follows:
(dollars in thousands) 1998 1997
- ------------------------------------------------------------
Balance at beginning of year $ 72,337 $ 67,146
Amount added in acquisitions 51,731 --
Amount capitalized 152,070 41,931
Amortization (28,586) (10,430)
Sales (64,630) (26,292)
Valuation allowance (230) (18)
- ------------------------------------------------------------
Balance at end of year $182,692 $ 72,337
- ------------------------------------------------------------
NOTE 10 - Intangible Assets
The following is a summary of intangible assets as of December 31 which
are included in other assets in the consolidated balance sheets.
(dollars in thousands) 1998 1997
- --------------------------------------------------------------
Intangibles from acquisitions:
Excess of cost over fair value
of assets acquired $ 615,470 $ 243,559
Core deposit benefits 253,004 112,572
Other identified intangibles 54,815 57,082
Mortgage servicing rights 182,692 72,337
Purchased credit card relationships 6,572 5,340
- --------------------------------------------------------------
Total intangible assets $1,112,553 $ 490,890
- --------------------------------------------------------------
NOTE 11 - Deposits
The following is a summary of Firstar's total deposits as of
December 31.
(dollars in thousands) 1998 1997
- ---------------------------------------------------------------
Noninterest-bearing deposits $ 6,649,199 $ 5,561,341
Savings accounts 2,272,495 2,228,974
NOW accounts 3,848,752 3,221,349
Money market deposit accounts 5,959,710 4,243,790
Time deposits $100,000 and over 1,614,748 1,676,693
Foreign deposits $100,000 and over 343,574 185,682
All other time deposits 8,162,287 7,368,238
- ---------------------------------------------------------------
Total interest-bearing deposits 22,201,566 18,924,726
- ---------------------------------------------------------------
Total deposits $28,850,765 $24,486,067
- ---------------------------------------------------------------
BANK WITHOUT BOUNDARIES 43
<PAGE>
NOTE 12 - Short-Term Borrowings
The following table is a summary of short-term borrowings for the
last three years.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ------------------------------ ----------------- ------------------ ------------------
Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At year end:
Federal funds purchased $2,137,425 4.7% $1,688,732 4.9% $ 842,331 5.2%
Securities sold under
agreements to repurchase 1,018,093 3.5 942,663 4.7 1,306,669 4.5
Commercial paper 131,035 5.5 102,103 5.8 66,078 5.5
Treasury, tax and loan notes 99,271 3.8 499,937 5.2 441,754 4.4
Other short-term borrowings 257,484 5.2 180,895 3.5 259,970 6.1
- --------------------------------------------------------------------------------------
Total $3,643,308 4.4% $3,414,330 4.9% $2,916,802 4.9%
- --------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased $2,227,898 5.4% $1,750,515 5.5% $1,325,106 5.4%
Securities sold under
agreements to repurchase 1,101,839 4.3 1,246,289 4.7 1,412,965 4.8
Commercial paper 100,110 5.4 101,616 5.6 101,429 5.5
Treasury, tax and loan notes 260,169 5.3 250,803 5.3 165,652 5.1
Other short-term borrowings 385,133 5.6 198,431 5.5 348,857 5.3
- --------------------------------------------------------------------------------------
Total $4,075,149 5.1% $3,547,654 5.2% $3,354,009 5.1%
- --------------------------------------------------------------------------------------
Maximum month-end balances:
Federal funds purchased $2,741,348 $2,203,052 $1,436,415
Securities sold under
agreements to repurchase 1,191,019 1,546,318 1,502,796
Commercial paper 131,035 125,007 146,720
Treasury, tax and loan notes 757,879 597,852 627,892
Other short-term borrowings 461,381 300,282 382,677
- --------------------------------------------------------------------------------------
</TABLE>
NOTE 13 - Long-Term Debt
The following is a summary of Firstar's long-term debt as of
December 31.
(dollars in thousands) 1998 1997
- ----------------------------------------------------------------
Federal Home Loan Bank notes $ 485,314 $ 552,438
Medium term notes 248,784 106,065
6.38% subordinated notes 148,994 148,799
6.63% subordinated notes 99,004 98,878
7.15% subordinated notes -- 100,000
7.25% subordinated notes 32,685 32,740
10.25% subordinated notes -- 78,340
8.32% trust capital securities 150,000 150,000
Variable rate trust capital securities 148,629 148,581
6.25% senior bank notes 248,191 247,730
6.48% senior bank notes -- 30,000
7.13% senior bank notes 25,000 25,000
5.88% senior notes 99,785 --
Other debt 22,483 26,196
- ----------------------------------------------------------------
Total long-term debt $1,708,869 $1,744,767
- ----------------------------------------------------------------
The holding company has a line of credit of $200 million, of which the
total amount was available as of December 31, 1998.
Notes payable to the Federal Home Loan Bank are collateralized by
Federal Home Loan Bank stock and first mortgage residential real estate
loans. The notes mature from 1999 through 2012 and have a variable
interest rate averaging 5.12% as of December 31, 1998.
Firstar's unsecured medium term notes mature from 1999 through 2002 and
have interest rates ranging from 5.45% to 6.97%.
Star Bank, N.A. issued $150 million of 6.38% notes under an indenture
dated as of February 24, 1994. The notes, which are subordinated to all
unsubordinated indebtedness of the bank for borrowed money, are
unsecured and mature March 1, 2004.
Star Bank, N.A. issued $100 million of 6.63% notes under an indenture
dated as of February 6, 1996. The notes, which are subordinated to all
unsubordinated indebtedness of the bank for borrowed money, are
unsecured and mature December 15, 2006.
Firstar issued $33 million of 7.25% notes under an indenture dated as of
September 16, 1993. The notes, which are subordinated to all
unsubordinated indebtedness of Firstar for borrowed money, are unsecured
and mature September 15, 2003.
FIRSTAR CORPORATION 44
<PAGE>
On December 17, 1996 and July 15, 1997, Firstar Capital Trust I and Star
Capital Trust I, respectively, both statutory business trusts ("the
Trusts") created by Firstar, issued $150 million of 8.32% Capital
Securities and $150 million of Floating Rate Securities (together "the
Securities") which will mature on December 15, 2026 and July 15, 2027,
respectively. The Floating Rate Securities pay quarterly distributions
at an annual rate equal to three month LIBOR plus .765%. The principle
combined assets of the Trusts are $309 million of Firstar's subordinated
debentures with like maturities and interest rates to the Securities.
Additionally, the Trusts have issued $9 million in the aggregate of
common securities to Firstar. The Securities, the assets of the Trusts
and common securities issued by the Trusts are redeemable in whole or in
part on or after December 23, 2006 and June 15, 2007, respectively, or
at any time in whole but not in part from the date of issuance upon the
occurrence of certain events. Firstar has fully and unconditionally
guaranteed the obligations of the Trusts. Firstar has the right to defer
payment of interest on the debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters, provided that no
deferred periods extend beyond the stated maturities of the debentures.
Such deferral of interest payments by Firstar could result in a deferral
of distribution payments on the related Securities. The Securities
qualify as Tier I capital of Firstar for regulatory capital purposes.
Firstar Bank Milwaukee, N.A. issued $250 million of 6.25% senior bank
notes on December 4, 1997. The notes are unsecured and mature on
December 1, 2002.
Star Bank, N.A. issued $25 million of 7.13% senior bank notes on May 30,
1996. The notes are unsecured and mature on May 30, 2000.
Firstar issued $100 million of 5.88% senior notes in November 2, 1998.
The notes are unsecured and mature on November 1, 2003.
Long-term debt has aggregate maturities for the five years 1999 through
2003 as follows: $247,264,000 in 1999, $216,053,000 in 2000, $50,282,000
in 2001, $311,540,000 in 2002, $132,954,000 in 2003.
NOTE 14 - Pension Plans
Firstar has non-contributory defined benefit pension plans covering
substantially all employees. The benefits are based on years of service
and employees' compensation while employed. The plans include both
funded and unfunded plans. The funding policy, where applicable, is to
make an annual contribution to the plan which at least equals the
minimum required contribution. The pension plans were amended in 1998 to
conform certain provisions of the previously separate plans of Firstar
Corporation and Star Banc Corporation upon their merger. Plan assets
primarily consist of listed stocks, corporate bonds, U.S. Treasury and
Agency securities, and mutual funds. Included in plan assets are shares
of Firstar stock with a market value of $20 million and $12 million at
December 31, 1998 and 1997, respectively. The tables below summarize
data relative to the plans.
(dollars in thousands) 1998 1997
- -------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $449,578 $384,489
Service cost 14,942 12,815
Interest cost 31,594 29,409
Amendments (3,943) 728
Curtailments -- (1,259)
Actuarial gain (704) 44,818
Benefits paid (17,163) (21,422)
- -------------------------------------------------------------
Benefit obligation at end of year $474,304 $449,578
- -------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year $442,235 $377,011
Actual return on plan assets 6,019 67,498
Employer contribution 62,743 19,147
Benefits paid (17,163) (21,421)
- -------------------------------------------------------------
Fair value of plan assets at
end of year $493,834 $442,235
- -------------------------------------------------------------
Funded status $ 19,530 $ (7,343)
Unrecognized transition obligation (4,412) (6,809)
Unrecognized prior service cost 1,105 4,395
Unrecognized net loss 47,066 21,022
- -------------------------------------------------------------
Prepaid pension cost $ 63,289 $ 11,265
- -------------------------------------------------------------
BANK WITHOUT BOUNDARIES 45
<PAGE>
Information about pension plans based upon status is as follows:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------
Plans with assets in excess of obligations:
Fair value of plan assets $493,834 $442,235
Benefit obligation (432,505) (411,364)
- -------------------------------------------------------------
Funded status $ 61,329 $ 30,871
- -------------------------------------------------------------
Plans with obligations in excess of assets:
Fair value of plan assets $ -- $ --
Benefit obligation (41,799) (38,214)
- -------------------------------------------------------------
Funded status $(41,799) $(38,214)
- -------------------------------------------------------------
Weighted average assumptions used in determining pension values
were as follows:
1998 1997
- -------------------------------------------------------------
Discount rate 6.50% 7.20%
Expected return on plan assets 9.66% 9.45%
Rate of compensation increase 4.00% 5.34%
- -------------------------------------------------------------
Pension costs included the following components for the years
ended December 31:
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------
Service cost $ 14,942 $ 12,815 $ 13,560
Interest cost 31,594 29,409 26,468
Expected return on plan assets (36,003) (31,718) (26,632)
Net amortization and deferral 1,256 (170) 216
- ---------------------------------------------------------------------
Net periodic benefit cost $ 11,789 $ 10,336 $ 13,612
- ---------------------------------------------------------------------
NOTE 15 - Other Employee Benefits
Firstar provides health care benefits to certain retired employees and
has a group of active employees who will be eligible for health care
benefits upon their retirement. The plan was amended upon the merger of
Firstar Corporation and Star Banc Corporation to limit eligibility of
future retirees. This action was treated as a plan curtailment. The
liability for these benefits is unfunded. The tables below summarize
data relative to these plans:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 54,752 $ 49,435
Service cost 111 943
Interest cost 2,970 3,854
Amendments (12,053) 255
Actuarial gain (loss) 2,967 3,502
Benefits paid (3,281) (3,237)
- -------------------------------------------------------------
Benefit obligation at end of year $ 45,466 $ 54,752
- -------------------------------------------------------------
Funded status $ 45,466 $ 54,752
Unrecognized transition obligation (283) (41,641)
Unrecognized prior service cost 89 6,940
Unrecognized net loss 6,457 12,342
- -------------------------------------------------------------
Postretirement benefit liability $ 51,729 $ 32,393
- -------------------------------------------------------------
Postretirement benefit costs included the following components
for the years ended December 31:
(dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------
Service cost $ 111 $ 943 $ 963
Interest cost 2,970 3,854 4,551
Curtailments 18,136 1,287 2,181
Net amortization and deferral 1,400 2,040 2,600
- ---------------------------------------------------------------------
Net periodic benefit cost $ 22,617 $ 8,124 $ 10,295
- ---------------------------------------------------------------------
The weighted average discount rates used in determining the amount of
benefit obligation were 6.25% and 7.18% at December 31, 1998 and 1997,
respectively. The measurement of benefit obligation at December 31, 1998
assumed a health care cost trend rate of 8.50% which gradually decreases
to 5.50% by 2004 and thereafter. To illustrate, increasing the assumed
health care cost trend by one percentage point in each year would
increase the benefit obligation by $3,182,000 and the aggregate of the
service and interest cost components of benefit cost by $218,000, while
decreasing the assumed cost trend by one percentage point would decrease
the benefit obligation by $2,758,000 and the aggregate of the service
and interest cost components of benefit cost by $187,000.
Firstar has 401(k) savings plans under which eligible employees can
participate by contributing a portion of their salary for investment in
one or more investment funds. Contributions are made to the accounts of
each participant. Amounts expensed in connection with these plans were
$9,713,000 in 1998, $12,784,000 in 1997 and $10,034,000 in 1996.
In 1998, Firstar terminated an employee stock ownership plan ("ESOP")
associated with the acquisition of Trans Financial. Expenses related to
the ESOP had been recognized based on cash contributions to the plan.
Contributions to the ESOP were $390,000 and $621,000 in 1997 and 1996,
respectively. Approximately 430,000 Firstar shares were issued to the
participants upon termination of the ESOP.
NOTE 16 - Stock options and compensation plans
In 1997, the shareholders of Firstar approved the adoption of the 1996
Stock Incentive Plan ("the Plan") replacing the 1986 and 1991 plans.
The Plan provides for the grant, to selected key managerial personnel,
of options to purchase shares of common stock generally at the stock's
fair market value at the date of grant. In addition, the Plan provides
for the grant, to selected key managerial personnel, of stock awards and
shares of common stock which are subject to restriction on transfer and
to a right of repurchase by Firstar. Not more than 7.5 million
authorized and unissued shares of common stock, in the aggregate, are
available for issue under the Plan. The Plan will terminate on January
7, 2001.
In 1998, the Firstar Stock Option Plan for all employees was adopted.
The 1998 Firstar Plan provided a one-time grant to all eligible
employees of stock options at the stock's fair market value at the
grant date. The 1998 Firstar Plan was in addition to all employee
StarShare Plan grants in 1993 and 1996. These one-time grants were
made to all active employees as a performance award. The 1998
Firstar Plan and StarShare Plan grants were one-time grants and
therefore no additional shares are available under these plans.
FIRSTAR CORPORATION 46
<PAGE>
In connection with the merger with Firstar Corporation and the
acquisitions of Trans Financial and Great Financial, all existing
options for shares of the acquired companies were converted into an
equivalent number of options for shares of Firstar common stock. No
additional options are eligible to be granted under these plans.
The grants of options under the 1998 Firstar Plan vest over a four-year
period. All options of the 1996 Stock Incentive Plan and the other
options acquired through acquisitions which were outstanding prior to
the merger of Star and Firstar became fully vested as a result of the
merger. All options of the 1996 Incentive Plan granted since November
20, 1998 vest over a four-year period. All stock options granted
expire ten years from date of grant.
The following is a summary of stock options, awards and restricted
shares outstanding and exercised under various stock incentive and
option plans of Firstar corporation.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Stock Average Stock Average Stock Average
Options Exercise Options Exercise Options Exercise
and Awards Price and Awards Price and Awards Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock Incentive and Directors Plans:
Number of shares outstanding
at beginning of year 11,404,734 $24.72 10,585,447 $17.19 10,278,995 $13.87
Granted 4,263,127 59.18 2,886,349 45.09 2,555,113 27.24
Exercised (2,894,935) 23.78 (1,677,130) 12.76 (1,764,268) 11.31
Cancelled (531,660) 32.81 (389,932) 24.49 (484,393) 19.67
- ----------------------------------------------------------------------------------------------------------
Number of shares outstanding
at end of year 12,241,266 $38.49 11,404,734 $24.72 10,585,447 $17.19
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 9,430,966 $29.18 5,315,617 $16.58 5,185,923 $11.66
Weighted average fair value of
Options granted $23.73 $12.40 $5.30
Restricted stock and awards 70.36 40.00 --
Available for future grant under
the Plans 3,196,249 9,549,475 4,493,538
- ----------------------------------------------------------------------------------------------------------
All Employee Stock Option Plans:
Options outstanding at
beginning of year 1,110,616 $29.51 1,491,261 $29.35 187,563 $11.75
Granted 3,400,000 72.38 -- -- 1,420,875 30.33
Exercised (304,574) 29.38 (119,322) 25.91 (94,371) 11.75
Cancelled (89,076) 29.63 (261,323) 30.27 (22,806) 18.36
- ----------------------------------------------------------------------------------------------------------
Options outstanding at
end of year 4,116,966 $64.91 1,110,616 $29.51 1,491,261 $29.35
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 716,966 $29.51 256,772 $26.76 78,486 $11.75
Weighted average fair value
of options granted $28.60 -- $6.46
Available for future grant under
the Plans -- -- --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value and pro forma income information calculated for
options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997, and 1996, respectively: expected volatility
of 39.80 percent, 22.42 percent, and 16.02 percent, risk free interest
rates of 4.64 percent, 5.96 percent, and 6.00 percent, dividend yields
of 1.29 percent, 1.43 percent, and 2.02 percent, and for all years,
expected lives of five years.
BANK WITHOUT BOUNDARIES 47
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1998, under various stock incentive and
option plans of Firstar Corporation:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Incentive and Directors Plans:
$ 5.58 - 10.54 450,474 2.22 Years $ 8.52 450,474 $ 8.52
11.25 - 11.92 1,470,556 5.27 Years 11.39 1,470,556 11.39
12.17 - 18.33 1,280,799 5.07 Years 15.61 1,280,799 15.61
19.00 - 23.33 1,432,003 6.36 Years 20.56 1,432,003 20.56
24.83 - 32.35 1,520,311 7.66 Years 29.06 1,520,311 29.06
37.25 - 50.99 1,962,202 8.51 Years 43.35 1,962,202 43.35
51.06 - 63.75 1,241,125 8.99 Years 57.36 1,241,125 57.36
64.50 - 71.63 2,883,796 9.87 Years 71.28 73,496 64.94
- -------------------------------------------------------------------------------------------------
$ 5.58 - 71.63 12,241,266 7.51 Years $38.49 9,430,966 $29.18
- -------------------------------------------------------------------------------------------------
All Employee Stock Option Plans:
$11.75 - 12.00 31,631 4.08 Years $11.75 31,631 $11.75
30.33 685,335 7.94 Years 30.33 685,335 30.33
72.38 3,400,000 9.94 Years 72.38 -- --
- -------------------------------------------------------------------------------------------------
$11.75 - 72.38 4,116,966 9.56 Years $64.91 716,966 $29.51
- -------------------------------------------------------------------------------------------------
</TABLE>
The Corporation applies APB Opinion No. 25 and related interpretations
in accounting for all its stock-based compensation plans. Accordingly,
no compensation expense has been recognized for stock option grants.
SFAS No. 123 encourages a "fair value" based method of accounting for
stock-based compensation plans. Had the Corporation recognized
compensation expense based on the fair value of options at their grant
date, as prescribed by SFAS No. 123, the Corporation's net income for
1998, 1997, and 1996 would have been $417,774,000, $508,044,000, and
$413,824,000, respectively. Pro forma basic earnings per share would
have been $1.93 in 1998, $2.45 in 1997, and $1.95 in 1996. Pro forma
diluted earnings per share would have been $1.89 in 1998, $2.40 in 1977,
and $1.92 in 1996. These pro forma disclosures are not likely to be
representative of the effect on reported net income and earnings per
share for future years since current options vest over a four-year
period and additional options are generally granted each year.
Recipients of stock awards are entitled to a compensation equivalent of
the dividends that would have been payable on the awards reserved, over
the number of years the award is deemed to be fully earned.
Compensation expense and the related increase in equity is recognized by
the Corporation over the service period until the award is fully earned,
based on the market value of the award. Compensation expense recognized
was $7,272,000 in 1998, $432,000 in 1997, and $365,000 in 1996.
Firstar's performance based stock plan granted performance shares to key
executives. Payouts are predicated upon achievement of Firstar return on
equity goals in relation to peer group banking companies and the market
value of Firstar's common stock over a three-year period. The grants are
designated in shares of stock and the participant is paid the value of
the earned shares one-half in cash and one-half in shares of Firstar
common stock plus a dividend equivalent for the performance period. This
plan was terminated in 1998 with the merger of Firstar and Star Banc
Corporation and prorata payments were made which resulted in the
issuance of 42,863 shares. Compensation expense recorded under this plan
was $4,351,000 in 1998, $4,502,000 in 1997, and $4,104,000 in 1996.
Directors and selected senior officers of the Corporation and its
banking subsidiaries may participate in the Corporation's Deferred
Compensation Plan through which they may postpone the receipt of
compensation. Amounts deferred under the plan may be valued on the basis
of an interest index or be used to purchase shares of the Corporation's
common stock. Although the plan is unfunded for tax purposes, a portion
of the shares of treasury stock held at December 31, 1998 and 1997, and
1996 were acquired to meet obligations arising from this plan and are
considered common stock equivalents for the purpose of computing
earnings per share.
The Corporation has entered into severance agreements with certain
officers of the Corporation. In general, the agreements provide for the
payment of a lump sum benefit to the officer, plus the continuation of
certain medical and insurance benefits and immediate exercisability of
stock options, in the event that the officer's employment is terminated
involuntarily by the Corporation, or voluntarily by the officer for good
reason, following a change in control of the Corporation during the
officer's protected period. The benefits payable under the agreements
can be up to three times the officer's base salary and incentive bonus.
FIRSTAR CORPORATION 48
<PAGE>
NOTE 17 - Income Taxes
The taxes applicable to income before income taxes were as follows:
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------
Current income taxes:
Federal $ 121,146 $ 195,411 $ 156,536
State and other 14,499 20,347 20,929
- --------------------------------------------------------------------------
Subtotal 135,645 215,758 177,465
- --------------------------------------------------------------------------
Deferred income taxes:
Federal 77,791 39,795 29,483
State and other (5,484) 485 1,734
- --------------------------------------------------------------------------
Subtotal 72,307 40,280 31,217
- --------------------------------------------------------------------------
Provision for income taxes $ 207,952 $ 256,038 $ 208,682
- --------------------------------------------------------------------------
Exercised stock options produced tax benefits of $41,011,000 in 1998,
$17,260,000 in 1997 and $9,812,000 in 1996 which were allocated directly
to shareholders' equity.
The effective tax rate differed from the federal statutory rate of 35%
as shown below:
1998 1997 1996
- --------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction) in rate
resulting from:
Tax-exempt income (4.2) (3.2) (3.8)
State and local taxes--
net of federal income
tax benefit 0.9 1.8 2.4
Amortization of
nondeductible intangibles 1.5 0.6 0.8
Nondeductible merger and
acquisition costs 1.3
Increase in cash surrender value
of life insurance (1.1) (0.5) (0.5)
Other--net (0.8) (0.4) (0.5)
- --------------------------------------------------------------------------
Effective tax rate 32.6% 33.3% 33.4%
- --------------------------------------------------------------------------
The significant components of deferred income tax expense attributable
to income from continuing operations are as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
Deferred tax expense
(exclusive of the effect of
other components listed below) $ 72,394 $ 40,482 $ 30,685
Change in valuation allowance
due to creation/utilization
of net operating losses (87) (202) 532
- --------------------------------------------------------------------------
Total $ 72,307 $ 40,280 $ 31,217
- --------------------------------------------------------------------------
The valuation allowance decreased $87,000 in 1998, decreased $202,000 in
1997 and increased $532,000 in 1996. The valuation allowance has been
recognized primarily to offset deferred tax assets related to state net
operating loss carry forwards totaling approximately $386,544,000 which
expire at various times within the next 20 years.
The significant components of the net deferred tax asset/(liability)
were as follows:
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
Deferred tax liabilities:
Equipment leased to customers $(251,215) $(143,542) $(101,820)
Securities available for sale (57,716) (19,315) (13,881)
Bank premises and equipment (16,886) (19,338) (18,769)
Acquired assets accounted for
as a purchase (11,777) (12,560) (13,779)
Pension and post-retirement
benefits (8,492) -- --
Deferred loan fees/costs (4,525) -- --
FHLB dividends (9,959) (3,244) (2,152)
Other-net (6,214) (1,303) --
Deferred tax assets:
Reserve for loan losses 144,625 142,456 133,736
Pension and post-retirement
benefits -- 9,778 8,776
State and federal net
operating loss carry forwards 20,406 11,462 11,887
Deferred compensation 14,977 15,117 16,595
Deferred loan fees/costs -- 2,857 3,740
Merger-related charges 43,790 -- --
Federal AMT credit carryforward 7,568 -- --
Charitable contributions carryforward 4,100 -- --
Other-net -- -- 4,237
- --------------------------------------------------------------------------
Subtotal (131,318) (17,632) 28,570
Valuation allowance (10,854) (10,941) (11,143)
- --------------------------------------------------------------------------
Net deferred tax asset/(liability) $(142,172) $ (28,573) $ 17,427
- --------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 49
<PAGE>
NOTE 18 - Shareholders' Equity
The authorized and outstanding shares of Firstar are as follows:
December 31 1998 1997
- ---------------------------------------------------------------------
Preferred stock, $1.00 par value
Authorized 10,000,000 10,000,000
Outstanding -- --
Preferred stock from acquired bank:
Series D - Authorized -- 40,250
- Outstanding -- 10,615
Common stock, $.01 par value
Authorized 800,000,000 800,000,000
Outstanding (net of treasury stock) 218,747,094 205,690,306
- ---------------------------------------------------------------------
Under the Firstar Preferred Share Purchase Rights Plan each share of
common stock entitles its holder to one right. Under certain conditions,
each right entitles the holder to purchase one one-hundredth of a share
of preferred stock at a price of $300, subject to adjustment. The rights
will only be exercisable if a person or a group has acquired, or
announced an intention to acquire, 15% or more of the outstanding shares
of Firstar common stock. Under certain circumstances, including the
existence of a 15% acquiring party, each holder of a right, other than
the acquiring party, will be entitled to purchase at the exercise price
Firstar common shares having a market value of two times the exercise
price. In the event of the acquisition of Firstar by another company
subsequent to a party acquiring 15% or more of Firstar common stock,
each holder of a right is entitled to receive the acquiring company's
common shares having a market value of two times the exercise price. The
rights may be redeemed at a price of $.01 per right prior to the
existence of a 15% acquiring party, and thereafter, may be exchanged for
one common share per right prior to the existence of a 50% acquiring
party. The rights will expire on December 1, 2008. The rights do not
have voting or dividend rights and until they become exercisable, have
no dilutive effect on the earnings of Firstar. Under the rights plan,
the Board of Directors of Firstar may reduce the thresholds applicable
to the rights from 15% to not less than 10%.
A reconciliation of the transactions affecting Accumulated Other
Comprehensive Income included in shareholders' equity for the years
ended December 31, is as follows:
Tax Net of
(dollars in thousands) Pre-tax Effect Tax
- -------------------------------------------------------------------------
1996
Unrealized losses on securities
available for sale $(23,003) $ 8,005 $(14,998)
Reclassification adjustment for losses
realized in net income 2,365 (823) 1,542
- -------------------------------------------------------------------------
Total $(20,638) $ 7,182 $(13,456)
- -------------------------------------------------------------------------
1997
Unrealized gains on securities
available for sale $ 8,412 $ (3,895) $ 4,517
Reclassification adjustment for gains
realized in net income 3,916 (1,810) 2,106
- -------------------------------------------------------------------------
Total $ 12,328 $ (5,705) $ 6,623
- -------------------------------------------------------------------------
1998
Unrealized gains on securities
available for sale $105,724 $(38,023) $ 67,701
Reclassification adjustment for gains
realized in net income (1,095) 393 (702)
- -------------------------------------------------------------------------
Total $104,629 $(37,630) $ 66,999
- -------------------------------------------------------------------------
FIRSTAR CORPORATION 50
<PAGE>
NOTE 19 - Regulatory Capital
Firstar and its banking subsidiaries are subject to various capital
requirements as defined by banking industry regulators for banks and
bank holding companies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions
by the regulators that, if undertaken, could have a material effect on
the financial statements of Firstar. As of the most recent notification
from its regulators, at December 31, 1998 and 1997, all of Firstar's
subsidiary banks were categorized as "well capitalized" under the
regulatory framework for prompt corrective action.
The following provides a summary of Firstar and its subsidiary banks'
tier 1 and total risk-based capital amounts and ratios, as compared to
minimum capital requirements for 1998 and 1997.
<TABLE>
<CAPTION>
For Minimum
Capital Adequacy To Be Well
(dollars in thousands) Actual Purposes Capitalized
- ---------------------------------------- ------------------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $3,471,828 11.01% $2,522,913 8.00% n/a n/a
Star Bank, N.A. 1,502,182 10.39 1,157,095 8.00 $1,446,869 10.00%
Firstar Bank Milwaukee, N.A. 798,358 10.93 584,566 8.00 730,708 10.00
Firstar Bank Wisconsin 303,377 10.58 229,472 8.00 286,840 10.00
Firstar Bank Minnesota, N.A. 183,423 10.58 138,688 8.00 173,360 10.00
Firstar Bank Iowa, N.A. 222,062 10.50 169,159 8.00 211,449 10.00
Firstar Bank Illinois 215,356 14.69 117,246 8.00 146,558 10.00
Firstar Bank U.S.A., N.A. 196,111 10.84 144,716 8.00 180,896 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 2,814,386 8.92 1,261,457 4.00 n/a n/a
Star Bank, N.A. 997,341 6.90 578,548 4.00 867,822 6.00
Firstar Bank Milwaukee, N.A. 549,083 7.51 292,283 4.00 438,425 6.00
Firstar Bank Wisconsin 240,467 8.38 114,736 4.00 172,104 6.00
Firstar Bank Minnesota, N.A. 151,647 8.75 69,344 4.00 104,016 6.00
Firstar Bank Iowa, N.A. 181,688 8.59 84,580 4.00 126,869 6.00
Firstar Bank Illinois 196,992 13.44 58,623 4.00 87,935 6.00
Firstar Bank U.S.A., N.A. 128,498 7.10 72,358 4.00 108,537 6.00
Tier 1 Capital (to Average Assets):
Consolidated 2,814,386 7.52 1,496,441 4.00 n/a n/a
Star Bank, N.A. 997,341 6.08 656,168 4.00 830,210 5.00
Firstar Bank Milwaukee, N.A. 549,083 6.29 348,933 4.00 436,167 5.00
Firstar Bank Wisconsin 240,467 6.35 151,536 4.00 189,420 5.00
Firstar Bank Minnesota, N.A. 151,647 6.09 99,669 4.00 124,587 5.00
Firstar Bank Iowa, N.A. 181,688 6.23 116,597 4.00 145,746 5.00
Firstar Bank Illinois 196,992 7.54 104,561 4.00 130,701 5.00
Firstar Bank U.S.A., N.A. 128,498 8.22 62,503 4.00 78,128 5.00
- ---------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $3,274,713 12.03% $2,178,259 8.00% n/a n/a
Star Bank, N.A. 1,150,460 10.50 876,902 8.00 $1,096,128 10.00%
Firstar Bank Milwaukee, N.A. 655,236 10.21 513,593 8.00 641,992 10.00
Firstar Bank Wisconsin 353,984 11.43 247,791 8.00 309,738 10.00
Firstar Bank Minnesota, N.A. 241,675 12.27 157,544 8.00 196,930 10.00
Firstar Bank Iowa, N.A. 243,698 11.63 167,814 8.00 209,767 10.00
Firstar Bank Illinois 212,508 14.31 118,464 8.00 148,080 10.00
Firstar Bank U.S.A., N.A. 139,390 12.76 87,381 8.00 109,227 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 2,613,541 9.60 1,089,130 4.00 n/a n/a
Star Bank, N.A. 765,614 6.98 438,451 4.00 657,677 6.00
Firstar Bank Milwaukee, N.A. 538,295 8.38 256,797 4.00 385,195 6.00
Firstar Bank Wisconsin 303,196 9.79 123,895 4.00 185,843 6.00
Firstar Bank Minnesota, N.A. 216,964 11.02 78,772 4.00 118,158 6.00
Firstar Bank Iowa, N.A. 210,707 10.04 83,907 4.00 125,860 6.00
Firstar Bank Illinois 193,882 13.05 59,232 4.00 88,848 6.00
Firstar Bank U.S.A., N.A. 105,705 9.68 43,691 4.00 65,536 6.00
Tier 1 Capital (to Average Assets):
Consolidated 2,613,541 8.23 1,269,943 4.00 n/a n/a
Star Bank, N.A. 765,614 6.24 490,744 4.00 613,430 5.00
Firstar Bank Milwaukee, N.A. 538,295 7.29 295,445 4.00 369,306 5.00
Firstar Bank Wisconsin 303,196 7.57 160,213 4.00 200,266 5.00
Firstar Bank Minnesota, N.A. 216,964 8.16 106,353 4.00 132,941 5.00
Firstar Bank Iowa, N.A. 210,707 7.29 115,672 4.00 144,590 5.00
Firstar Bank Illinois 193,882 7.28 106,498 4.00 133,122 5.00
Firstar Bank U.S.A., N.A. 105,705 12.77 33,114 4.00 41,393 5.00
- ---------------------------------------------------------------------------------------------------
</TABLE>
BANK WITHOUT BOUNDARIES 51
<PAGE>
NOTE 20 - Financial Instruments and Commitments
Firstar is a party to financial instruments with off-balance-sheet risk
in the normal course of business in managing its interest rate risk and
meeting the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of
credit, interest rate swap agreements, interest rate caps and floors,
forward contracts to purchase or sell foreign currencies and forward
commitments to sell residential mortgage loans. These instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized on the consolidated balance sheet.
The contract or notional amounts of these instruments reflect the extent
of involvement that Firstar has in particular classes of financial
instruments.
Firstar's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit, standby letters of credit and commercial letters of credit is
represented by the contract amount of these instruments. Commitments
generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected
to or typically expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
need for collateral is assessed on a case-by-case basis, based upon
management's credit evaluation of the other party.
The following table shows the contract amount of off-balance sheet
financial instruments associated with Firstar's commercial and consumer
lending activities as of December 31.
(dollars in thousands) 1998 1997
- ---------------------------------------------------------
Commitments to extend credit $11,276,724 $8,674,181
Credit card lines 4,362,189 4,314,225
Standby letters of credit 578,423 932,557
Letters of credit 59,803 62,780
- ---------------------------------------------------------
As part of its asset and liability management, Firstar uses various
types of interest rate contracts for the purpose of managing its
interest rate risk. The use of interest rate contracts enables Firstar
to synthetically alter the repricing characteristics of designated
earning assets and interest bearing liabilities. The following table
summarizes the notional amounts and fair market values of interest rate
contracts used in the interest rate risk management process at December
31.
1998 1997
- -------------------------------------------------------------------
Notional Market Notional Market
(dollars in thouands) Value Value Value Value
- -------------------------------------------------------------------
Interest rate swaps
In a receivable position $270,000 $3,841 $ 470,000 $ 1,440
In a payable position 8,000 (158) 153,000 (4,548)
Interest rate floors
In a receivable position 516,500 343 716,000 1,729
- -------------------------------------------------------------------
$794,500 $4,026 $1,339,000 $(1,379)
- -------------------------------------------------------------------
The interest rate swaps were used to convert certain fixed rate deposits
and borrowed funds to a variable rate basis and to convert certain
floating rate commercial loans to a fixed rate basis. Interest rate
floors provide for the receipt of payments when the three month LIBOR
rate is below a predetermined level. These interest rate floors have
been entered into to protect against the impact of declining rates on
certain variable rate loans along with the interest rate risk associated
with certain money market deposit accounts which have guaranteed minimum
interest rates.
The net cash flows associated with these off-balance-sheet interest rate
contracts used to manage interest rate risk reduced net interest income
by $142,000, $1,833,000 and $4,380,000 during 1998, 1997 and 1996,
respectively. The maturity of these interest rate contracts as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Maturity Range of Derivative Financial Instruments
--------------------------------------------------
(dollars in millions) 1999 2000 2001 Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Swaps
Receive fixed rate $ 90 $ 140 $ 40 $ 270
Average receive rate 8.78% 9.08% 8.61% 8.91%
Average pay rate 7.75% 7.75% 7.75% 7.75%
Receive variable rate $ 8 -- -- $ 8
Average receive rate 5.25% -- -- 5.25%
Average pay rate 8.59% -- -- 8.59%
Interest rate floors $ 211 $ 305 -- $ 516
Average floor rate 5.09% 4.75% -- 4.89%
- -------------------------------------------------------------------------------
Total $ 309 $ 445 $ 40 $ 794
- -------------------------------------------------------------------------------
</TABLE>
Firstar enters into commitments to sell groups of residential mortgage
loans that it originates or purchases as part of its mortgage banking
activities. Firstar commits to sell the loans at specified prices in a
future period typically within 90 days. The risk associated with these
commitments consists primarily of loans not closing in sufficient
volumes and at appropriate yields to meet the sale commitments. Firstar
had contracts totaling $1.8 billion and $605 million on December 31,
1998 and 1997, respectively. Gains or losses on these contracts are
included in the determination of the market value of mortgages held for
sale.
Firstar also acts as an intermediary for customers in their management
of interest rate and foreign currency risk. In this regard, Firstar will
enter into interest rate swaps, caps, floors and foreign exchange
contracts with its customers to minimize their exposure to market risk.
Firstar enters into essentially offsetting transactions with other
counterparties. Revenue from this intermediary activity was $5.7 million
and $4.3 million in 1998 and 1997, respectively. Information on these
transactions at December 31 is shown below:
1998 1997
- -------------------------------------------------------------------
Notional Market Notional Market
(dollars in thouands) Amount Value Amount Value
- -------------------------------------------------------------------
Interest rate swaps
In a receivable position $535,111 $11,726 $282,858 $2,872
In a payable position 464,931 9,203 266,858 2,037
Interest rate caps/floors
In a receivable position 97,500 182 63,215 639
In a payable position 97,500 182 63,215 639
Foreign exchange contracts
In a receivable position 81,000 873 71,000 3,242
In a payable position 73,000 364 84,000 1,479
- -------------------------------------------------------------------
The notional values of derivative financial instruments do not represent
direct credit exposures. Firstar is exposed to credit-related losses in
the event of nonperformance by counterparties to these instruments.
Where appropriate, Firstar requires collateral based upon the positive
market value of the exposure taking into account bilateral netting
agreements with certain counterparties. Based upon market values of all
derivative financial instruments, Firstar's credit exposure was $17.0
million at December 31, 1998.
FIRSTAR CORPORATION 52
<PAGE>
NOTE 21 - Litigation
Various legal claims have arisen during the normal course of business
which, in the opinion of management, will not result in material
liability to Firstar.
NOTE 22 - Dividend Restriction
Bank regulatory agencies limit the amount of dividends a subsidiary bank
can declare to the parent company in any calendar year without obtaining
prior approval. Dividends totaling $90 million required regulatory
agency approval in 1998. The amount of dividends available to the parent
company from the bank subsidiaries at January 1, 1999 was $343 million.
NOTE 23 - Earnings Per Share
The following table shows the amounts used in the computation of basic
and diluted earnings per share, in accordance with SFAS No. 128.
(dollars in thousands except per share data)
1998 1997 1996
- ---------------------------------------------------------------------
Net income $430,147 $513,894 $415,418
Dividends on preferred stock (83) (483) (872)
- ---------------------------------------------------------------------
Net income available to
common shareholders $430,064 $513,411 $414,546
- ---------------------------------------------------------------------
Weighted average shares:
Common shares 216,510 206,761 211,286
Convertible preferred shares 139 451 827
Options & stock plans 4,369 4,171 2,767
- ---------------------------------------------------------------------
Weighted average diluted
common shares 221,018 211,383 214,880
- ---------------------------------------------------------------------
Basic earnings per common share $1.99 $2.48 $1.96
Diluted earnings per common share $1.95 $2.43 $1.93
- ---------------------------------------------------------------------
NOTE 24 - Other noninterest expense
The following are included in all other expenses for the years ended
December 31.
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------
Amortization of intangibles $57,121 $35,292 $30,030
Outside processing services 70,938 58,871 48,682
Postage and courier 37,451 34,847 31,620
Marketing 32,467 29,527 31,285
- ------------------------------------------------------------------
NOTE 25 - 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 fund custody and record keeping, and corporate bond and stock
transfer services.
<TABLE>
<CAPTION>
For the year ended December 31, 1998 (dollars in thousands)
Trust and Merger-
Consumer Wholesale Private Related
Banking Banking Banking Treasury Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 848,746 $ 379,068 $ 61,845 $ 123,120 $ 1,412,779 $ -- $ 1,412,779
Provision for loan losses 78,019 10,707 2,034 4,576 95,336 18,300 113,636
Noninterest income 453,544 117,218 281,848 7,538 860,148 -- 860,148
Noninterest expense 910,165 141,239 200,414 26,404 1,278,222 242,970 1,521,192
Income taxes 102,960 112,872 46,299 32,674 294,805 (86,853) 207,952
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 211,146 $ 231,468 $ 94,946 $ 67,004 $ 604,564 $ (174,417) $ 430,147
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $10,692,100 $10,307,489 $ 1,815,758 $ 3,212,409 $25,027,756
Total assets 13,178,705 10,863,454 1,227,816 11,255,001 36,524,976
Deposits 21,634,300 3,304,805 1,381,739 510,154 26,830,998
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Treasury includes the net effect of transfer pricing of interest income
and expense along with the operating results of the investment
securities and residential mortgage loan portfolios. All revenue and
expenses of administrative and support functions has been allocated to
the primary business segments.
Prior year amounts are not presented due to the unavailability of
comparable data from the merged companies.
BANK WITHOUT BOUNDARIES 53
<PAGE>
NOTE 26 - Fair Value of Financial Instruments
Disclosure of fair value information about both on and off-balance-sheet
financial instruments is provided where it is practicable to estimate
that value. For many of Firstar's financial instruments, however, an
available trading market does not exist; therefore, significant
estimations and present value calculations were used to determine fair
values as described below. Changes in estimates and assumptions could
have a significant impact on these fair values.
Cash and Cash Equivalents
For cash and due from banks, federal funds sold, securities purchased
under agreement to resell and interest-bearing deposits in banks, the
carrying value is a reasonable estimate of fair value.
Investment Securities
Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments or estimated
current replacement cost of the instrument.
Loans
For variable rate loans which reprice frequently or are based on market
changes, with no significant changes in credit risk, fair values are
based on carrying values. The fair values for all other types of loans
(including nonperforming loans) are estimated by discounting the future
cash flows using current rates being offered for similar loans to
borrowers of similar credit quality.
Deposit Liabilities
The fair values of noninterest-bearing deposits, savings, NOW and money
market deposit accounts are, by definition, equal to the amount payable
on demand at the reporting date. The carrying values of variable rate,
fixed-term time deposits and certificates of deposit approximate their
fair values. For fixed-rate certificates of deposit, fair values are
estimated using a discounted cash flow analysis based on rates currently
offered for deposits of similar remaining maturities.
Short-Term Borrowings
The carrying amounts of federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings approximate
their fair values.
Long-Term Debt
Fair values of Firstar's long-term debt are estimated by using
discounted cash flow analyses, based on current market rates for debt
with similar terms and remaining maturities.
Off-Balance-Sheet Instruments
The fair value of interest rate swap agreements is based on the present
value of the swap primarily using counter party or third party dealer
quotes. Fair values for caps and floors were obtained using an option
pricing model. These values represent the estimated amount Firstar would
receive or pay to terminate the contracts or agreements taking into
account current interest rates and market volatility. Prices obtained
from counter parties or pricing models are tested by obtaining third
party valuations. The fair value of commitments to extend credit and
standby letters of credit is not material and is not shown here.
Due to the wide range of valuation techniques and numerous estimates and
assumptions which must be made for financial instruments which lack
available secondary markets, management is concerned that reasonable
comparability of estimated fair value disclosures between financial
institutions may not be likely.
The following table summarizes the estimated fair values of Firstar's
financial instruments at December 31.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,425,056 $ 2,425,056 $ 2,228,920 $ 2,228,920
Trading securities 2,754 2,754 2,293 2,293
Investment securities 6,356,309 6,358,189 5,599,996 5,653,679
Net loans 25,472,101 25,815,254 22,843,092 23,223,334
Loans held for sale 1,539,892 1,543,031 453,332 453,741
Financial liabilities:
Deposits 28,850,765 28,929,861 24,486,067 24,517,235
Short-term borrowings 3,463,308 3,463,308 3,414,330 3,414,330
Long-term debt 1,708,869 1,758,513 1,744,767 1,780,873
Derivative financial instruments:
Asset and liability management:
Interest rate contracts
Asset -- 4,184 -- 3,169
Liability -- 158 -- 4,548
Customer activities:
Interest rate contracts
Asset 11,908 11,908 3,511 3,511
Liability 9,385 9,385 2,676 2,676
Foreign exchange contracts
Asset 873 873 3,242 3,242
Liability 364 364 1,479 1,479
- ---------------------------------------------------------------------------------------------
</TABLE>
FIRSTAR CORPORATION 54
<PAGE>
NOTE 27 - PARENT COMPANY FINANCIAL INFORMATION
Balance Sheets
As of December 31 (dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------
Assets:
Investment in subsidiaries:
Banking subsidiaries $3,475,800 $2,884,869
Nonbank subsidiaries 89,204 65,935
- ------------------------------------------------------------------------------
Total investment
in subsidiaries 3,565,004 2,950,804
Cash and cash equivalents 120,178 55,332
Other investments 7,126 18,209
Advances to subsidiaries 704,795 491,108
Other assets 87,391 25,754
- ------------------------------------------------------------------------------
Total assets $4,484,494 $3,541,207
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Short-term borrowings $ 131,035 $ 102,103
Long-term debt 684,523 622,919
Other liabilities 139,023 66,294
Shareholders' equity 3,529,913 2,749,891
- ------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $4,484,494 $3,541,207
- ------------------------------------------------------------------------------
Statements of Income
For the years ended December 31 (dollars in thousands)
1998 1997 1996
- ------------------------------------------------------------------------------
Revenue:
Dividends from subsidiaries
Banking subsidiaries $402,450 $464,423 $431,414
Nonbank subsidiaries 15,000 6,225 7,600
- ------------------------------------------------------------------------------
Total dividends
from subsidiaries 417,450 470,648 439,014
Fees and assessments from subsidiaries 44,098 49,919 36,826
Other income 37,013 19,504 13,065
- ------------------------------------------------------------------------------
Total revenue 498,561 540,071 488,905
- ------------------------------------------------------------------------------
Expense:
Interest on short-term borrowings 9,640 5,636 11,452
Interest on long-term debt 43,130 40,466 21,133
Other operating expense 71,654 61,472 52,598
- ------------------------------------------------------------------------------
Total expense 124,424 107,574 85,183
- ------------------------------------------------------------------------------
Income before income tax benefit 374,137 432,497 403,722
Income tax benefit 12,773 15,708 11,340
Equity in undistributed income of subsidiaries 43,237 65,689 356
- ------------------------------------------------------------------------------
Net income $430,147 $513,894 $415,418
- ------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 55
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
For the years ended December 31 (dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 430,147 $ 513,894 $ 415,418
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiaries (43,237) (65,689) (356)
Depreciation and amortization 10,572 3,482 2,079
Net change in receivables from subsidiaries (942) 2,574 2,274
Gain on sale of securities available for sale -- (210) --
Net change in other assets and other liabilities (774) 3,928 19,804
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 395,766 457,979 439,219
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital contributions to subsidiaries (211,005) (7,875) (6,928)
Net change in advances to subsidiaries (99,062) (333,857) (87,734)
Cash from mergers of holding companies 55,789 -- --
Cash received from sale of interest in partnership to subsidiary -- -- 27,063
Other investing activity 1,034 (3,395) (3,051)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (253,244) (345,127) (70,650)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net change in short-term borrowings 28,932 (38,975) 104,265
Net change in long-term debt 63,601 254,600 93,530
Dividends paid (222,770) (192,514) (171,661)
Common stock transactions 51,368 (285,325) (250,427)
Shares reserved to meet deferred compensation obligations 1,193 1,945 1,624
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (77,676) (260,269) (222,669)
- ------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 64,846 (147,417) 145,900
Cash and cash equivalents at beginning of year 55,332 202,749 56,849
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 120,178 $ 55,332 $ 202,749
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Interest expense $ 76,761 $ 43,936 $ 32,903
Taxes paid 137,166 196,824 171,822
- ------------------------------------------------------------------------------------------------------
</TABLE>
FIRSTAR CORPORATION 56
<PAGE>
NOTE 28 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for 1998 and
1997.
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) Quarter Ended
1998 Dec. 31 Sept. 30 June 30 Mar. 31
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $368,902 $355,405 $349,741 $338,731
Provision for loan losses 28,503 32,038 24,450 28,645
Net interest income after provision for loan losses 340,399 323,367 325,291 310,086
Noninterest income 223,628 227,821 211,656 197,043
Noninterest expense 547,089 358,548 315,160 300,395
Income taxes 3,921 63,018 73,113 67,900
Net income 13,017 129,622 148,674 138,834
- --------------------------------------------------------------------------------------------------
Per share:
Basic earnings per common share $ 0.06 $ 0.60 $ 0.68 $ 0.65
Diluted earnings per common share 0.06 0.58 0.67 0.64
Cash dividends declared on common stock 0.30 0.23 0.23 0.23
Book value per common share 16.14 16.15 15.76 15.31
Market price -- high 93.94 73,50 64.38 61.25
low 57.19 54.88 59.19 53.13
Weighted average common shares outstanding 218,429 217,799 217,265 212,472
Weighted average diluted common shares 222,820 222,294 221,711 217,176
- --------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 0.13% 1.38% 1.65% 1.64%
Return on average common equity 1.44 14.88 17.81 18.30
Net interest margin 4.48 4.42 4.45 4.51
Efficiency ratio 90.63 60.31 55.09 55.02
Noninterest income to net revenue 37.05 38.32 36.99 36.09
- --------------------------------------------------------------------------------------------------
Quarter Ended
1997 Dec. 31 Sept. 30 June 30 Mar. 31
- --------------------------------------------------------------------------------------------------
Net interest income $330,109 $326,897 $323,937 $321,224
Provision for loan losses 38,118 28,191 26,157 25,306
Net interest income after provision for loan losses 291,991 298,706 297,780 295,918
Noninterest income 206,159 178,957 168,028 158,899
Noninterest expense 301,832 279,972 274,923 269,779
Income taxes 62,796 66,116 64,702 62,424
Net income 133,522 131,575 126,183 122,614
- --------------------------------------------------------------------------------------------------
Per share:
Basic earnings per common share $ 0.65 $ 0.64 $ 0.61 $ 0.58
Diluted earnings per common share 0.63 0.62 0.60 0.58
Cash dividends declared on common stock 0.20 0.20 0.20 0.20
Book value per common share 13.34 12.98 12.83 12.16
Market price -- high 58.00 47.06 44.75 45.25
low 46.13 42.63 38.88 29.70
Weighted average common shares outstanding 206,276 206,153 206,136 208,509
Weighted average diluted common shares 211,215 210,857 210,592 212,924
- --------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 1.65% 1.64% 1.61% 1.60%
Return on average common equity 19.57 19.92 20.06 19.72
Net interest margin 4.66 4.62 4.61 4.64
Efficiency ratio 55.21 54.24 54.75 55.08
Noninterest income to net revenue 37.71 34.67 33.46 32.44
- --------------------------------------------------------------------------------------------------
</TABLE>
BANK WITHOUT BOUNDARIES 57
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS OF FIRSTAR CORPORATION
Responsibility for the financial information presented in the Annual
Report rests with Firstar Corporation's management. The Corporation
believes that the consolidated financial statements reflect fairly the
substance of transactions and present fairly the Corporation's financial
position and results of operations in conformity with generally accepted
accounting principles appropriate in the circumstances applying certain
estimates and judgments as required.
In meeting its responsibilities for the reliability of the financial
statements, the Corporation depends on its system of internal controls.
The system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with the
appropriate corporate authorization and recorded properly to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. Although control procedures are designed
to achieve these objectives, it must be recognized that errors or
irregularities may nevertheless occur. Also, estimates and judgments are
required to assess and balance the relative cost and expected benefits
of the controls. The Corporation believes that its internal controls
provide reasonable assurance that errors or irregularities that could be
material to the financial statements are prevented or would be detected
within a timely period by employees in the normal course of performing
their assigned functions. An important element of the system is a
continuing and extensive internal audit program.
The board of directors of the Corporation has an Audit Committee
composed of directors who are not officers or employees of the
Corporation. The committee meets periodically and privately with
management, the internal auditors and the independent public accountants
to consider audit results and to discuss internal accounting control,
auditing and financial reporting matters.
Arthur Andersen LLP, independent public accountants, have been engaged
to render an independent professional opinion on the Corporation's
financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and forms the basis for their
report as to the fair presentation, in the financial statements, of the
Corporation's financial position, operating results and cash flows.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Firstar Corporation:
We have audited the accompanying consolidated balance sheets of FIRSTAR
CORPORATION (a Wisconsin corporation) and subsidiaries as of December
31, 1998 and 1997 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Firstar
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
January 11, 1999
FIRSTAR CORPORATION 58
<PAGE>
CORPORATE DIRECTORS
Paul M. Baker 3,4
Formerly Chairman and Chief Executive Officer,
Great Financial Corporation
Michael E. Batten 1,3
Chairman and Chief Executive Officer, Twin Disc, Incorporated
James R. Bridgeland, Jr. 1,5
Partner, Taft, Stettinius & Hollister
Laurance L. Browning, Jr. 2,5
Formerly Vice Chairman, Emerson Electric Co.
Robert C. Buchanan 2
President and Chief Executive Officer, Fox Valley Corporation
Victoria B. Buyniski 3,4
President and Chief Executive Officer, United Medical Resources, Inc.
Samuel M. Cassidy 1
Formerly President and Chief Executive Officer, Star Bank, N.A.
and Executive Vice President, Star Banc Corporation
George M. Chester, Jr. 4
Partner, Covington & Burling
V. Anderson Coombe 3
Chairman, The Wm. Powell Co.
John C. Dannemiller 4,5
Chairman, President and Chief Executive Officer, Applied Industrial
Technologies
Roger L. Fitzsimonds 1
Chairman, Firstar Corporation
James L. Forbes 1,2
President and Chief Executive Officer, Badger Meter, Inc.
David B. Garvin 3
Ironwood Farm
Jerry A. Grundhofer 1
President and Chief Executive Officer, Firstar Corporation
J.P. Hayden, Jr. 1,2,3,5
Chairman, The Midland Company
Joe F. Hladky 3,4
President, The Gazette Company
Roger L. Howe 1,2,3
Formerly Chairman, U.S. Precision Lens, Inc.
Thomas J. Klinedinst, Jr. 3,4
Chairman, President, Chief Operating Officer and Chief Executive Officer,
Thos. E. Wood, Inc.
William H. Lacy 2,5
President and Chief Executive Officer, MGIC Investment Corporation
Sheldon B. Lubar 1,5
Chairman, Lubar & Company
Kenneth P. Manning 2,3
Chairman and Chief Executive Officer, Universal Foods Corporation
Daniel F. McKeithan, Jr. 1,3,5
President and Chief Executive Officer, Tamarack Petroleum Company, Inc.
Charles S. Mechem, Jr. 2
Chairman, Cincinnati Bell, Inc.
Daniel J. Meyer
Chairman and Chief Executive Officer, Cincinnati Milacron, Inc.
David B. O'Maley 2
Chairman, President and Chief Executive Officer,
Ohio National Financial Services
Robert J. O'Toole 2,4
Chairman and Chief Executive Officer, A.O. Smith Corporation
O'dell M. Owens, M.D., M.P.H. 4
The Franciscan Health System of the Ohio Valley
Thomas E. Petry 1,2,3
Formerly Chairman and Chief Executive Officer,
Eagle-Picher Industries, Inc.
Judith D. Pyle 3
Vice Chairman, The Pyle Group and Georgette Klinger, Inc.
John J. Stollenwerk 3,4
President, Allen-Edmonds Shoe Corporation
Oliver W. Waddell 1
Formerly Chairman, Star Banc Corporation and Vice Chairman, Star Bank, N.A.
William W. Wirtz 3
President, Wirtz Corporation
1=Executive Committee
2=Compensation Committee
3=Audit Committee
4=Community Outreach and Fair Lending Committee
5=Committees on Directors/Governance
BANK WITHOUT BOUNDARIES 59
<PAGE>
OFFICE OF THE CEO
Jerry A. Grundhofer
President and Chief Executive Officer
Roger L. Fitzsimonds
Chairman
John A. Becker
Vice Chairman and Chief Operating Officer
Richard K. Davis
Vice Chairman
Consumer Banking
David M. Moffett
Vice Chairman and Chief Financial Officer
MANAGING COMMITTEE
Jerry A. Grundhofer
President and Chief Executive Officer
Daniel A. Arrigoni
Executive Vice President
Mortgage Banking
John A. Becker
Vice Chairman and Chief Operating Officer
Kathy P. Beechem
Executive Vice President
Metro Banking and In-Store Banking
Daniel B. Benhase
Executive Vice President
Trust and Investments
Vince A. Berta
Executive Vice President
Western Kentucky Region
Joseph A. Campanella
Executive Vice President
Community Banking
Richard K. Davis
Vice Chairman
Consumer Banking
Roger L. Fitzsimonds
Chairman
Timothy J. Fogarty
Executive Vice President
Operations
Kenneth R. Griffith
Executive Vice President
Retail Lending and Finance Company
John R. Heistad
Executive Vice President
Credit Administration
Jerome C. Kohlhepp
Executive Vice President
Specialized Lending
Mark J. Masuhr
Executive Vice President
Commercial Products
David M. Moffett
Vice Chairman and Chief Financial Officer
Ronald E. Roder
Executive Vice President
Information Systems
Stephen E. Smith
Executive Vice President
Human Resources
Mary Ellen Stanek
President and Chief Executive Officer
FIRMCO
Patricia A. Wesner
Executive Vice President
Credit Card/Debit Card
Jay B. Williams
Executive Vice President
Sales and Marketing
FIRSTAR CORPORATION 60
<PAGE>
CORPORATE INFORMATION
The Annual Meeting of Shareholders of Firstar Corporation will be held at
11:00 a.m. (CDT), Tuesday, April 13, 1999, in the Miller Room, Miller
Brewing Company Pavilion at O'Donnell Park, 910 East Michigan Street,
Downtown Milwaukee.
Financial Information
Additional financial or general information, including copies of this annual
report, Form 10-K filed with the Securities and Exchange Commission, and
interim reports published quarterly during the year may be obtained
online at www.firstar.com/about/about.html or by contacting:
Firstar Investor Relations
Request Line
414.765.4808
or
Joseph D. Messinger
First Vice President
Investor Relations
414.765.5235
Media requests should be made to:
Steven W. Dale
Vice President
Media Relations
414.765.4455
Stock Listing
Firstar Corporation common stock is listed under the symbol "FSR" on the New
York Stock Exchange.
Transfer Agent/Shareholder Services
Inquiries relating to shareholder records, stock transfers, changes of
ownership, changes of address and dividend payment should be sent to the
transfer agent at the following address:
Firstar Bank Milwaukee N.A.
1555 North River Center Drive, Suite 301
Milwaukee, WI 53212
1.800.637.7549
Dividend Reinvestment
Firstar Corporation offers its shareholders an automatic dividend
reinvestment program. The program enables shareholders to reinvest their
dividends in shares at the prevailing market price. For more information, write
to Firstar Bank Milwaukee N.A., Dividend Reinvestment Department,
1555 North River Center Drive, Suite 301, Milwaukee, WI 53212 or call
1.800.637.7549.
Independent Public Accountants
The independent public accountants of Firstar Corporation for 1999 are
PricewaterhouseCoopers, LLP.
Corporate Headquarters
Firstar Center
777 East Wisconsin Avenue
Milwaukee, WI 53202
414.765.4321
Online
For product, corporate and financial information, please visit our site
on the web at http://www.firstar.com.
BANK WITHOUT BOUNDARIES 61
<PAGE>
FIRSTAR CORPORATION
Corporate Headquarters
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202 U.S.A.
Website: www.firstar.com
Cincinnati Headquarters
425 Walnut Street
Cincinnati, Ohio 45202 U.S.A.
Subsidiaries of Firstar Corporation Exhibit 21
Firstar Corporation has no parents. The following list shows the name of
each subsidiary of Firstar and the percentage of ownership as of December 31,
1998.
Percentage Jurisdiction in which
Name of Subsidiary Ownership Incorporated or Organized
- ------------------------------------ ---------- -------------------------
1 Firstar Bank, National
Association 100% United States
1 Firstar Bank Milwaukee, National
Association 100% United States
1 Firstar Bank Wisconsin 100% Wisconsin
1 Firstar Bank Iowa, National
Association 100% United States
1 Firstar Bank Burlington, National
Association 100% United States
1 Firstar Bank of Minnesota, National
Association 100% United States
1 Firstar Bank Illinois 100% Illinois
1 Firstar Bank U.S.A., National
Association 100% United States
2 Firstar Metropolitan Bank & Trust 100% Arizona
1 Firstar BankWausau, National
Association 100% United States
6 Firstar Corporation(WI) 100% Wisconsin
1 Firstar Corporation of Arizona 100% Arizona
1 Firstar Mutual Funds LLC 100% Wisconsin
1 Firstar Trust Company of Florida,
National Association 100% United States
1 Firstar Investment Research &
Management Company, LLC 100% Wisconsin
1 Firstar Insurance Services, LLC 100% Wisconsin
3 Firstar Investment Services, Inc. 100% Wisconsin
1 Elan Life Insurance Company 79.00% Arizona
1 Firstar Title Corp. 100% Wisconsin
3 Firstar Community Investment
Corporation 100% Wisconsin
3 Firstar Equipment Finance
Corporation 100% Wisconsin
3 Firstar Lease Receivables
Corporation 100% Wisconsin
3 Firstar Home Mortgage Corporation 100% Wisconsin
3 Firstar Equipment Corporation 100% Wisconsin
1 Firstar Finance, Inc 100% Ohio
1 Star Capital Corporation 100% Ohio
1 Miami Valley Insurance Company 100% Arizona
<PAGE>
3 Firstar Trade Services
Corporation 100% Wisconsin
5 Firstar Trade Services Limited 100% Hong Kong
3 Milwaukee Capital Corporation 100% Nevada
4 Wisconsin Capital Corporation 100% Nevada
1 Firstar Capital Trust I 100% Delaware
1 Star Capital I 100% Delaware
Notes
- -----
1 Subsidiary of Firstar Corporation(WI)
2 Subsidiary of Firstar Corporation of Arizona
3 Subsidiary of Firstar Bank Milwaukee, National Association
4 Subsidiary of Firstar Bank Wisconsin
5 Subsidiary of Firstar Trade Services Corporation
6 Subsidiary of Firstar Corporation
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report incorporated by reference in this
Form 10-K, into the Company's previously filed Registration
Statement Files No. 2-94845, No. 33-9494, No. 33-10085, No. 33-
24672, No. 33-46018, No. 33-61308, No. 33-38830, No. 33-41030,
No. 33-19830, No. 33-57521, No. 33-57523, No. 33-58559, No. 33-
58913, No. 33-58915, No. 33-59207, No. 33-53109, No. 333-26665,
No. 333-69229, No. 333-69233, and No. 333-69231.
/s/ ARTHUR ANDERSEN LLP
_____________________________
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 19, 1999
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned Directors of Firstar Corporation, hereby
appoint Jerry A. Grundhofer and Jennie P. Carlson or either of
them with full power of substitution, our true and lawful
attorneys and agents, to do any and all acts and things in our
names and on our behalf as Directors of the Corporation, which
said attorneys and agents may deem necessary or advisable to
enable the Corporation to comply with the Securities Act of
1934, as amended, and any rules, regulations or requirements of
the Securities and Exchange Commission, in connection with the
filing of the Corporation's annual report on Form 10-K for the
year 1998, including, without limitation, signing for us, or any
of us, in our names as Directors of the Corporation, such Form
10-K and any and all amendments thereto, and we hereby ratify
and confirm all that said attorneys and agents shall do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, and
the rules and regulations thereunder, this Power of Attorney has
been signed below by the following persons as Directors of the
Corporation as of the 12th day of January, 1999.
/s/ Paul M. Baker
- -----------------------------
Director
Paul M. Baker
/s/Michael E. Batten
- -----------------------------
Director
Michael E. Batten
/s/ James R. Bridgeland, Jr.
- -----------------------------
Director
James R. Bridgeland, Jr.
/s/Laurance L. Browning, Jr.
- -----------------------------
Director
Laurance L. Browning, Jr.
/s/ Robert C. Buchanan
- -----------------------------
Director
Robert C. Buchanan
/s/Victoria B. Buyniski
- -----------------------------
Director
Victoria B. Buyniski
/s/ Samuel M. Cassidy, III
- -----------------------------
Director
Samuel M. Cassidy, III
/s/ George M. Chester, Jr.
- -----------------------------
Director
George M. Chester, Jr.
/s/ V. Anderson Coombe
- -----------------------------
Director
V. Anderson Coombe
/s/ John C. Dannemiller
- -----------------------------
Director
John C. Dannemiller
/s/James L. Forbes
- -----------------------------
Director
James L. Forbes
/s/David B. Garvin
- -----------------------------
Director
David B. Garvin
/s/ J.P. Hayden, Jr.
- -----------------------------
Director
J.P. Hayden, Jr.
/s/ Joe F. Hladky
- -----------------------------
Director
Joe F. Hladky
/s/ Roger L. Howe
- -----------------------------
Director
Roger L. Howe
/s/ Thomas J. Klinedinst, Jr.
- -----------------------------
Director
Thomas J. Klinedinst, Jr.
/s/ William H. Lacy
- -----------------------------
Director
William H. Lacy
/s/ Sheldon B. Lubar
- -----------------------------
Director
Sheldon B. Lubar
/s/ Kenneth P. Manning
- -----------------------------
Director
Kenneth P. Manning
/s/ Daniel F. McKeithan, Jr.
- -----------------------------
Director
Daniel F. McKeithan, Jr.
/s/ Charles S. Mechem, Jr.
- -----------------------------
Director
Charles S. Mechem, Jr.
/s/ Daniel J. Meyer
- -----------------------------
Director
Daniel J. Meyer
/s/ David B. O'Maley
- -----------------------------
Director
David B. O'Maley
/s/ Robert J. O'Toole
- -----------------------------
Director
Robert J. O'Toole
/s/ O'dell M. Owens, M.D.
- -----------------------------
Director
O'dell M. Owens, M.D.
/s/ Thomas E. Petry
- -----------------------------
Director
Thomas E. Petry
- -----------------------------
Director
Judith D. Pyle
/s/ John J. Stollenwerk
- -----------------------------
Director
John J. Stollenwerk
/s/ Oliver W. Waddell
- -----------------------------
Director
Oliver W. Waddell
- -----------------------------
Director
William W. Wirtz
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