STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10Q
September 30, 1995
Page
Table of Contents Number
Part I. Financial Information:
Financial Highlights................................................3
Report of Independent Public Accountants............................4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements...............5-8
Notes to Condensed Consolidated Financial Statements.....9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................15-26
Part II. Other Information
Item 1. Legal Proceedings.......................................none
Item 2. Changes in Securities...................................none
Item 3. Defaults Upon Senior Securities.........................none
Item 4. Submission of Matters to a Vote of Security Holders.....none
Item 5. Other Information.......................................none
Item 6. Exhibits and Reports on Form 8-K..........................27
Signatures.................................................................27
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<CAPTION>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
Third Quarter Year thru September
Percent Percent
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Net income...........................$ 34,197 $ 29,807 14.7 % $ 100,733 $ 86,183 16.9 %
Per share:
Primary earnings...................$ 1.14 $ 1.00 14.0 % $ 3.35 $ 2.88 16.3 %
Fully diluted earnings............. 1.14 0.99 15.2 3.34 2.84 17.6
Common stock dividends declared.... 0.40 0.35 14.3 1.20 1.05 14.3
Preferred dividends declared....... 1.50 1.50 -- 4.50 4.50 --
Book value per common share........ 26.35 23.50 12.1 26.35 23.50 12.1
Market value per common share...... 53.50 41.00 30.5 53.50 41.00 30.5
Average balances:
Total assets.......................$ 9,507,859 $ 8,227,994 15.6 % $ 9,362,910 $ 7,919,643 18.2 %
Earning assets..................... 8,638,367 7,664,824 12.7 8,544,335 7,373,861 15.9
Loans, net of unearned interest.... 6,793,289 5,817,796 16.8 6,576,855 5,591,584 17.6
Deposits........................... 7,482,081 6,091,796 22.8 7,237,600 6,002,676 20.6
Shareholders' equity............... 788,224 703,899 12.0 767,994 695,694 10.4
Ratios:
Return on average assets........... 1.43 % 1.44 % 1.44 % 1.45 %
Return on average equity........... 17.21 16.80 17.54 16.56
Average shareholders' equity
to average assets................ 8.29 8.55 8.20 8.78
Risk-based capital ratios:
Tier 1........................... 7.73 8.59 7.73 8.59
Total............................ 11.01 12.17 11.01 12.17
Leverage........................... 6.10 6.04 6.10 6.04
Net interest margin................ 4.53 4.60 4.41 4.63
Noninterest expense to net revenue. 54.22 54.21 54.64 55.06
Noninterest income as a percent
of net revenue................... 24.70 24.49 25.89 25.19
</TABLE>
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ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Star Banc Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of Star
Banc Corporation (an Ohio corporation) as of September 30, 1995, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1995 and 1994, and the condensed
consolidated statements of changes in shareholders' equity and cash flows
for the nine-month periods ended September 30, 1995 and 1994. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Star Banc Corporation as of
December 31, 1994 (not presented herein), and, in our report dated January
9, 1995, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1994, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Arthur Andersen, LLP
Cincinnati, Ohio,
October 10, 1995
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<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS:
Cash and Due From Banks........................... $ 472,435 $ 429,467
Interest Bearing Deposits in Banks................ 100 100
Federal Funds Sold and Securities Purchased
Under Agreements to Resell...................... 5,924 56,545
Investment Securities:
Available-For-Sale.............................. 217,136 563,091
Held-To-Maturity (market value of $1,654,838
at September 30, 1995 and $1,671,088 at
December 31, 1994)............................ 1,653,039 1,764,854
Total Securities................................ 1,870,175 2,327,945
Loans:
Commercial Loans................................ 2,242,100 2,079,804
Real Estate Loans............................... 2,628,451 2,378,661
Retail Loans.................................... 2,127,013 1,865,295
Total Loans................................... 6,997,564 6,323,760
Less: Unearned Interest....................... 93,246 74,203
6,904,318 6,249,557
Allowance for Loan Losses............... 106,019 95,979
Net Loans..................................... 6,798,299 6,153,578
Premises and Equipment............................ 131,894 122,829
Acceptances - Customers' Liability................ 25,372 8,249
Other Assets...................................... 422,497 292,078
Total Assets.................................. $ 9,726,696 $ 9,390,791
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits.................... $ 1,302,281 $ 1,214,703
Interest-Bearing Deposits:
Savings and NOW............................... 1,964,751 2,048,442
Time Deposits $100,000 and Over............... 458,315 636,181
All Other Deposits............................ 3,891,932 3,464,489
Total Deposits.............................. 7,617,279 7,363,815
Short-term Borrowings............................. 1,005,115 1,034,700
Long-term Debt.................................... 161,141 166,466
Acceptances Outstanding........................... 25,372 8,249
Other Liabilities................................. 130,894 99,343
Total Liabilities............................. 8,939,801 8,672,573
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - 4,374 at September 30, 1995
and 29,707 at December 31, 1994............... 363 2,466
Common Stock:
Shares Authorized - 50,000,000
Shares Issued - 30,160,458 at September 30, 1995
and 30,105,835 at December 31, 1994........... 150,802 150,529
Surplus........................................... 77,092 78,037
Retained Earnings................................. 575,013 510,268
Treasury Stock:
At cost - 314,746 shares at September 30, 1995
and 303,039 at December 31, 1994................ (11,724) (9,445)
Net Unrealized (Loss) on Securities............... (4,651) (13,637)
Total Shareholders' Equity.................... 786,895 718,218
Total Liabilities and Shareholders' Equity.... $ 9,726,696 $ 9,390,791
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in thousands except per share data)
Third Quarter Nine Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans...................$ 151,241 $ 119,680 $ 432,514 $ 337,700
Interest on Investment Securities:
Taxable.................................... 30,113 22,891 94,186 64,576
Non-Taxable................................ 143 362 522 1,179
Interest on Federal Funds Sold and Securities
Purchased Under Agreements to Resell....... 180 528 655 1,145
Interest on Interest-Bearing Deposits........ 2 300 4 457
Total Interest Income...................... 181,679 143,761 527,881 405,057
INTEREST EXPENSE:
Interest on Savings and NOW.................. 11,225 9,743 32,762 28,336
Interest on Time Deposits $100,000 and Over.. 6,485 4,422 21,444 11,353
Interest on Other Deposits................... 51,901 28,968 141,616 79,874
Interest on Short-Term Borrowings............ 12,370 11,147 43,501 25,079
Interest on Long-Term Debt................... 2,815 2,051 8,327 6,908
Total Interest Expense..................... 84,796 56,331 247,650 151,550
Net Interest Income...................... 96,883 87,430 280,231 253,507
Provision for Loan Losses.................... 7,288 7,100 19,441 19,392
Net Interest Income after
Provision for Loan Losses.............. 89,595 80,330 260,790 234,115
NONINTEREST INCOME:
Trust Income................................. 10,602 8,986 30,616 26,915
Service Charges on Deposits.................. 11,074 9,063 32,013 25,686
Other Service Charges and Fees............... 10,309 8,412 29,336 24,841
Investment Securities Gains-Net.............. 3 9 1,187 8
All Other Income............................. 69 2,139 5,611 8,715
Total Noninterest Income................... 32,057 28,609 98,763 86,165
NONINTEREST EXPENSE:
Salaries..................................... 29,092 26,887 83,537 76,435
Pension and Other Employee Benefits.......... 4,588 4,861 14,740 14,243
Equipment Expense............................ 3,964 3,578 11,858 11,223
Occupancy Expense - Net...................... 5,429 4,504 15,790 13,284
All Other Expense............................ 27,301 23,494 82,523 73,129
Total Noninterest Expense.................. 70,374 63,324 208,448 188,314
INCOME BEFORE TAX............................ 51,278 45,615 151,105 131,966
Income Tax................................... 17,081 15,808 50,372 45,783
NET INCOME...................................$ 34,197 $ 29,807 $ 100,733 $ 86,183
PER SHARE:
Primary Earnings.............................$ 1.14 $ 1.00 $ 3.35 $ 2.88
Fully Diluted Earnings....................... 1.14 0.99 3.34 2.84
Common Stock Cash Dividends Declared......... 0.40 0.35 1.20 1.05
Preferred Stock Cash Dividends Declared...... 1.50 1.50 4.50 4.50
See Notes to Condensed Consolidated Financial Statements
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<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Series B Unrealized
Preferred Common Retained Treasury Gain/(Loss Total
Stock Stock Surplus Earnings Stock Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994..... $ 14,622 $ 148,767 $ 80,038 $ 435,724 $ (3,352)$ -- $ 675,799
Net income.................. 86,183 86,183
Cash dividends declared on
common stock............... (31,295) (31,295)
Cash dividends declared on
Series B Preferred Stock... (277) (277)
Issuance of shares upon
exercise of options on
common stock............... 90 17 2,348 2,455
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued...... (12,064) 1,672 (1,938) 12,329 (1)
Purchase of treasury stock.. (24,809) (24,809)
Treasury shares issued to
meet deferred compensation
obligations................ (276) 276 --
Shares reserved to meet
deferred compensation
obligations................ 793 312 1,105
Initial adoption of
SFAS 115................... 4,386 4,386
Change in net unrealized
gain/(loss) on securities
available for sale......... (12,606) (12,606)
Balance, September 30, 1994.. $ 2,558 $ 150,529 $ 78,634 $ 490,335 $ (12,896)$ (8,220)$ 700,940
Balance, January 1, 1995..... $ 2,466 $ 150,529 $ 78,037 $ 510,268 $ (9,445)$ (13,637)$ 718,218
Net income.................. 100,733 100,733
Cash dividends declared on
common stock............... (35,918) (35,918)
Cash dividends declared on
Series B Preferred Stock... (70) (70)
Issuance of common stock
and treasury shares........ 273 800 2,301 3,374
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued...... (2,103) (2,727) 4,829 (1)
Purchase of treasury stock.. (9,363) (9,363)
Shares reserved to meet
deferred compensation
obligations................ 982 (46) 936
Change in net unrealized
gain/(loss) on securities
available for sale......... 8,986 8,986
Balance, September 30, 1995.. $ 363 $ 150,802 $ 77,092 $ 575,013 $ (11,724)$ (4,651)$ 786,895
</TABLE>
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<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 100,733 $ 86,183
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 23,994 22,965
Provision for loan losses.............................. 19,441 19,392
Provision for deferred taxes........................... 11,918 1,149
(Gain)/loss on sale of premises and equipment - net.... (209) (131)
(Gain)/loss on sale of securities - net................ (1,187) (1)
(Gain)/loss on sale of residential real estate loans... 3,206 (572)
Proceeds from sale of mortgage loans .................. 113,738 106,659
Mortgage Loans originated for sale on secondary market. (138,564) (67,239)
Net change in other assets............................. (91,039) (7,991)
Net change in other liabilities........................ 4,645 (4,447)
Total adjustments.................................... (54,057) 69,784
Net cash provided by operating activities............ 46,676 155,967
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities.... 150,838 233,530
Proceeds from maturities of available-for-sale securities.. 104,663 296,914
Proceeds from sales of available-for-sale securities....... 422,791 991
Purchase of held-to-maturity securities.................... (39,551) (1,006,422)
Purchase of available-for-sale securities.................. (168,729) (397,586)
Net change in loans........................................ (652,796) (789,260)
Proceeds from sales of loans............................... 13,483 17,998
Proceeds from sales of premises and equipment.............. 1,844 986
Purchase of premises and equipment......................... (13,161) (16,074)
Net change due to acquisition of branches.................. 568,488 972,568
Net cash provided by/(used in) investing activities...... 387,870 (686,355)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits..................................... (391,614) 15,862
Net change in short-term borrowings........................ (29,585) 323,866
Principal payments on long-term debt....................... (5,470) (33,390)
Proceeds from issuance of long-term debt................... -- 147,975
Proceeds from issuance of common stock..................... 3,374 2,455
Purchase of treasury stock................................. (9,363) (24,810)
Conversion of preferred stock.............................. (1) --
Shares reserved to meet deferred compensation obligations.. 936 1,105
Dividends paid............................................. (10,476) (29,974)
Net cash provided by/(used in) financing activities...... (442,199) 403,089
Net change in cash and cash equivalents.................... (7,653) (127,299)
Cash and cash equivalents at beginning of year............. 486,112 560,534
Cash and cash equivalents at June 30.......................$ 478,459 $ 433,235
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for three months ended June 30 1995 1994
Interest.................................................$ 234,509 $ 140,878
Income Taxes............................................. 32,584 41,700
Noncash transfer of loans to other real estate owned....... 1,238 867
See Notes to Condensed Consolidated Financial Statements
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
These condensed consolidated financial statements have been
prepared by Star Banc Corporation ("the Corporation") pursuant
to the rules and regulations of the Securities and Exchange
Commission and, therefore, certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes
thereto included in the Corporation's annual report on Form
10-K for the year ended December 31, 1994, filed with the
Securities and Exchange Commission.
These condensed consolidated financial statements include the
accounts of the Corporation and all its subsidiaries and reflect
all adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the periods reported.
All such adjustments are of a normal recurring nature.
Note 2. Investment Securities
The following table summarizes unrealized gains and losses for
held-to-maturity and available-for-sale securities at September 30,
1995 and December 31, 1994. (Dollars are in thousands)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasuries and
agencies $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Mortgage-backed
securities 1,606,219 17,008 17,339 1,605,888 1,742,165 506 94,493 1,648,178
Obligations of state and
political subdivisions 45,685 2,135 4 47,816 21,554 249 25 21,778
Other debt securities 1,135 -- 1 1,134 1,135 -- 3 1,132
Total held-to-maturity
securities $1,653,039 $19,143 $17,344 $1,654,838 $1,764,854 $755 $94,521 $1,671,088
Available-for-Sale
U.S. Treasuries and
agencies $ 23,286 $ 350 $ 41 $ 23,595 $ 117,357 $ 42 $ 1,149 $ 116,250
Mortgage-backed
securities 154,863 271 16 155,118 424,461 21 11,469 413,013
Obligations of state and
political subdivisions -- -- -- -- -- -- -- --
Other debt securities 187 6 -- 193 215 -- 6 209
Federal reserve/FHLB stock
and other equity
securities 38,230 -- -- 38,230 33,619 -- -- 33,619
Total available-for-sale
securities $ 216,566 $ 627 $ 57 $ 217,136 $ 575,652 $ 63 $12,624 $ 563,091
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As of September 30, 1995, the Corporation reported a net
unrealized loss of $4.7 million for securities. For the first
nine months of 1995, the net unrealized gain/(loss) reported as
a separate component of equity changed from an unrealized loss
of $13.6 million to an unrealized loss of $4.7 million, increasing
shareholders' equity $8.9 million.
The following table presents the amortized cost and fair
value of held-to-maturity and available-for-sale debt securities
at September 30, 1995. (Dollars are in thousands)
Amortized Fair
Held-to-Maturity Cost Value
One year or less $ 281,877 $ 281,463
After one year through five years 881,752 877,404
After five years through ten years 270,128 272,182
After ten years 219,282 223,789
Total $ 1,653,039 $1,654,838
Available-for-Sale
One year or less $ 31,421 $ 31,622
After one year through five years 103,727 103,984
After five years through ten years 35,330 35,384
After ten years 7,857 7,916
Total $ 178,335 $ 178,906
Note: Maturity information related to mortgage-backed
securities included above is presented based upon weighted
average maturities anticipating future prepayments.
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Note 3. Loans
The following table summarizes the composition of the loan
portfolio, net of unearned interest, as of September 30, 1995
and December 31, 1994. (Dollars are in thousands)
September 30, December 31,
1995 1994
Commercial loans:
Corporate loans $1,713,031 $1,625,934
Asset-based lending 212,029 180,738
Commercial leasing 236,946 196,504
Industrial revenue bonds 39,399 41,176
Total commercial loans 2,201,405 2,044,352
Real estate loans:
Residential mortgage 1,342,073 1,168,828
Commercial mortgage 1,070,878 981,954
Construction and land development 215,500 227,879
Total real estate loans 2,628,451 2,378,661
Retail loans:
Installment 1,392,243 1,310,012
Credit cards 301,672 228,673
Retail leasing 380,547 287,859
Total retail loans 2,074,462 1,826,544
Total loans, net of unearned
interest $6,904,318 $6,249,557
Note 4. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses is
shown in the following table. (Dollars are in thousands)
Nine months
Ended Year Ended
September 30, December 31,
1995 1994
Balance - beginning of period $ 95,979 $ 83,156
Loans charged-off (20,764) (24,570)
Recoveries on loans
previously charged-off 11,363 13,021
Net charge-offs (9,401) (11,549)
Provision charged to earnings 19,441 24,372
Balance - end of period $ 106,019 $ 95,979
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Note 5. Impaired Loans
Effective January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 114 (SFAS No. 114), as amended
by Statement of Financial Accounting Standards No. 118 (SFAS
No. 118), related to accounting by creditors for impairment of
loans. SFAS No. 114 requires that impaired loans as defined by
the statement be measured based on (1) the present value of the
expected future cash flows discounted at the loan's effective
interest rate, or (2) as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. When the measure of the impaired
loan is less than the recorded investment in the loan, a valuation
allowance is recorded. The Corporation had previously measured
the allowance for loan losses on impaired loans using methods
similar to those prescribed by SFAS No. 114.
The valuation allowance recorded on impaired loans is
included in the total allowance for loan losses shown in Note 4.
In addition to the methods prescribed in SFAS No. 114 for
impaired loans, the adequacy of the total allowance for loan
losses is based on management's evaluation of several key
factors, including the current loan portfolio, current economic
conditions, evaluation of significant problem loans, changes in
the mix and levels of various types of loans, past charge-off
experience and other pertinent information. There was no
additional allowance for loan losses required in 1995 as
a result of the adoption of SFAS No. 114 and No. 118.
The following table shows the Corporation's recorded
investment in impaired loans and the related valuation
allowance, as calculated under SFAS No. 114, at September 30,
1995. (Dollars are in thousands)
September 30, 1995
Recorded Valuation
Investment Allowance
Impaired Loans:
Valuation allowance required $ 8,803 $ 2,510
No valuation allowance required 19,515 --
Total impaired loans $ 28,318 $ 2,510
The average recorded investment in impaired loans for the
nine months ended September 30, 1995 was $28 million. As a
general policy, the Corporation applies both principal and
interest payments received on impaired loans as a reduction of
principal. The Corporation recognized $68,000 in interest
income on impaired loans in the first nine months of 1995.
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Note 6. Income Tax
The components of the net deferred tax asset/(liability)
included in the Corporation's consolidated balance sheets at
September 30, 1995 and December 31, 1994 are shown in the
following table. (Dollars are in thousands)
September 30, December 31,
1995 1994
Allowance for loan losses $ 37,377 $ 33,151
Deferred loan fees 1,892 2,313
Deferred compensation 2,388 1,825
Unrealized loss on securities 2,504 7,343
Intangible asset amortization 512 543
Other 3,055 2,656
Total deferred tax asset 47,728 47,831
Leased assets (49,033) (32,206)
Pension liabilities (4,842) (4,511)
Fixed asset depreciation (4,406) (4,444)
Purchase accounting/intangible assets (1,694) (1,508)
Other (1,191) (1,516)
Total deferred tax liability (61,166) (44,185)
Net deferred tax asset/(liability) $ (13,438) $ 3,646
The Corporation has not recorded a valuation reserve related to
deferred tax assets.
Note 7. Noninterest Income and Other Noninterest Expense
The following are included in other service charges and fees, and
all other income for the three months and nine months ended
September 30, 1995 and 1994. (Dollars are in thousands)
Three Months Nine Months
1995 1994 1995 1994
Credit card fees $ 3,904 $ 3,258 $10,944 $ 8,978
ATM fees 2,073 1,319 5,574 3,573
Mortgage banking income (2,195) 1,023 (330) 3,284
The following are included in all other expense for the three
months and nine months ended September 30, 1995 and 1994.
Three Months Nine Months
1995 1994 1995 1994
FDIC insurance $ 492 $ 3,217 $ 8,350 $ 9,875
Amortization of
intangible assets 3,939 1,640 9,878 4,586
Outside processing
services 2,563 2,412 7,649 7,143
Marketing 3,074 1,769 7,099 6,092
State taxes 2,239 2,429 6,703 7,225
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Note 8. Acquisitions
On July 15, 1995, Star Bank, N.A. ("the Bank"), the lead bank of
the Corporation, purchased 24 Columbus area branch offices of the
Ohio division of Household Bank, f.s.b. This transaction was
accounted for as a purchase, and accordingly, all assets acquired
and liabilities assumed were recorded at fair value. In purchasing
these branches, the Bank received $564 million in cash and $645
million in deposits for a premium of 9.75 percent of deposits or
approximately $64 million. The allocation of the purchase price
has not been completed at this time.
Note 9. Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 122 (SFAS
No. 122) "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65." SFAS No. 122 requires
a mortgage banking enterprise to capitalize mortgage servicing
rights on originated mortgage loans, when the underlying
loans are sold or securitized and servicing is retained.
A mortgage banking enterprise that acquires mortgage servicing
rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans
(excluding the servicing rights) based on their relative
fair values. SFAS No. 122 also requires that capitalized
servicing rights are assessed based on the fair value of those
rights. Capitalized mortgage servicing rights should
be stratified based upon one or more of the predominant risk
characteristics of the underlying loans and impairment should
be recognized through a valuation allowance for each impaired
stratum.
Adoption of SFAS No. 122 is required for fiscal years
beginning after December 15, 1995 and is applied prospectively
to transactions in which mortgage loans are sold or securitized
with servicing rights retained and to impairment valuations of
all capitalized mortgage servicing rights. The adoption of
SFAS No. 122 in 1996, is not expected to have a material impact
on the Corporation's financial condition or results of
operations.
Note 10. Stock Options
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS
No. 123) "Accounting for Stock-Based Compensation."
SFAS No. 123 defines a fair value based method of accounting for
employee stock options, under which compensation cost is
measured at the grant date based on the value of the award and is
recognized over the vesting period. SFAS No. 123 encourages
adoption of this method of accounting for all employee stock
compensation plans, however; it also allows an entity to
continue to measure compensation cost for those plan as
prescribed in APB Opinion No. 25 "Accounting for Stock Issued to
Employees." If a company elects to remain with APB No. 25,
pro forma disclosures of net income and earnings per share
must be made as if fair value based accounting, as defined by
SFAS No. 123, had been applied.
At this time the Corporation expects to remain with its
current method accounting for stock based compensation. The
disclosure requirements of SFAS No. 123 will be adopted as
required for financial statements beginning in 1996.
-14-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Net income of Star Banc Corporation ("the Corporation") for the
quarter ended September 30, was $34,197,000, a 14.7 percent
increase over the third quarter of 1994. Net income for the
first nine months of 1995 was $100,733,000 a 16.9 percent
increased compared to 1994. Primary and fully diluted earnings
per share were $1.14 for the third quarter of 1995, compared to
$1.00 and $0.99, respectively, for the third quarter of 1994.
These amounts represent increases of 14.0 percent and 15.2
percent on primary and fully diluted earnings per share,
respectively. For the first nine months of 1995, earnings per
share was $3.35 on a primary basis and $3.34 fully diluted.
This represents an increase over 1994 of 16.3 percent on a
primary basis and 17.6 percent on a fully diluted basis.
Earnings results for the third quarter and first nine months
of 1995 reflect increases in net interest income and noninterest
income partially offset by an increase in noninterest expenses
as a result of recent acquisitions. Included in the third
quarter of 1995 was a $3.8 million refund of deposit insurance
premiums from the FDIC. In addition, the Corporation
transferred $118 million of residential real estate loans from
the mortgage portfolio to held-for-sale loans resulting in a
$2.8 million loss for the quarter. Also included in the third
quarter was approximately $1.0 million in additional expenses
related to the introduction and development of new retail
banking products.
Return on average assets was 1.43 percent for the third
quarter and 1.44 percent for the first nine months of 1995,
relatively flat compared to the same periods in 1994. Return
on average equity increased to 17.21 percent for the third
quarter and 17.54 percent for the first nine months of 1995
compared to 16.80 percent and 16.56 percent, respectively, for
the same periods in 1994.
On July 15, 1995, Star Bank, N.A. , the lead bank of the
Corporation, acquired 24 Columbus area branch offices of the
Ohio division of Household Bank, f.s.b. This transaction was
accounted for as a purchase, and accordingly, the assets
acquired and liabilities assumed were recorded at estimated fair
value. In purchasing these branch offices, the Bank received
$564 million in cash and acquired $645 million in deposits for a
premium of approximately $64 million.
On September 17, 1994, Star Bank, N.A., ("the Bank") acquired
47 former TransOhio Federal Savings Bank branch offices located
in the Cleveland and Akron, Ohio areas from the Resolution Trust
Corporation. The Bank acquired $1.1 billion in deposits for a
premium of $122 million in this transaction.
Financial Condition
Total assets at September 30, 1995, amounted to $9.73 billion
compared to $9.39 billion at December 31, 1994. The increase in
total assets was due to continued strong loan growth throughout
1995, in addition to the acquisition of the Household branch
offices. Total loans, net of unearned interest, increased $655
million to $6.90 billion at September 30, 1995, compared to
$6.25 billion at December 31, 1994. The corporation has
experienced strong increases in loan volumes for most lending
areas in 1995. Total loans, net of unearned interest, have
increased at an annualized rate of 14.0 percent in the first
nine months of 1995. Through September 30, 1995, commercial
loans increased $157 million, real estate loans increased $250
million and retail loans were up $248 million.
-15-
<PAGE>
Investment securities declined $458 million to $1.87 billion
at September 30, 1995, compared to $2.33 billion at December 31,
1994. This decrease was due to the sale of $375 million in
mortgage-backed securities in the first quarter, in addition to
sales of $31 million in mortgaged-backed securities and $17
million of U.S. Treasuries in the second quarter of 1995, and
maturities and paydowns of mortgage-backed securities. All
security sales were from the Corporation's available-for-sale
portfolio. The proceeds of these sales were used to pay down
higher cost borrowings. Also in the third quarter of 1995,
the Corporation used a portion of the proceeds from the
Household acquisition to purchase $175 million in
mortgage-backed securities.
As of September 30, 1995, the Corporation's investment
securities portfolio included $1.65 billion in securities
classified as held-to-maturity, a decline of $112 million from
December 31, 1994. There was $217 million in securities
classified as available-for-sale at September 30, 1995, a
decline of $346 million from December 31, 1994.
Deposits increased $253 million to $7.62 billion at
September 30, 1995, from $7.36 billion at December 31, 1994.
This increase was the result of the purchase of $645 million
in deposits and 24 branch offices from Household Bank in the
third quarter. Excluding the Household acquisition, deposits
decreased $400 million, as foreign deposits $100,000 and over
declined $216 million and savings and NOW accounts were down
$187 million. Foreign deposits declined in the first nine
months of 1995 due primarily to reduction in funding needs as a
result of the sale of investment securities and the Household
acquisition. The Corporation also noted customers continuing to
shift funds from savings and NOW accounts and certificates of
deposit into money market accounts, and nonbank financial
products in 1995. As a result of this movement of customer
funds, excluding the Household acquisition, money market deposit
accounts increased $89 million or 13.7 percent in the first nine
months of 1995.
Results of Operations
Net interest income, the Corporation's principal source of
earnings, increased $9.5 million in the third quarter and $26.7
million for the first nine months of 1995. This represents
increases of 10.8 percent in the third quarter and 10.5 percent
for the first nine months of 1995, compared to the same periods
in 1994. These increases were due to an increase in the level
of average interest-earning assets, primarily loans, and a shift
from borrowed funds to less expensive core deposits. Average
earning assets were up $1.17 billion or 15.9% in the first nine
months of 1995 with average loans increasing $985 million or
17.6 percent, compared to 1994. The increase in net interest
income due to the higher loan and earning asset levels was
partially offset by a decline in spreads between the rates
received on earning assets relative to rates paid on
interest-bearing liabilities in 1995, compared to 1994.
Net interest margin declined 7 basis points to 4.53 percent
in the third quarter of 1995, compared to 4.60 percent for the
same period in 1994. Net interest margin for the first nine
months of 1995 declined 22 basis points compared to the prior
year. The decline in net interest margin was caused by rates on
interest bearing liabilities rising faster than rates on
interest earning assets throughout 1994 and into 1995. In
addition, the TransOhio acquisition has compressed the net
interest margin for 1995, compared to 1994, as the proceeds
received were invested in securities which have lower yields
than the average yields of the Corporation's assets.
-16-
<PAGE>
The Corporation's net interest margin has begun to rebound
in 1995, with increases in the second and third quarters of
1995. The recent increases in net interest margin are due to
an improvement in the mix of interest earning assets, as the
continued strong loan growth has been funded by maturities and
sales of lower yielding securities. In addition, with the
Household acquisition in the third quarter of 1995, there has
been a shift in funding sources from borrowed funds to less
expensive core deposits. Table 1 provides detailed information
as to the average balances, interest income/expense and rates
earned or paid by major balance sheet category.
Excluding the write-down from transferring residential real
estate loans into the held-for-sale category, noninterest income
was $34.9 million for the third quarter of 1995, an increase of
$6.2 million or 21.8 percent, from $28.6 million for the same
period of 1994. Service charges on deposits increased $2.0
million or 22.2 percent for the third quarter, due in part to
the TransOhio acquisition. Other areas recognizing increases
for the third quarter included ATM fees, credit card fees and
trust income which were up 57.2, 19.8 and 18.0 percent,
respectively, compared to the same period in 1994. For the
first nine months of 1995, noninterest income has increased
$15.4 million or 17.9 percent, compared to the prior year. This
increase was also led by service charges on deposits, ATM fees,
credit card fees and trust income. Included in 1995 are net
gains on sales of securities of $1.2 million. Excluding the net
securities gains, noninterest income increased $14.2 million or
16.5 percent in 1995, compared to the same period in 1994.
Noninterest expense totaled $70.4 million in the third
quarter of 1995, an 11.1 percent increase from the same period of
1994. Included in the third quarter of 1995, was a $3.8 million
refund of deposit insurance premiums from the FDIC. Excluding
the FDIC refund, noninterest expense increased 17.1 percent to
$74.2 million in the third quarter of 1995, compared to the same
period in 1994. This increase in noninterest expenses was due
primarily to the TransOhio and Household acquisitions.
Additional expenses included in 1995 related to these
acquisitions include salaries, occupancy, FDIC insurance,
equipment, supplies and amortization of intangibles. Also
contributing to this increase was additional expenses as a
result of new retail banking products and services.
The Corporation's noninterest expense ratio remained flat at
54.2 percent in the third quarter of 1995, compared to the third
quarter of 1994, as the increase in expense levels related to
the TransOhio and Household acquisitions was partially offset by
the FDIC refund. For the first nine months of 1995, the
noninterest expense ratio decreased 42 basis points to 54.64
percent. The improvement in the noninterest expense ratio in
1995 is primarily a result of growth in revenues, continued
strong loan growth and stringent expense controls. The
efficiency ratio is expected to trend lower in future quarters
as the integration of the Household offices is completed,
providing additional cost savings and revenue enhancements.
The Corporation's effective tax rate amounted to 33.3
percent for the three months and nine months ended September 30,
1995. This compares to an effective tax rate of 34.7 percent for
the same periods of 1994. The decline in the effective rate for
1995 is due to tax benefits received from Corporate and Bank
owned life insurance programs established in the beginning of
1995, in addition to tax benefits recorded on limited
partnership investments of the parent company.
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Third Quarter, 1995 Third Quarter, 1994
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans........................$2,173,825 $ 50,014 9.14 % $1,893,422 $ 40,299 8.45 %
Real estate loans....................... 2,598,568 55,555 8.54 2,241,441 44,044 7.85
Retail loans............................ 2,020,896 46,462 9.15 1,682,933 35,942 8.50
Total loans........................ 6,793,289 152,031 8.91 5,817,796 120,285 8.23
Taxable investment securities........... 1,823,326 30,112 6.60 1,750,710 22,891 5.23
Non-taxable investment securities....... 9,725 203 8.36 28,424 536 7.69
Federal funds sold and securities
purchased under agreements to resell.. 11,927 181 6.01 44,203 528 4.74
Interest bearing deposits in banks...... 100 1 4.96 23,691 300 5.01
Total interest earning assets...... 8,638,367 $ 182,528 8.42 % 7,664,824 $ 144,540 7.52 %
Cash and due from banks................. 421,757 366,536
Allowance for loan losses............... (105,429) (91,219)
Other assets............................ 553,164 287,853
Total assets.......................$9,507,859 $8,227,994
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.........................$1,979,896 $ 11,225 2.25 % $1,808,357 $ 9,743 2.14 %
Money market deposit accounts........... 845,441 8,163 3.83 732,335 5,035 2.73
Time deposits $100,000 and over......... 437,488 6,485 5.88 381,229 4,422 4.60
Time deposits under $100,000............ 3,004,167 43,739 5.78 2,131,427 23,933 4.45
Short-term borrowings................... 921,731 12,370 5.32 1,062,282 11,147 4.16
Long-term debt.......................... 161,418 2,815 6.92 166,841 2,051 4.88
Total interest bearing liabilities. 7,350,141 $ 84,797 4.58 % 6,282,471 $ 56,331 3.55 %
Noninterest bearing deposits............ 1,215,089 1,038,448
Other liabilities....................... 154,405 203,176
Shareholders' equity.................... 788,224 703,899
Total liabilities and
shareholders' equity.............$9,507,859 $8,227,994
Net interest margin..................... 4.53 % 4.60 %
Interest rate spread.................... 3.84 3.97
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent for 1995 and 1994.
The total of nonaccruing loans is included in average amount outstanding. Yields on available-for-sale
securities are calculated based on average amortized historical cost balances.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Nine Months, 1995 Nine Months, 1994
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans........................ $2,143,588 $ 148,133 9.24 % $1,851,946 $ 112,725 8.14 %
Real estate loans....................... 2,507,483 157,709 8.39 2,155,328 126,531 7.83
Retail loans............................ 1,925,784 128,935 8.94 1,584,310 100,164 8.45
Total loans........................ 6,576,855 434,777 8.83 5,591,584 339,420 8.11
Taxable investment securities........... 1,939,150 94,186 6.48 1,701,956 64,576 5.06
Non-taxable investment securities....... 14,483 786 7.24 29,354 1,785 8.23
Federal funds sold and securities
purchased under agreements to resell.. 13,747 655 6.37 36,873 1,145 4.20
Interest bearing deposits in banks...... 100 4 4.74 14,094 457 4.15
Total interest earning assets...... 8,544,335 $ 530,408 8.29 % 7,373,861 $ 407,383 7.38 %
Cash and due from banks................. 404,716 361,093
Allowance for loan losses............... (102,612) (88,646)
Other assets............................ 516,471 273,335
Total assets........................ $9,362,910 $7,919,643
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................... $1,961,226 $ 32,762 2.23 % $1,807,142 $ 28,336 2.10 %
Money market deposit accounts........... 728,907 19,550 3.59 727,818 13,681 2.51
Time deposits $100,000 and over......... 488,670 21,444 5.87 362,156 11,353 4.19
Time deposits under $100,000............ 2,914,644 122,066 5.60 2,058,163 66,193 4.30
Short-term borrowings................... 1,056,153 43,501 5.51 940,644 25,079 3.56
Long-term debt.......................... 164,671 8,327 6.76 151,364 6,908 6.10
Total interest bearing liabilities. 7,314,271 $ 247,650 4.53 % 6,047,287 $ 151,550 3.35 %
Noninterest bearing deposits............ 1,144,153 1,047,397
Other liabilities....................... 136,492 129,265
Shareholders' equity.................... 767,994 695,694
Total liabilities and
shareholders' equity............. $9,362,910 $7,919,643
Net interest margin..................... 4.41 % 4.63 %
Interest rate spread.................... 3.76 4.03
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent for 1995 and 1994.
The total of nonaccruing loans is included in average amount outstanding. Yields on available-for-sale
securities are calculated based on average amortized historical cost balances.
</TABLE>
-19-
<PAGE>
Asset Quality
As of September 30, 1995, the allowance for loan losses was
$106.0 million or 1.54 percent of loans, net of unearned
interest. This compares to an allowance of $96.0 million or
1.54 percent of loans, net of unearned interest, at December 31,
1994. The allowance as a percentage of nonperforming loans has
continued to improve, increasing to 310.4 percent at September
30, 1995, compared to 272.3 percent at December 31, 1994.
Table 3 provides a summary of activity in the allowance for
loan losses account by type of loan. As shown in that table,
net charge-offs totaled $4.3 million in the third quarter of
1995, up from $2.6 million for the same period a year earlier.
Net charge-offs for the first nine months of 1995 were $9.4
million, down slightly from $9.8 million for the same period in
1994. Annualized net charge-offs as a percentage of average
outstanding loans have remained at historically low levels at
0.25 percent for the third quarter and 0.19 percent for the
first nine months of 1995. This compares to 0.18 percent and
0.23 percent, respectively, for the same periods in 1994.
The increase in net charge-offs in the third quarter of 1995
was primarily in the retail loan area led by credit card
charge-offs. For the nine months ended September 30, 1995, net
charge-offs have declined $351,000, compared to 1994. The most
significant decrease was in the commercial loan area due in part
to a large recovery received in 1995.
As shown in Tables 4 and 5, the Corporation's nonperforming
assets have remained at historically low levels in 1995.
Nonperforming assets have declined $7.2 million to $37.6 million
at September 30, 1995, compared to September 30, 1994.
Nonperforming assets have also declined slightly from December
31, 1994, levels. The percentage of nonperforming loans to
end-of-period loans has continued to decline in 1995,
decreasing to 0.49 percent at September 30, 1995, compared to
0.68 percent at September 30, 1994, and 0.56 percent at December
31, 1994. Loans past-due 90 days or more and still accruing
interest decreased $906,000 in the first nine months of 1995,
and $2.3 million compared to September 30, 1994. This decrease
also occurred within the commercial loan and commercial real
estate portfolios.
Effective January 1, 1995, the Corporation adopted Statement
of Financial Accounting Standards No. 114 (SFAS No. 114), as
amended by Statement of Financial Accounting Standards No. 118
(SFAS No. 118), related to accounting by creditors for
impairment of loans. SFAS No. 114 requires that impaired loans
as defined by the statement be measured based on (1) the
present value of the expected future cash flows discounted at
the loan's effective interest rate, or (2) as a practical
expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded
investment in the loan, a valuation allowance is recorded. The
Corporation had previously measured the allowance for loan
losses on impaired loans using methods similar to those
prescribed by SFAS No. 114.
-20-
<PAGE>
The specific valuation allowance recorded on impaired loans
is included in the total allowance for loan losses. In addition
to the methods prescribed in SFAS No. 114 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: the quality of the current loan portfolio,
current economic conditions, evaluation of significant problem
loans, an analysis of periodic internal loan reviews,
delinquency trends and ratios, changes in the mix and levels of
various loan types, historical charge-off and recovery
experience and other pertinent information. These estimates are
reviewed continually and, as adjustments become necessary, they
are reported in earnings in the period in which they become
known. It is management's opinion that the allowance for loan
losses at September 30, 1995, was adequate to absorb all
anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at September 30,
1995, was $28.3 million with a related valuation allowance
calculated under SFAS No. 114 of $2.5 million. There was no
additional allowance for loan losses required in 1995 as a
result of the adoption of SFAS No. 114 and No. 118.
-21-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
Third Quarter Nine Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Average loans - net of unearned
interest.......................... $ 6,793,289 $ 5,817,796 $ 6,576,855 $ 5,591,584
Allowance for loan losses:
Balance - beginning of period..... $ 103,039 $ 88,307 $ 95,979 $ 83,156
Charge-offs:
Commercial...................... (2,461) (2,621) (9,532) (8,896)
Real estate..................... (104) (225) (1,273) (905)
Retail.......................... (4,122) (2,878) (9,959) (9,453)
Total charge-offs............. (6,687) (5,724) (20,764) (19,254)
Recoveries:
Commercial...................... 569 1,154 4,959 3,009
Real estate..................... 68 139 1,011 685
Retail.......................... 1,742 1,820 5,393 5,808
Total recoveries.............. 2,379 3,113 11,363 9,502
Net charge-offs............. (4,308) (2,611) (9,401) (9,752)
Provision charged to earnings..... 7,288 7,100 19,441 19,392
Balance - end of period........... $ 106,019 $ 92,796 $ 106,019 $ 92,796
Ratio of net charge-offs to average
loans - net of unearned interest.. 0.25% 0.18% 0.19% 0.23%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 34,066 $ 34,990 $ 40,650
Loans which have been
renegotiated................. 89 261 273
Total nonperforming loans.... 34,155 35,251 40,923
Other real estate owned........ 3,484 2,793 3,876
Total nonperforming assets... $ 37,639 $ 38,044 $ 44,799
Percentage of nonperforming
loans to loans* ............. 0.49% 0.56% 0.68%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.54% 0.61% 0.74%
Loans past due 90 days
or more...................... $ 7,358 $ 8,264 $ 9,612
* Net of unearned interest.
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
September 30, 1995 December 31, 1994
Nonperforming Loans 90 Days Nonperforming Loans 90 Days
or or
Non- Restruc- Percentage More Non- Restruc- Percentage More
accrual tured Total of Loans Past-Due accrual tured Total of Loans Past-Due
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial:
Corporate............ $18,942 $89 $19,031 1.09 % $ 408 $20,813 $261 $21,074 1.26 % $1,213
Asset-based lending.. -- -- -- -- -- -- -- -- -- --
Commercial leasing... 234 -- 234 0.10 -- 25 -- 25 0.01 --
Total commercial
loans............ 19,176 89 19,265 0.87 408 20,838 261 21,099 1.03 1,213
Real estate loans:
Residential.......... 4,367 -- 4,367 0.33 2,969 4,431 -- 4,431 0.38 1,906
Commercial mortgage.. 8,284 -- 8,284 0.77 1,078 8,268 -- 8,268 0.84 2,090
Construction/land
development........ 404 -- 404 0.19 1,017 404 -- 404 0.18 1,446
Total real estate
loans............ 13,055 -- 13,055 0.50 5,064 13,103 -- 13,103 0.55 5,442
Retail loans:
Installment.......... 1,016 -- 1,016 0.07 553 651 -- 651 0.05 801
Credit cards......... 746 -- 746 0.25 1,333 297 -- 297 0.13 765
Retail leasing....... 73 -- 73 0.02 -- 101 -- 101 0.04 43
Total retail loans. 1,835 -- 1,835 0.09 1,886 1,049 -- 1,049 0.06 1,609
Total loans........ $34,066 $89 $34,155 0.49 % $7,358 $34,990 $261 $35,251 0.56 % $8,264
</TABLE>
-24-
<PAGE>
Liquidity, Capital Resources and Cash Flows
To ensure that adequate funds are always available to meet
unexpected customer demands for funds, such as high levels of
deposit withdrawals or loan demand, or other aspects of the
banking business, the Corporation has succeeded in developing
and maintaining a large stable base of core funding from
customers based in its local market areas. By policy, the
Corporation limits the amount each banking subsidiary can
borrow, subject to the Corporation's ability to borrow funds in
the capital markets in an efficient and cost effective manner.
The Corporation's lead bank, Star Bank N.A. ("the Bank"), is a
member of the Federal Home Loan Bank of Cincinnati, and in
1995 began issuing national market retail certificates of
deposits. In 1994, the Bank prepared an offering circular in
order to issue bank notes of up to $500 million with terms that
can vary from 30 days to 30 years. Currently, the Bank has not
issued any notes under this offering circular. In addition to
these funding alternatives, the Corporation maintains a presence
in the national fed funds, repurchase agreement, certificate of
deposit and Eurodollar markets.
In the first quarter of 1995, the Bank began issuing retail
brokered certificates of deposit, with $50 million outstanding
at September 30, 1995. In the third quarter of 1995, the
Corporation prepared a private placement memorandum in order to
issue commercial paper notes up to a maximum aggregate amount of
$100 million, with maturities up to 270 days. The proceeds of
the notes from the commercial paper program will be used for
general corporate purposes and to provide funding to Star Banc
Finance Inc. There is currently $17 million in commercial
paper outstanding at September 30, 1995. The Corporation's
consolidated long-term debt, which includes senior and
promissory notes, declined $5.3 million to $161 million at
September 30, 1995. The decrease in long-term debt was due to
scheduled principal payments.
Total shareholders' equity increased $69 million in the first
nine months to $787 million at September 30, 1995. The
Corporation also raised its quarterly dividend rate per common
share from $0.35 in 1994 to $0.40 in 1995, a 14.0 percent
increase.
Banking industry regulators define minimum capital requirements
for banks and bank holding companies. The Corporation's tier 1
and total risk-based capital ratios at September 30, 1995, were
7.73 percent and 11.01 percent, respectively, well above the
minimum requirements of 4.0 percent for tier 1 capital to
risk-weighted assets and 8.0 percent for total capital to
risk-weighted assets. These compare to tier 1 and total ratios
of 8.66 percent and 12.16 percent at December 31, 1994.
Regulatory authorities have also established a minimum adjusted
equity-to-average quarterly assets ("leverage") ratio of 3.00
percent. As of September 30, 1995, the Corporation's leverage
ratio was 6.10 percent compared to 6.27 percent at December 31,
1994. The decline in the Corporation's regulatory capital
ratios in the third quarter of 1995 was primarily a result of
the acquisition of the Household branch offices, which added
approximately $250 million in assets, including $65 million in
intangible assets, without any addition to the Corporation's
capital. The Corporation and each of its subsidiary banks
maintain risk-based and leverage capital ratios within the "well
capitalized" category as defined by the FDIC.
In 1994, the board of directors of the Corporation approved a
common stock buyback program to purchase up to one million
shares of common stock over the next three years. The
repurchased shares are held as treasury shares for reissue in
connection with conversion of preferred shares, employee stock
options and other corporate purposes. Through September 30,
1995, the Corporation has repurchased 836,000 shares, of which
147,000 had not yet been reissued.
-25-
<PAGE>
As shown in the Condensed Consolidated Statements of Cash
Flows, cash and cash equivalents decreased $8 million in the
first nine months of 1995, compared to a decline of $127 million
for the same period in 1994. Cash flows provided by operating
activities amounted to $47 million for the nine months ended
September 30, 1995 compared to $156 million for the same period
in 1994. The decrease was attributable to a $50 million
investment in bank owned life insurance in the first quarter of
1995, in addition to a $64 million net change in mortgage loans
held for sale in the first nine months of 1995, compared to the
same period in 1994.
Investing activities provided $388 million in cash flows in the
first nine months of 1995, compared to a use of $686 million in
the first nine months of 1994. This change was due to the
reduction of the investment securities portfolio in 1995 as a
result of security sales and maturities, in addition to the cash
received from the acquisition of the Household branch offices.
The funds provided by the security sales and maturities were
used to fund loan growth, reduce the level of short-term
borrowings and replace funding previously provided by national
market deposit sources. Cash flows used in financing
activities were $442 million in the first nine months of 1995 as
a result of the decline in deposit and borrowing levels in
1995, compared to increases in deposits and borrowings in 1994.
Recently Issued Accounting Standards
In May 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 122 (SFAS No.
122) "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65." Management anticipates adopting SFAS No.
122 in 1996 as is required. Additional information on SFAS No.
122 is shown in Note 8 of the Notes to Condensed Consolidated
Financial Statements.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 (SFAS
No. 123) "Accounting for Stock-Based Compensation." The
disclosure requirements of SFAS No. 123 will be adopted in 1996.
Additional information on SFAS No. 123 is shown in Note 9 of
the Notes to Condensed Consolidated Financial Statements.
-26-
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(B) There were no Current Reports on Form 8-K filed by the
Corporation during the third quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
November 14, 1995 /s/ Jerry A. Grundhofer
------------------- ---------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
November 14, 1995 /s/ David M. Moffett
------------------- ----------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-27-
<TABLE>
<CAPTION>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share data)
Third Quarter Nine Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income......................... $ 34,197 $ 29,807 $ 100,733 $ 86,183
Preferred dividends................ 7 46 70 277
Income available to common
shareholders..................... $ 34,190 $ 29,761 $ 100,663 $ 85,906
Weighted average of common
stock equivalents................. 30,052 29,831 30,031 29,866
Weighted average of preferred
stock convertible to common
stock equivalents................ 59 201 97 430
Weighted average of fully
diluted common stock equivalents.. 30,111 30,032 30,128 30,296
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents)..................... $ 1.14 $ 1.00 $ 3.35 $ 2.88
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents)........ $ 1.14 $ 0.99 $ 3.34 $ 2.84
Note: The effect of stock options outstanding are not dilutive to earnings
per share as defined in APB 15 and therefore are not included with
the above calculations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 472,435 472,435
<INT-BEARING-DEPOSITS> 100 100
<FED-FUNDS-SOLD> 5,924 5,924
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 217,136 217,136
<INVESTMENTS-CARRYING> 1,653,039 1,653,039
<INVESTMENTS-MARKET> 1,654,838 1,654,838
<LOANS> 6,904,318 6,904,318
<ALLOWANCE> 106,019 106,019
<TOTAL-ASSETS> 9,726,696 9,726,696
<DEPOSITS> 7,617,279 7,617,279
<SHORT-TERM> 1,005,115 1,005,115
<LIABILITIES-OTHER> 156,266 156,266
<LONG-TERM> 161,141 161,141
<COMMON> 150,802 150,802
0 0
363 363
<OTHER-SE> 635,730 635,730
<TOTAL-LIABILITIES-AND-EQUITY> 9,726,696 9,726,696
<INTEREST-LOAN> 151,241 432,514
<INTEREST-INVEST> 30,256 94,708
<INTEREST-OTHER> 182 659
<INTEREST-TOTAL> 181,679 527,881
<INTEREST-DEPOSIT> 69,611 195,822
<INTEREST-EXPENSE> 84,796 247,650
<INTEREST-INCOME-NET> 96,883 280,231
<LOAN-LOSSES> 7,288 19,441
<SECURITIES-GAINS> 3 1,187
<EXPENSE-OTHER> 70,374 208,448
<INCOME-PRETAX> 51,278 151,105
<INCOME-PRE-EXTRAORDINARY> 51,278 151,105
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 34,197 100,733
<EPS-PRIMARY> 1.14 3.35
<EPS-DILUTED> 1.14 3.34
<YIELD-ACTUAL> 8.42 8.29
<LOANS-NON> 34,066 34,066
<LOANS-PAST> 7,358 7,358
<LOANS-TROUBLED> 89 89
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 103,039 95,979
<CHARGE-OFFS> 6,687 20,764
<RECOVERIES> 2,379 11,363
<ALLOWANCE-CLOSE> 106,019 106,019
<ALLOWANCE-DOMESTIC> 106,019 106,019
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
