STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10Q
March 31, 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 - 23
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...................... 24
Signatures............................................................ 24
-2-
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
First Quarter
Percent
1995 1994 Change
<S> <C> <C> <C>
Net income........................... $ 32,766 $ 27,849 17.7 %
Per share:
Primary earnings................... $ 1.09 $ 0.93 17.2 %
Fully diluted earnings............. 1.09 0.91 19.8
Common stock dividends declared.... 0.40 0.35 14.3
Preferred dividends declared....... 1.50 1.50 --
Book value per common share........ 24.99 22.86 9.3
Market value per common share...... 41.88 36.50 14.7
Average balances:
Total assets....................... $ 9,373,733 $ 7,720,428 21.4 %
Earning assets..................... 8,582,895 7,187,787 19.4
Loans, net of unearned interest.... 6,330,127 5,364,460 18.0
Deposits........................... 7,228,516 5,980,924 20.9
Shareholders' equity............... 745,915 687,078 8.6
Ratios:
Return on average assets........... 1.42 % 1.46 %
Return on average equity........... 17.81 16.44
Average shareholders' equity
to average assets................ 7.96 8.90
Risk-based capital ratios:
Tier 1........................... 8.78 11.26
Total............................ 12.23 15.14
Leverage........................... 6.44 8.38
Net interest margin................ 4.27 4.55
Noninterest expense to net revenue. 55.75 54.57
Noninterest income as a percent
of net revenue................... 26.61 26.17
</TABLE>
-3-
<PAGE>
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 March 31, 1995,
and the related condensed consolidated statements of income, changes
in shareholders' equity and cash flows for the three-month periods
ended March 31, 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,
April 10, 1995
-4-
<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1995 1994
<S> <C> <C>
ASSETS:
Cash and Due From Banks........................... $ 349,588 $ 429,467
Interest Bearing Deposits in Banks................ 100 100
Federal Funds Sold and Securities Purchased
Under Agreements to Resell...................... 11,975 56,545
Investment Securities:
Available-For-Sale.............................. 123,065 563,091
Held-To-Maturity (market value of $1,694,285 at
March 31, 1995 and $1,671,088 at
December 31, 1994............................. 1,729,507 1,764,854
Total securities................................ 1,852,572 2,327,945
Loans:
Commercial Loans................................ 2,177,767 2,079,804
Real Estate Loans............................... 2,438,728 2,378,661
Retail Loans.................................... 1,910,771 1,865,295
Total Loans................................... 6,527,266 6,323,760
Less: Unearned Interest....................... 79,359 74,203
6,447,907 6,249,557
Allowance for Loan Losses............... 99,298 95,979
Net Loans..................................... 6,348,609 6,153,578
Premises and Equipment............................ 124,888 122,829
Acceptances - Customers' Liability................ 27,753 8,249
Other Assets...................................... 338,441 292,078
Total Assets.................................. $ 9,053,926 $ 9,390,791
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits.................... $ 1,138,356 $ 1,214,703
Interest-Bearing Deposits:
Savings and NOW............................... 1,924,274 2,048,442
Time Deposits $100,000 and Over............... 565,020 636,181
All Other Deposits............................ 3,543,662 3,464,489
Total Deposits.............................. 7,171,312 7,363,815
Short-term Borrowings............................. 825,173 1,034,700
Long-term Debt.................................... 166,514 166,466
Acceptances Outstanding........................... 27,753 8,249
Other Liabilities................................. 115,495 99,343
Total Liabilities............................. 8,306,247 8,672,573
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - 24,928 at March 31,
1995 and 29,707 at December 31, 1994......... 2,069 2,466
Common Stock:
Shares Authorized - 50,000,000
Shares Issued - 30,105,835 at March 31, 1995
and December 31, 1994......................... 150,529 150,529
Surplus........................................... 77,595 78,037
Retained Earnings................................. 531,060 510,268
Treasury Stock, at cost - 264,926 shares at March
31, 1995 and 303,039 at December 31, 1994....... (8,015) (9,445)
Net Unrealized (Loss) on Securities............... (5,559) (13,637)
Total Shareholders' Equity.................... 747,679 718,218
Total Liabilities and Shareholders' Equity.... $ 9,053,926 $ 9,390,791
See Notes to Condensed Consolidated Financial Statements
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in thousands except per share data)
First Quarter
1995 1994
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans.......................$135,701 $105,444
Interest on Investment Securities:
Taxable......................................... 34,948 20,660
Non-Taxable..................................... 186 462
Interest on Federal Funds Sold and
Securities Purchased Under
Agreements to Resell............................ 355 377
Interest on Interest-Bearing Deposits............. 1 141
Total Interest Income...........................171,191 127,084
INTEREST EXPENSE:
Interest on Savings and NOW....................... 10,814 9,326
Interest on Time Deposits $100,000 and Over....... 8,449 3,447
Interest on Other Deposits........................ 43,474 25,062
Interest on Short-Term Borrowings................. 15,164 6,003
Interest on Long-Term Debt........................ 2,542 2,396
Total Interest Expense.......................... 80,443 46,234
Net Interest Income........................... 90,748 80,850
Provision for Loan Losses......................... 5,229 6,472
Net Interest Income after
Provision for Loan Losses................... 85,519 74,378
NONINTEREST INCOME:
Trust Income...................................... 9,735 8,994
Service Charges on Deposits....................... 10,438 8,195
Other Service Charges and Fees.................... 9,017 7,808
Investment Securities Gains-Net................... 1,282 1
All Other Income.................................. 2,722 3,932
Total Noninterest Income........................ 33,194 28,930
NONINTEREST EXPENSE:
Salaries.......................................... 27,105 23,692
Pension and Other Employee Benefits............... 5,741 4,484
Equipment Expense................................. 3,806 3,810
Occupancy Expense - Net........................... 5,135 4,400
All Other Expense................................. 27,768 23,933
Total Noninterest Expense....................... 69,555 60,319
INCOME BEFORE TAX................................. 49,158 42,989
Income Tax........................................ 16,392 15,140
NET INCOME.......................................$ 32,766 $ 27,849
PER SHARE:
Primary Earnings.................................$ 1.09 $ 0.93
Fully Diluted Earnings............................ 1.09 0.91
Common Stock Cash Dividends Declared.............. 0.40 0.35
Preferred Stock Cash Dividends Declared........... 1.50 1.50
See Notes to Condensed Consolidated Financial Statements
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
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 on 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................ 27,849 27,849
Cash dividends declared
on common stock.......... (10,506) (10,506)
Cash dividends declared on
Series B Preferred Stock. (128) (128)
Issuance of shares upon
exercise of options
on common stock.......... 18 87 105
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued.... (7,494) 1,628 2,793 3,073 --
Purchase of treasury
stock.................... (3,283) (3,283)
Treasury shares issued to
meet deferred compensation
obligations.............. (61) 61 --
Shares reserved to meet
deferred compensation
obligations.............. 210 210
Adoption of SFAS 115...... 4,386 4,386
Change in net unrealized
gain/(loss) on securities. (2,967) (2,967)
Balance, March 31, 1994....$ 7,128 $ 150,413 $ 83,067 $ 452,939 $ (3,501)$ 1,419 $ 691,465
Balance, January 1, 1995...$ 2,466 $ 150,529 $ 78,037 $ 510,268 $ (9,445)$ (13,637)$ 718,218
Net income................. 32,766 32,766
Cash dividends declared
on common stock........... (11,937) (11,937)
Cash dividends declared on
Series B Preferred Stock.. (37) (37)
Issuance of treasury
shares.................... (569) 1,138 569
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... (397) (440) 836 (1)
Purchase of treasury
stock..................... (553) (553)
Shares reserved to meet
deferred compensation
obligations............... 567 9 576
Change in net unrealized
gain/(loss) on securities. 8,078 8,078
Balance, March 31, 1995....$ 2,069 $ 150,529 $ 77,595 $ 531,060 $ (8,015)$ (5,559)$ 747,679
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Quarter Ended
March 31
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 32,766 $ 27,849
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 7,754 6,202
Provision for loan losses............................. 5,229 6,472
Provision for deferred taxes.......................... 10,720 403
(Gain)/loss on sale of premises and equipment - net... (95) (17)
(Gain)/loss on sale of securities - net............... (1,281) (1)
(Gain)/loss on sale of residential real estate loans.. 22 (350)
Proceeds from mortgage loans held for sale............ 9,105 66,808
Mortgage Loans originated for sale on secondary market (7,994) (35,864)
Net change in other assets............................ (64,263) (186)
Net change in other liabilities....................... 14,990 17,263
Total adjustments................................... (25,813) 60,730
Net cash provided by operating activities........... 6,953 88,579
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 35,268 138,238
Proceeds from maturities of available-for-sale securities. 82,659 119,832
Proceeds from sales of available-for-sale securities...... 373,759 629
Purchase of held-to-maturity securities................... - (168,964)
Purchase of available-for-sale securities................. (3,912) (235,816)
Net change in loans....................................... (205,450) (253,398)
Proceeds from sales of loans.............................. 3,579 3,144
Proceeds from sales of premises and equipment............. 113 22
Purchase of premises and equipment........................ (5,229) (2,847)
Net change due to acquisition of branches................. - -
Net cash provided by/(used in) investing activities..... 280,787 (399,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... (192,441) (48,038)
Net change in short-term borrowings....................... (209,527) 79,320
Principal payments on long-term debt...................... - (5,084)
Proceeds from issuance of long-term debt.................. - 147,975
Proceeds from issuance of common stock.................... 233 105
Purchase of treasury stock................................ (553) (3,283)
Conversion of preferred stock............................. (1) -
Shares reserved to meet deferred compensation obligations. 576 210
Dividends paid............................................ (10,476) (8,849)
Net cash provided by/(used in) financing activities..... (412,189) 162,356
Net change in cash and cash equivalents................... (124,449) (148,225)
Cash and cash equivalents at beginning of year............ 486,112 560,534
Cash and cash equivalents at March 31....................$ 361,663 $ 412,309
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for three months ended March 31 1995 1994
Interest...............................................$ 77,657 $ 47,449
Income Taxes............................................ 211 77
Noncash transfer of loans to other real estate owned...... 554 -
See Notes to Condensed Consolidated Financial Statements
</TABLE>
-8-
<PAGE>
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 March 31, 1995 and December 31, 1994.
(Dollars are in thousands)
<TABLE>
<CAPTION>
March 31, 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 1,711,359 10,312 45,778 1,675,892 1,742,165 506 94,493 1,648,178
Obligations of State and
Political Subdivisions 17,013 259 11 17,261 21,554 249 25 21,778
Other debt securities 1,135 -- 3 1,132 1,135 -- 3 1,132
Total Investment
Securities $ 1,729,507 $ 10,571 $ 45,792 $ 1,694,285 $1,764,854 $ 755 $ 94,521 $1,671,088
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasuries and
Agencies $ 54,363 $ 245 $ 636 $ 53,972 $ 117,357 $ 42 $ 1,149 $ 116,250
Mortgage-backed
Securities 32,748 21 -- 32,769 424,461 21 11,469 413,013
Obligations of State and
Political Subdivisions -- -- -- -- -- -- -- --
Other debt securities 215 1 1 215 215 -- 6 209
Federal Reserve/FHLB Stock
and other equity securities 36,109 -- -- 36,109 33,619 -- -- 33,619
Total Investment
Securities $ 123,435 $ 267 $ 637 $ 123,065 $ 575,652 $ 63 $ 12,624 $ 563,091
</TABLE>
-9-
<PAGE>
As of March 31, 1995, the Corporation reported a net unrealized loss of
$5.6 million for securities. For the first three 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 $5.6 million
increasing shareholders' equity $8.0 million.
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at March 31, 1995.
(Dollars in thousands)
Amortized Fair
Held-to-Maturity Cost Value
One year or less $ 201,211 $ 197,733
After one year through five years 747,584 733,871
After five years through ten years 406,176 397,453
After ten years 374,536 356,228
Total $ 1,729,507 $1,694,285
Available-for-Sale
One year or less $ 37,568 $ 37,282
After one year through five years 47,919 47,889
After five years through ten years 889 827
After ten years 950 958
Total $ 87,326 $ 86,956
Note: Maturity information related to mortgage-backed securities included above
is presented based upon weighted average maturities anticipating
future prepayments.
-10-
<PAGE>
Note 3. Loans
The following table summarizes the composition of the loan portfolio,
net of unearned interest, as of March 31, 1995 and December 31, 1994.
(Dollars are in thousands)
March 31, December 31,
1995 1994
Commercial loans:
Corporate loans $1,695,730 $1,625,934
Asset-based lending 201,962 180,738
Commercial leasing 204,661 196,504
Industrial revenue bonds 39,435 41,176
Total commercial loans 2,141,788 2,044,352
Real estate loans:
Residential mortgage 1,222,417 1,168,828
Commercial mortgage 1,006,789 981,954
Construction and land development 209,522 227,879
Total real estate loans 2,438,728 2,378,661
Retail loans:
Installment 1,308,704 1,310,012
Credit cards 239,059 228,673
Retail leasing 319,628 287,859
Total retail loans 1,867,391 1,826,544
Total loans, net of unearned interest $6,447,907 $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)
Three Months
Ended Year Ended
March 31, December 31,
1995 1994
Balance - beginning of period $ 95,979 $ 83,156
Loans charged-off (6,273) (24,570)
Recoveries on loans previously charged-off 4,363 13,021
Net charge-offs (1,910) (11,549)
Provision charged to earnings 5,229 24,372
Balance - end of period $ 99,298 $ 95,979
-11-
<PAGE>
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 calculated under SFAS No. 114 at
March 31, 1995. (Dollars in thousands)
March 31, 1995
Recorded Valuation
Investment Allowance
Impaired Loans:
Valuation allowance required $ 11,481 $ 2,534
No valuation allowance required 16,680 --
Total impaired loans $ 28,161 $ 2,534
The average recorded investment in impaired loans for the three months ended
March 31, 1995 was $29 million. As a general policy, the Corporation applies
payments received on impaired loans as a reduction of principal. No interest
income was recognized on impaired loans for the first quarter of 1995.
-12-
Note 6. Income Tax
The components of the net deferred tax asset included in the Corporation's
consolidated balance sheets at March 31, 1995 and December 31, 1994 are
shown in the following table. (Dollars are in thousands)
March 31, December 31,
1995 1994
Allowance for loan losses $ 34,401 $ 33,151
Deferred loan fees 2,194 2,313
Deferred compensation 1,613 1,825
Unrealized loss on securities 3,039 7,343
Other 2,667 2,656
Total deferred tax asset 43,914 47,288
Leased assets (39,383) (32,206)
Fixed asset depreciation (4,444) (4,444)
Pension liabilities (4,609) (4,511)
Purchase accounting/intangible assets (978) (965)
Other (1,574) (1,516)
Total deferred tax liability (50,988) (43,642)
Net deferred tax asset/
(liability) $ (7,074) $ 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 is included in other service charges and fees, and all other
income for the three months ended March 31, 1995 and 1994.
March 31,
1995 1994
Credit card fees $ 3,286 $ 2,620
ATM fees 1,656 1,037
Mortgage banking income 940 1,260
The following are included in all other expense for the three months ended
March 31, 1995 and 1994.
March 31,
1995 1994
FDIC insurance $ 3,929 $ 3,330
Amortization of intangible assets 2,977 1,600
State taxes 2,240 2,411
Outside Services 2,084 1,939
Marketing 1,931 2,019
-13-
<PAGE>
Note 7. Pending Acquisitions
On March 10, 1995, Star Bank, N.A. ("the Bank"), the lead bank of the
Corporation, signed a definitive agreement to acquire 24 Columbus area
branch offices of the Ohio division of Household Bank. This transaction will be
accounted for as a purchase. In purchasing these branches, the Bank will
acquire approximately $680 million in deposits for a premium of 9.75 percent
of deposits or approximately $66 million. This transaction is expected to be
consummated in July, 1995.
-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
March 31, 1995 was $32,766,000, a 17.7 percent increase over the first
quarter of 1994. Primary and fully diluted earnings per share were $1.09 for
the first three months of 1995, compared to $0.93 and $0.91, respectively, for
the first quarter of 1994. These amounts represent increases of 17.2 percent
and 19.8 percent on primary and fully diluted earnings per share, respectively.
Earnings results for the first quarter of 1995 reflected increases in net
interest income and noninterest income, in addition to a reduction in the
provision for loan losses. Included in the first quarter of 1995 was a $1.3
million gain on sale of $375 million in available-for-sale securities.
Excluding the gain on sale of securities, net income was $31.9 million for the
first quarter of 1995, an increase of 14.7 percent over the same period in
1994. Fully diluted earnings per share were $1.06 excluding the gain, an
increase of 16.5 percent over 1994.
Return on average assets was 1.42 percent for the first quarter of 1995,
compared to 1.46 percent for the same period in 1994. This slight decline
was due to the TransOhio acquisition which occurred in the third quarter of
1994. Return on average equity increased to 17.81 percent for the first
quarter of 1995 compared to 16.44 percent in 1994.
On March 10, 1995, Star Bank, N.A. ("the Bank"), the lead bank of the
Corporation, signed a definitive agreement to acquire 24 Columbus area
branch offices of the Ohio division of Household Bank. This transaction will
be accounted for as a purchase, and accordingly, the assets acquired and
liabilities assumed will be recorded at estimated fair value. In purchasing
these branch offices, the Bank will acquire approximately $680 million in
deposits for a premium of approximately $66 million. This transaction is
expected to be consummated in July, 1995.
FINANCIAL CONDITION
Total assets at March 31, 1995 amounted to $9.05 billion compared to $9.39
billion at December 31, 1994. The decline in total assets was due to the
sale of $375 million in securities in the first quarter of 1995. Total loans,
net of unearned interest, increased to $6.45 billion at March 31, 1995,
compared to $6.25 billion at December 31, 1994. The corporation has experienced
strong increases in loan volumes for most lending areas for the first three
months of 1995. Total loans, net of unearned interest, have increased at an
annualized rate of 12.7 percent in the first three months of 1995. During the
first quarter of 1995, commercial loans increased $97 million, real estate
loans increased $60 million and retail loans were up $41 million.
Investment securities declined $475 million to $1.85 billion at March 31,
1995, compared to $2.33 billion at December 31, 1994. This decrease was due to
the sale of $375 million in mortgage-backed securities from the Corporation's
available-for-sale portfolio in the first quarter. The proceeds of this sale
were used to pay down higher cost borrowings. The sale of securities is
expected to have a positive impact on the Corporation's earnings in the second
quarter, as well as improve its net interest margin, return on assets and
capital ratios. As of March 31, 1995, the Corporation's investment securities
portfolio included $1.73 billion in securities classified as held-to-maturity a
decline of $35 million from December 31, 1994, and $123 million classified as
available-for-sale.
-15-
<PAGE>
Deposits declined $193 million to $7.17 billion at March 31, 1995 from $7.36
billion at December 31, 1994. This decline was due to a $95 million decrease
in foreign deposits $100,000 and over and a $76 million decline in noninterest
bearing deposits. Noninterest-bearing deposits declined in the first quarter
primarily as a result of seasonal factors. Due to the traditional increase in
level of business activity during the fourth quarter of each year, demand
deposits are expected to increase significantly. This seasonal buildup in
demand deposits results in increases in cash and due from banks, and money
market instruments. As business activity slows following the holiday season,
demand deposits, money market instruments and cash and due from banks decline.
Interest-bearing deposits decreased $116 billion to $6.03 billion at
March 31, 1995, compared to $6.15 billion at December 31, 1994. Foreign
deposits declined $95 million in the first three months of 1995 due primarily to
reduction in funding needs as a result of the sale of investment securities.
The Corporation also noted customers continuing to shift funds from savings,
NOW and money market accounts into higher yielding certificates of deposit
in the first quarter of 1995. As a result of this movement of customer funds,
in addition to marketing campaigns designed to retain funds of current
customers and attract new customers, small certificates of deposit increased
$79 million in the first three months of 1995, while savings and NOW accounts
declined $124 million in the first three months of 1995.
RESULTS OF OPERATIONS
Net interest income, the Corporation's principal source of earnings, increased
$9.9 million or 12.2 percent in the first quarter of 1995, compared to the
same period in 1994. The increase in 1995 was due to an increase in the level
of average interest-earning assets, which were up $1.40 billion or 19.4% in the
first three months, compared to 1994. Average loans were up $966 million in the
first quarter of 1995, compared to 1994. In addition securities increased $470
million in 1995, related to the TransOhio acquisition. The increase in net
interest income due to the higher loan and securities levels was partially
offset by the continued decline in spreads between the rates received on
earning assets relative to rates paid on interest-bearing liabilities.
Net interest margin declined 28 basis points to 4.27 percent in the first
three months of 1995, compared to 4.55 percent for the same period in 1994.
Compared to the first quarter of 1994, the TransOhio acquisition compressed the
Corporation's net interest margin as the proceeds received were invested in
securities which have lower yields than the average yields of the Corporations
assets. The increases in market rates over the last year resulted in a 91
basis point increase in asset yields in the first quarter, which was more than
offset by a 119 basis point increase in the cost of supporting funds.
The average rate spread between yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities declined 30 basis points in the
first quarter of 1995 to 3.67 percent, compared to 3.97 percent in the first
quarter of 1994. Table 1 provides detailed information as to the average
balances, interest income/expense and rates earned or paid by major balance
sheet category.
Net interest income after provision for loan losses was impacted by a
decrease in the provision for loan losses of $1.2 million in the first
quarter of 1995, compared to 1994. As discussed further in the Asset Quality
section, the provision has continued to decline in 1995 due to reductions
in the levels of net charge-offs and nonperforming loans.
-16-
<PAGE>
Noninterest income was $33.2 million for the first three months of 1995, an
increase of $4.3 million or 14.7 percent, from the $28.9 million reported
for the same period of 1994. Excluding the $1.3 million gain on sale of
securities in the first quarter of 1995, noninterest income increased $3.0
million or 10.3 percent in 1995, compared to the same period in 1994. Service
charges on deposits increased $2.2 million or 27.4 percent in 1995, due in part
to the TransOhio acquisition. In addition, credit card and ATM fees
increased 25.4 percent and 59.7 percent, respectively in the first quarter of
1995.
Noninterest expense totaled $69.6 million in the first quarter of 1995, a
15.3 percent increase from $60.3 million for the same period of 1994. The
increase in noninterest expenses in 1995 was due primarily to the TransOhio
acquisition. Additional increases related to TransOhio include salaries,
occupancy, FDIC insurance, equipment, supplies and amortization of
intangibles. Also contributing to this increase were employee awards and
incentives based on a "pay for performance" philosophy in achieving sales
and product goals and objectives and an increase in benefits costs. The
Corporation's noninterest expense ratio increased to 55.8 percent for the
first quarter of 1995, compared to 54.8 percent for the same period of 1994,
due primarily to higher expense levels related to TransOhio.
The Corporation's effective tax rate amounted to 33.4 percent for the three
months ended March 31, 1995. This compares to an effective rate of 35.2
percent for the same period of 1994. The decline in the effective rate
for 1995 is due to tax benefits received from recently established Corporate
and Bank owned life insurance programs, in addition to tax benefits recorded on
limited partnership investments of the parent company.
ASSET QUALITY
As of March 31, 1995, the allowance for loan losses was $99.3 million or 1.54
percent of loans, net of unearned interest. This compares to an allowance of
$96 million or 1.54 percent of loans, net of unearned interest, at December
31, 1994. The allowance as a percentage of nonperforming loans improved
to 295.9 percent at March 31, 1995 compared to 272.3 percent at December
31, 1993.
Table 2 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
$1.9 million in the first quarter of 1995, down significantly from $4.2
million for the same period a year earlier. Annualized net charge-offs
as a percentage of average outstanding loans declined to 0.12 percent
for the same quarter of 1995, compared to 0.32 percent for the same period
in 1994.
Net charge-offs have continued to decline in 1995, primarily in the
commercial and retail loan areas. The most significant decrease was in the
commercial loan area where net charge-offs were $200,000 in the first
quarter of 1995, compared to $2.9 million for the same period in 1994.
This was due in part to a large recovery received in 1995. Retail net
charge-offs improved slightly, decreasing to $1.0 million in the first
quarter of 1995, from $1.2 million in the first quarter of 1994. These
results reflect the Corporation's commitment to maintaining strict credit
standards, as well as the improvement in the economy throughout 1994 and
into 1995.
-17-
<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
First Quarter, 1995 First Quarter, 1994
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$ 2,085,415 $ 47,734 9.27 % $ 1,811,024 $ 34,171 7.64 %
Real estate loans......................2,404,714 48,997 8.16 2,077,294 40,685 7.84
Retail loans...........................1,839,998 39,674 8.70 1,476,142 31,116 8.52
Total loans.......................6,330,127 136,405 8.69 5,364,460 105,972 7.96
Taxable investment securities..........2,211,196 34,948 6.32 1,729,459 20,660 4.79
Non-taxable investment securities...... 19,236 302 6.29 31,132 689 8.96
Federal funds sold and securities
purchased under agreements to resell. 22,236 355 6.47 45,969 377 3.32
Interest-bearing deposits in banks..... 100 1 4.48 16,767 141 3.42
Total interest earning assets.....8,582,895 $ 172,011 8.07 % 7,187,787 $ 127,839 7.16 %
Cash and due from banks................ 391,161 360,644
Allowance for loan losses.............. (99,053) (86,367)
Other assets........................... 498,730 258,364
Total assets....................$ 9,373,733 $ 7,720,428
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$ 1,975,471 $ 10,814 2.22 % $ 1,812,442 $ 9,326 2.09 %
Money market deposit accounts.......... 663,410 5,374 3.29 730,989 4,169 2.31
Time deposits $100,000 and over........ 592,983 8,449 5.78 364,233 3,447 3.84
Time deposits under $100,000...........2,899,355 38,100 5.33 2,016,923 20,893 4.20
Short-term borrowings..................1,120,281 15,164 5.49 840,951 6,003 2.90
Long-term debt......................... 166,491 2,542 6.19 106,060 2,396 9.16
Total interest-bearing liabilities7,417,991 $ 80,443 4.40 % 5,871,598 $ 46,234 3.19 %
Noninterest-bearing deposits...........1,097,297 1,056,337
Other liabilities...................... 112,530 105,415
Shareholders' equity................... 745,915 687,078
Total liabilities and
shareholders' equity..........$ 9,373,733 $ 7,720,428
Net interest margin..................... 4.27 % 4.55 %
Interest rate spread.................... 3.67 3.97
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent amoun
are calculated utilizing marginal federal income tax rate of 35 percent for 1995 and 1994. The total
nonaccruing loans is included in average amount outstanding.
</TABLE>
-18-
<PAGE>
As shown in Tables 3 and 4, the Corporation has continued to reduce the level
of nonperforming assets over the last year. Nonperforming assets declined
$13.7 million to $35.9 million at March 31, 1995, compared to March 31, 1994.
Nonperforming assets declined $2.2 million in the first quarter of 1995, for
the sixth straight quarterly decline in nonperforming assets. The percentage of
nonperforming loans to end-of-period loans declined to 0.52 percent from
0.56 percent at December 31, 1994, also the sixth straight quarterly decline.
The majority of the improvement was achieved within the commercial loan
portfolio, nonaccrual commercial loans have decreased $11.6 million over
the last year. Loans past-due 90 days or more and still accruing interest
decreased $1.8 million in the first three months of 1995, and $13.7 million
compared to March 31, 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.
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 March 31, 1995 was
adequate to absorb all anticipated losses in the loan portfolio as of that
date.
The recorded investment in impaired loans at March 31, 1995 was $28.2
million with a related valuation allowance calculated under SFAS No. 114 of
$2.5 million. There was no additional allowance for loan losses required in
1995 as a result of the adoption of SFAS No. 114 and No. 118.
-19-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2 SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
First Quarter
1995 1994
<S> <C> <C>
Average loans - net of unearned
interest...........................$ 6,330,127 $ 5,364,460
Allowance for loan losses:
Balance - beginning of period......$ 95,979 $ 83,156
Charge-offs:
Commercial....................... (2,257) (3,697)
Real estate...................... (1,077) (310)
Retail........................... (2,939) (3,136)
Total charge-offs.............. (6,273) (7,143)
Recoveries:
Commercial....................... 2,034 767
Real estate...................... 437 214
Retail........................... 1,892 1,937
Total recoveries............... 4,363 2,918
Net charge-offs.............. (1,910) (4,225)
Provision charged to earnings...... 5,229 6,472
Balance - end of period............$ 99,298 $ 85,403
Ratio of net charge-offs to average
loans - net of unearned interest... 0.12% 0.32%
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 NONPERFORMING ASSETS
(Dollars in thousands)
March 31, December 31, March 31
1995 1994 1994
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 33,519 $ 34,990 $ 45,798
Loans which have been
renegotiated................. 35 261 238
Total nonperforming loans.... 33,554 35,251 46,036
Other real estate owned........ 2,317 2,793 3,560
Total nonperforming assets.... $ 35,871 $ 38,044 $ 49,596
Percentage of nonperforming
loans to loans* ............. 0.52% 0.56% 0.84%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.56% 0.61% 0.90%
Loans past due 90 days
or more...................... $ 6,489 $ 8,264 $ 20,141
* Net of unearned interest.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
March 31, 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.............. $17,929 $35 $17,964 1.04 % $664 $20,813 $261 $21,074 1.26 % $1,213
Asset-based lending.... -- -- -- -- -- -- -- -- -- --
Commercial leasing..... 23 -- 23 0.01 -- 25 -- 25 0.01 --
Total commercial loans 17,952 35 17,987 0.84 664 20,838 261 21,099 1.03 1,213
Real estate loans:
Residential............ 4,560 -- 4,560 0.37 2,142 4,431 -- 4,431 0.38 1,906
Commercial mortgage.... 9,429 -- 9,429 0.94 494 8,268 -- 8,268 0.84 2,090
Construction/land
development.......... 404 -- 404 0.19 1,766 404 -- 404 0.18 1,446
Total real estate loans 14,393 -- 14,393 0.59 4,402 13,103 -- 13,103 0.55 5,442
Retail loans:
Other retail........... 643 -- 643 0.05 462 651 -- 651 0.05 801
Credit cards........... 393 -- 393 0.16 918 297 -- 297 0.13 765
Retail leasing......... 138 -- 138 0.04 43 101 -- 101 0.04 43
Total retail loans... 1,174 -- 1,174 0.06 1,423 1,049 -- 1,049 0.06 1,609
Total loans.......... $33,519 $35 $33,554 0.52 % $6,489 $34,990 $261 $35,251 0.56 % $8,264
</TABLE>
-22-
<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 March 31, 1995.
The Corporation's consolidated long-term debt, which includes senior and
promissory notes, remained at $166 million for the first three months of 1995.
Total shareholders' equity increased $29 million in the first three months
to $748 million at March 31, 1995. The Corporation also raised its quarterly
dividend rate per common share from $0.35 in 1993 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 March 31, 1995 were 8.78 percent and 12.23 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 March 31, 1995 the Corporation's leverage
ratio was 6.44 percent compared to 6.27 percent at December 31, 1994. The
Corporation's leverage ratio is expected to improve in the second quarter
of 1995 due to a full quarters' effect of the sale of $375 million in mortgage-
backed securities. The proceeds from the sale of these securities were used to
reduce short-term borrowings. The increases in the Corporation's regulatory
capital ratios in the first quarter of 1995 was due to the retention of
earnings net of dividends declared.
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 March 31, 1995, the
Corporation has repurchased 663,000 shares, of which 98,000 had not yet been
reissued.
As shown in the Condensed Consolidated Statements of Cash Flows, cash flows
provided by operating activities amounted to $7 million for the three months
ended March 31, 1995 compared to $89 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 $30 million decline
in the change in mortgage loans held for sale in the first three months of
1995, compared to the same period in 1994.
-23-
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(B) A Current Report on Form 8-K was filed by the Corporation on
March 1, 1995 reporting the formation of StarBanc Finance,
Inc., a wholly owned consumer finance subsidiary of Star Banc
Corporation. Star Banc Finance, Inc. will offer a broader mix
of consumer lending products and services such as indirect new
and used auto loans, second mortgages, personal loans and other
types of consumer financing within the
Corporations current markets.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
May 15, 1995 /s/ Jerry A. Grundhofer
- ------------ -----------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
May 15, 1995 /s/ David M. Moffett
- ------------ ---------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-24-
<PAGE>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share data)
Three Months
March 31, March 31,
1995 1994
Net income.........................$ 32,766 $ 27,849
Preferred dividends................ 37 129
Income available to common
shareholders.....................$ 32,729 $ 27,720
Weighted average of common
stock equivalents................. 29,988 29,791
Weighted average of preferred
stock convertable to common
stock equivalents................ 129 754
Weighted average of fully
diluted common stock equivalents.. 30,117 30,545
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents).....................$ 1.09 $ 0.93
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents)........$ 1.09 $ 0.91
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> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 349,588
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 11,975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,065
<INVESTMENTS-CARRYING> 1,729,507
<INVESTMENTS-MARKET> 1,694,285
<LOANS> 6,447,907
<ALLOWANCE> 99,298
<TOTAL-ASSETS> 9,053,926
<DEPOSITS> 7,171,312
<SHORT-TERM> 825,173
<LIABILITIES-OTHER> 143,248
<LONG-TERM> 166,514
<COMMON> 150,529
0
2,069
<OTHER-SE> 595,081
<TOTAL-LIABILITIES-AND-EQUITY> 9,053,926
<INTEREST-LOAN> 135,701
<INTEREST-INVEST> 35,134
<INTEREST-OTHER> 356
<INTEREST-TOTAL> 171,191
<INTEREST-DEPOSIT> 62,737
<INTEREST-EXPENSE> 80,443
<INTEREST-INCOME-NET> 90,748
<LOAN-LOSSES> 5,229
<SECURITIES-GAINS> 1,282
<EXPENSE-OTHER> 69,555
<INCOME-PRETAX> 49,158
<INCOME-PRE-EXTRAORDINARY> 49,158
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,766
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 8.07
<LOANS-NON> 33,519
<LOANS-PAST> 6,489
<LOANS-TROUBLED> 35
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 95,979
<CHARGE-OFFS> 6,273
<RECOVERIES> 4,363
<ALLOWANCE-CLOSE> 99,298
<ALLOWANCE-DOMESTIC> 99,298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
