STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10Q
June 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 - 25
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..........................26
Signatures.................................................................26
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
Second Quarter Year thru June
Percent Percent
1995 1994 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Net income........................... $ 33,770 $ 28,527 18.4 % $ 66,536 $ 56,376 18.0 %
Per share:
Primary earnings................... $ 1.12 $ 0.95 17.9 % $ 2.21 $ 1.88 17.6 %
Fully diluted earnings............. 1.12 0.94 19.1 2.21 1.85 19.5
Common stock dividends declared.... 0.40 0.35 14.3 0.80 0.70 14.3
Preferred dividends declared....... 1.50 1.50 -- 3.00 3.00 --
Book value per common share........ 25.75 23.01 11.9 25.75 23.01 11.9
Market value per common share...... 46.00 37.88 21.4 46.00 37.88 21.4
Average balances:
Total assets....................... $ 9,205,663 $ 7,804,793 17.9 % $ 9,289,234 $ 7,762,910 19.7 %
Earning assets..................... 8,411,133 7,263,728 15.8 8,496,540 7,225,968 17.6
Loans, net of unearned interest.... 6,602,060 5,587,513 18.2 6,466,845 5,476,603 18.1
Deposits........................... 6,999,418 5,934,089 18.0 7,113,334 5,957,377 19.4
Shareholders' equity............... 769,377 695,916 10.6 757,711 691,521 9.6
Ratios:
Return on average assets........... 1.47 % 1.47 % 1.44 % 1.46 %
Return on average equity........... 17.61 16.44 17.71 16.44
Average shareholders' equity
to average assets................ 8.36 8.92 8.16 8.91
Risk-based capital ratios:
Tier 1........................... 8.84 10.93 8.84 10.93
Total............................ 12.21 14.68 12.21 14.68
Leverage........................... 6.84 8.33 6.84 8.33
Net interest margin................ 4.44 4.74 4.35 4.64
Noninterest expense to net revenue. 53.96 56.41 54.85 55.51
Noninterest income as a percent
of net revenue................... 26.39 24.97 26.50 25.56
</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 June 30, 1995, and the
related condensed consolidated statements of income for the three-month and
six-month periods then ended, and the condensed consolidated statements of
changes in shareholders' equity and cash flows for the six-month periods ended
June 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 interin
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,
July 10, 1995
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<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30 December 31,
1995 1994
<S> <C> <C>
ASSETS:
Cash and Due From Banks........................... $ 390,586 $ 429,467
Interest Bearing Deposits in Banks................ 100 100
Federal Funds Sold and Securities Purchased
Under Agreements to Resell...................... 2,645 56,545
Investment Securities:
Available-For-Sale.............................. 62,771 563,091
Held-To-Maturity (market value of $1,680,647
at June 30, 1995 and $1,671,088 at
December 31, 1994)............................ 1,683,402 1,764,854
Total Securities................................ 1,746,173 2,327,945
Loans:
Commercial Loans................................ 2,196,667 2,079,804
Real Estate Loans............................... 2,590,449 2,378,661
Retail Loans.................................... 2,009,897 1,865,295
Total Loans................................... 6,797,013 6,323,760
Less: Unearned Interest....................... 88,745 74,203
6,708,268 6,249,557
Allowance for Loan Losses............... 103,039 95,979
Net Loans..................................... 6,605,229 6,153,578
Premises and Equipment............................ 125,503 122,829
Acceptances - Customers' Liability................ 34,249 8,249
Other Assets...................................... 325,340 292,078
Total Assets.................................. $ 9,229,825 $ 9,390,791
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits.................... $ 1,201,246 $ 1,214,703
Interest-Bearing Deposits:
Savings and NOW............................... 1,894,557 2,048,442
Time Deposits $100,000 and Over............... 401,236 636,181
All Other Deposits............................ 3,487,607 3,464,489
Total Deposits.............................. 6,984,646 7,363,815
Short-term Borrowings............................. 1,161,634 1,034,700
Long-term Debt.................................... 163,222 166,466
Acceptances Outstanding........................... 34,249 8,249
Other Liabilities................................. 113,693 99,343
Total Liabilities............................. 8,457,444 8,672,573
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - 17,319 at June 30, 1995
and 29,707 at December 31, 1994............... 1,437 2,466
Common Stock:
Shares Authorized - 50,000,000
Shares Issued - 30,160,458 at June 30, 1995
and 30,105,835 at December 31, 1994........... 150,802 150,529
Surplus........................................... 78,389 78,037
Retained Earnings................................. 552,828 510,268
Treasury Stock, at cost - 218,406 shares at June
30, 1995 and 303,039 at December 31, 1994....... (6,124) (9,445)
Net Unrealized (Loss) on Securities............... (4,951) (13,637)
Total Shareholders' Equity.................... 772,381 718,218
Total Liabilities and Shareholders' Equity.... $ 9,229,825 $ 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 JUNE 30
(Unaudited)
(Dollars in thousands except per share data)
Second Quarter Six Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans.................. $145,572 $112,576 $281,273 $218,020
Interest on Investment Securities:
Taxable................................... 29,125 21,025 64,073 41,685
Non-Taxable............................... 193 355 379 817
Interest on Federal Funds Sold and
Securities Purchased Under
Agreements to Resell...................... 120 240 475 617
Interest on Interest-Bearing Deposits....... 1 16 2 157
Total Interest Income..................... 175,011 134,212 346,202 261,296
INTEREST EXPENSE:
Interest on Savings and NOW................. 10,723 9,267 21,537 18,593
Interest on Time Deposits $100,000 and Over. 6,510 3,484 14,959 6,931
Interest on Other Deposits.................. 46,241 25,844 89,715 50,906
Interest on Short-Term Borrowings........... 15,967 7,929 31,131 13,932
Interest on Long-Term Debt.................. 2,970 2,461 5,512 4,857
Total Interest Expense.................... 82,411 48,985 162,854 95,219
Net Interest Income..................... 92,600 85,227 183,348 166,077
Provision for Loan Losses................... 6,924 5,820 12,153 12,292
Net Interest Income after
Provision for Loan Losses............. 85,676 79,407 171,195 153,785
NONINTEREST INCOME:
Trust Income................................ 10,279 8,935 20,014 17,929
Service Charges on Deposits................. 10,501 8,428 20,939 16,623
Other Service Charges and Fees.............. 10,010 8,621 19,027 16,429
Investment Securities Gains-Net............. (98) (2) 1,184 (1)
All Other Income............................ 2,820 2,644 5,542 6,576
Total Noninterest Income.................. 33,512 28,626 66,706 57,556
NONINTEREST EXPENSE:
Salaries.................................... 27,340 25,856 54,445 49,548
Pension and Other Employee Benefits......... 4,411 4,898 10,152 9,382
Equipment Expense........................... 4,088 3,835 7,894 7,645
Occupancy Expense - Net..................... 5,226 4,380 10,361 8,780
All Other Expense........................... 27,454 25,702 55,222 49,635
Total Noninterest Expense................. 68,519 64,671 138,074 124,990
INCOME BEFORE TAX........................... 50,669 43,362 99,827 86,351
Income Tax.................................. 16,899 14,835 33,291 29,975
NET INCOME.................................. $ 33,770 $ 28,527 $ 66,536 $ 56,376
PER SHARE:
Primary Earnings............................ $ 1.12 $ 0.95 $ 2.21 $ 1.88
Fully Diluted Earnings...................... 1.12 0.94 2.21 1.85
Common Stock Cash Dividends Declared........ 0.40 0.35 0.80 0.70
Preferred Stock Cash Dividends Declared..... 1.50 1.50 3.00 3.00
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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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 on SecuritiesEquity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994...$ 14,622 $ 148,767 $ 80,038 $ 435,724 $ (3,352)$ -- $675,799
Net income................ 56,376 56,376
Cash dividends declared
on common stock.......... (20,892) (20,892)
Cash dividends declared
on Series B Preferred
Stock.................... (231) (231)
Issuance of common stock
and treasury shares...... 90 349 300 739
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued.... (8,977) 1,672 1,457 5,848 --
Purchase of treasury
stock.................... (19,519) (19,519)
Shares reserved to meet
deferred compensation
obligations.............. 380 380
Initial adoption of
SFAS 115................. 4,386 4,386
Change in net unrealized
gain/(loss) on securities (10,201) (10,201)
Balance, June 30, 1994.....$ 5,645 $ 150,529 $ 82,224 $ 470,977 $ (16,723)$ (5,815) $686,837
Balance, January 1, 1995...$ 2,466 $ 150,529 $ 78,037 $ 510,268 $ (9,445)$ (13,637) $718,218
Net income................ 66,536 66,536
Cash dividends declared
on common stock.......... (23,912) (23,912)
Cash dividends declared
on Series B Preferred
Stock.................... (64) (64)
Issuance of common stock
and treasury shares...... 273 822 1,623 2,718
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued.... (1,029) (1,228) 2,256 (1)
Purchase of treasury
stock.................... (553) (553)
Shares reserved to meet
deferred compensation
obligations.............. 758 (5) 753
Change in net unrealized
gain/(loss) on securities 8,686 8,686
Balance, June 30, 1995.....$ 1,437 $ 150,802 $ 78,389 $ 552,828 $ (6,124)$ (4,951) $772,381
</TABLE>
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<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 66,536 $ 56,376
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 15,483 16,957
Provision for loan losses............................. 12,153 12,292
Provision for deferred taxes.......................... 9,182 (317)
(Gain)/loss on sale of premises and equipment - net... (162) (131)
(Gain)/loss on sale of securities - net............... (1,184) 1
(Gain)/loss on sale of residential real estate loans.. 85 (482)
Proceeds from mortgage loans held for sale............ 26,373 125,656
Mortgage loans originated for sale on secondary market (42,576) (87,100)
Net change in other assets............................ (53,260) (8,762)
Net change in other liabilities....................... 2,473 6,213
Total adjustments................................... (31,433) 64,327
Net cash provided by operating activities........... 35,103 120,703
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 83,000 206,283
Proceeds from maturities of available-for-sale securities. 96,584 227,558
Proceeds from sales of available-for-sale securities...... 422,623 641
Purchase of held-to-maturity securities................... (1,831) (175,699)
Purchase of available-for-sale securities................. (6,064) (236,315)
Net change in loans....................................... (453,323) (483,313)
Proceeds from sales of loans.............................. 5,135 12,486
Proceeds from sales of premises and equipment............. 1,203 136
Purchase of premises and equipment........................ (10,562) (7,606)
Net cash provided by/(used in) investing activities..... 136,765 (455,829)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... (379,061) (151,290)
Net change in short-term borrowings....................... 126,934 289,729
Principal payments on long-term debt...................... (3,340) (31,140)
Proceeds from issuance of long-term debt.................. - 147,975
Proceeds from issuance of common stock.................... 1,095 739
Purchase of treasury stock................................ (553) (19,519)
Conversion of preferred stock............................. (1) -
Shares reserved to meet deferred compensation obligations. 753 380
Dividends paid............................................ (10,476) (19,461)
Net cash provided by/(used in) financing activities..... (264,649) 217,413
Net change in cash and cash equivalents................... (92,781) (117,713)
Cash and cash equivalents at beginning of year............ 486,112 560,534
Cash and cash equivalents at June 30.....................$ 393,331 $ 442,821
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for six months ended June 30 1995 1994
Interest...............................................$ 154,133 $ 92,876
Income Taxes............................................ 23,382 26,469
Noncash transfer of loans to other real estate owned...... 655 715
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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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 June 30, 1995 and
December 31, 1994. (Dollars are in thousands)
<TABLE>
<CAPTION> June 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 1,671,602 16,399 19,421 1,668,580 1,742,165 506 94,493 1,648,178
Obligations of state
and political
subdivisions 10,665 275 6 10,934 21,554 249 252 1,778
Other debt securities 1,135 -- 2 1,133 1,135 -- 3 1,132
Total held-to-
maturity securities $1,683,402 $16,674 $19,429 $1,680,647 $1,764,854 $ 755 $94,521 $1,671,088
AVAILABLE-FOR-SALE
U.S. Treasuries and
agencies $ 24,701 $ 392 $ 68 $ 25,025 $ 117,357 $ 42 $ 1,149 $ 116,250
Mortgage-backed
securities 150 5 -- 155 424,461 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 37,398 -- -- 37,398 33,619 -- -- 33,619
Total available-for-
sale securities $ 62,436 $ 403 $ 68 $ 62,771 $ 575,652 $ 63 $ 12,624 $ 563,091
</TABLE>
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As of June 30, 1995, the Corporation reported a net unrealized loss of
$5.0 million for securities. For the first six 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 $5.0
million, increasing shareholders' equity $8.6 million.
The following table presents the amortized cost and fair value of held-
to-maturity and available-for-sale debt securities at June 30, 1995.
(Dollars are in thousands)
Amortized Fair
Cost Value
Held-to-Maturity --------- -------
One year or less $ 228,709 $ 227,648
After one year through five years 841,310 836,867
After five years through ten years 320,201 320,091
After ten years 293,182 296,041
Total $1,683,402 $1,680,647
Available-for-Sale
One year or less $ 11,088 $ 11,086
After one year through five years 11,617 11,967
After five years through ten years 1,379 1,348
After ten years 954 972
Total $ 25,038 $ 25,373
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. LOAMS
The following table summarizes the composition of the loan portfolio, net
of unearned interest, as of June 30, 1995 and December 31, 1994.
(Dollars are in thousands)
June 30, December 31,
1995 1994
---------- ----------
Commercial loans:
Corporate loans $1,690,954 $1,625,934
Asset-based lending 194,003 180,738
Commercial leasing 230,641 196,504
Industrial revenue bonds 40,757 41,176
Total commercial loans 2,156,355 2,044,352
Real estate loans:
Residential mortgage 1,333,174 1,168,828
Commercial mortgage 1,038,802 981,954
Construction and land development 218,473 227,879
Total real estate loans 2,590,449 2,378,661
Retail loans:
Installment 1,344,853 1,310,012
Credit cards 265,031 228,673
Retail leasing 351,580 287,859
Total retail loans 1,961,464 1,826,544
Total loans, net of unearned interest $6,708,268 $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)
Six Months
Ended Year Ended
June 30, December 31,
1995 1994
---------- ----------
Balance - beginning of period $ 95,979 $ 83,156
Loans charged-off (14,077) (24,570)
Recoveries on loans
previously charged-off 8,984 13,021
Net charge-offs (5,093) (11,549)
Provision charged to earnings 12,153 24,372
Balance - end of period $103,039 $ 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 June 30, 1995. (Dollars are in thousands)
June 30, 1995
Recorded Valuation
Investment Allowance
Impaired Loans: ---------- ---------
Valuation allowance required $ 14,610 $ 2,804
No valuation allowance required 13,169 --
Total impaired loans $ 27,779 $ 2,804
The average recorded investment in impaired loans for the six months
ended June 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. No interest income was recognized on impaired
loans in the first six 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 June 30, 1995 and December 31,
1994 are shown in the following table. (Dollars are in thousands)
June 30, December 31,
1995 1994
-------- ---------
Allowance for loan losses $ 35,622 $ 33,151
Deferred loan fees 1,926 2,313
Deferred compensation 2,256 1,825
Unrealized loss on securities 2,666 7,343
Intangible asset amortization 520 543
Other 2,883 2,656
Total deferred tax asset 45,873 47,831
Leased assets (43,883) (32,206)
Pension liabilities (4,715) (4,511)
Fixed asset depreciation (4,444) (4,444)
Purchase accounting/intangible assets (1,461) (1,508)
Other (1,583) (1,516)
Total deferred tax liability (56,086) (44,185)
Net deferred tax asset/(liability) $ (10,213) $ 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 and six months ended June 30, 1995 and 1994.
Three Months Six Months
1995 1994 1995 1994
------- ------- ------ ------
Credit card fees $ 3,754 $ 3,100 $ 7,040 $ 5,720
ATM fees 1,845 1,217 3,501 2,254
The following are included in all other expense for the three months and
six months ended June 30, 1995 and 1994.
Three Months Six Months
1995 1994 1995 1994
------- ------- ------- ------
FDIC insurance $ 3,929 $ 3,327 $ 7,858 $ 6,657
Amortization of
intangible assets 2,962 1,346 5,939 2,946
State taxes 2,224 2,385 4,464 4,796
Outside services 1,926 1,971 4,010 3,910
Credit card processing 2,113 1,764 4,128 3,178
Marketing 2,094 2,304 4,025 4,323
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NOTE 7. 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 will be accounted for as a
purchase, and accordingly, all assets acquired and liabilities assumed will
be 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 8. 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.
Management anticipates adoption of SFAS No. 122 in 1996, and is currently
assessing the impact on the Corporation's financial condition and results
of operations.
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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
June 30, 1995, was $33,770,000, an 18.4 percent increase over the second quarter
of 1994. Net income for the first six months of 1995 was $66,536,000 an 18.0
percent increase compared to 1994. Primary and fully diluted earnings per
share were $1.12 for the second quarter of 1995, compared to $0.95 and $0.94,
respectively, for the second quarter of 1994. These amounts represent increases
of 17.9 percent and 19.1 percent on primary and fully diluted earnings per
share, respectively. For the first half of 1995, earnings per share was $2.21
on both a primary and fully diluted basis. This was an increase over 1994 of
17.6 percent on a primary basis and 19.5 percent on a fully diluted basis.
Earnings results for the second quarter and first half of 1995 reflect
increases in net interest income and noninterest income. 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 $65.7 million for the first half of 1995, an increase of 16.5 percent
over the same period in 1994. Fully diluted earnings per share were $2.18
excluding the gain, an increase of 17.8 percent over 1994.
Return on average assets was 1.47 percent for the second quarter and 1.44
percent for the first half of 1995, relatively flat compared to the same
periods in 1994. These ratios represent an improvement over the fourth quarter
of 1994 and first quarter 1995, as these periods were affected by the
TransOhio acquisition. Return on average equity increased to 17.61 percent for
the second quarter and 17.71 percent for the first six months of 1995 compared
to 16.44 percent for the same periods in 1994.
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
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 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 received $564 million in
cash and acquired $645 million in deposits for a premium of approximately $64
million.
FINANCIAL CONDITION
Total assets at June 30, 1995, amounted to $9.23 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 $6.71 billion at June 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 the first half of 1995.
Total loans, net of unearned interest, have increased at an annualized rate of
14.8 percent in the first half of 1995. During the first six months of 1995,
commercial loans increased $112 million, real estate loans increased $212
million and retail loans were up $135 million.
Investment securities declined $582 million to $1.75 billion at June 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
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of U.S. Treasuries in the second quarter of 1995. 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. These sales have contributed to
the improvements in earnings, net interest margin, return on assets and capital
ratios in the second quarter of 1995.
As of June 30, 1995, the Corporation's investment securities portfolio included
$1.68 billion in securities classified as held-to-maturity a decline of $81
million from December 31, 1994. There was $63 million in securities classified
as available-for-sale at June 30, 1995, a decline of $500 million from December
31, 1994.
Deposits declined $379 million to $6.98 billion at June 30, 1995, from $7.36
billion at December 31, 1994. This decline was due to a $219 million decrease in
foreign deposits $100,000 and over and a $154 million decline in savings and
NOW accounts. Foreign deposits declined in the first six 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 and NOW accounts into higher yielding money market accounts,
certificates of deposit and nonbank financial products in the first half of
1995. As a result of this movement of customer funds, money market deposit
accounts increased $55 million or 8.5 percent in the first half of 1995.
RESULTS OF OPERATIONS
Net interest income, the Corporation's principal source of earnings, increased
$7.4 million in the second quarter and $17.3 million for the first half of
1995. These represent increases of 8.7 percent in the second quarter and 10.4
percent for the first half of 1995, compared to the same periods in 1994. The
increases in 1995 were due to an increase in the level of average
interest-earning assets, which were up $1.27 billion or 17.6% in the first half
of 1995, compared to 1994. Average loans were up $990 million or 18.1 percent
in the first six months of 1995, compared to 1994. In addition, average
securities increased $308 million in the first six months of 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 30 basis points to 4.44 percent in the second
quarter of 1995, compared to 4.74 percent for the same period in 1994. Net
interest margin for the first half of 1995 declined 29 basis points compared to
the prior year. The TransOhio acquisition has compressed the Corporation's 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. The Corporation's net interest margin has begun to
rebound in the second quarter of 1995, as the continued strong loan growth has
been funded by maturities and sales of lower yielding securities. The increases
in market rates over the last year resulted in a 93 basis point increase in
asset yields in the second quarter of 1995, compared to 1994, which was more
than offset by a 123 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 39 basis points in the
second quarter and 34 basis points for the first six months of 1995. 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 $1.1
million increase in the provision for loan losses in the second quarter of 1995,
compared to 1994. This increase is due primarily to continued loan growth in
1995. As described in the Asset Quality section, nonperforming loans and
charge-off levels have improved compared to 1994.
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Noninterest income was $33.5 million for the second quarter of 1995, an
increase of $4.9 million or 17.1 percent, from $28.6 million for the same
period of 1994. Service charges on deposits increased $2.1 million or 24.6
percent for the second quarter, due in part to the TransOhio acquisition.
Other areas recognizing increases for the second quarter included ATM fees,
credit card fees and trust income which were up 51.6, 21.1 and 15.0 percent,
respectively, compared to the same period in 1994. For the first six months of
1995, noninterest income has increased $9.2 million or 15.9 percent, compared to
the prior year. This increase was led by service charges on deposits, ATM fees
and credit card fees. Also included in 1995 are net gains on sales of
securities of $1.2 million. Excluding the net securities gains, noninterest
income increased $8.0 million or 13.8 percent in 1995, compared to the same
period in 1994.
Noninterest expense totaled $68.5 million in the second quarter of 1995, a
6.0 percent increase from $64.7 million for the same period of 1994. The
increase in noninterest expenses in 1995 was due to primarily to the TransOhio
acquisition. Additional expenses included in 1995 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 decreased 245 basis points to 53.96
percent for the second quarter of 1995, compared to 56.41 percent for the same
period of 1994. For the first half of 1995, the noninterest expense ratio
decreased 66 basis points to 54.85 percent. The improvement in the noninterest
expense ratio in 1995 is a result of growth in revenues, continued strong
loan growth and stringent expense controls. The efficiency ratio is
expected to trend upward in the third quarter of 1995 as a result of the
Household Bank acquisition. However, as the integration of the Household
offices is completed, the efficiency ratio should improve.
The Corporation's effective tax rate amounted to 33.4 percent for the three
months and six months ended June 30, 1995. This compares to an effective tax
rate of 34.2 percent for the second quarter and 34.7 percent for the first half
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.
ASSET QUALITY
As of June 30, 1995, the allowance for loan losses was $103.0 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 304.3 percent at June 30, 1995, compared to 272.3 percent
at December 31, 1993.
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 $3.2
million in the second quarter of 1995, up slightly from $2.9 million for the
same period a year earlier. Net charge-offs for the first six months of 1995
were $5.1 million, a decrease of $2.0 million, compared to 1994. Annualized net
charge-offs as a percentage of average outstanding loans were 0.19 percent for
the second quarter and 0.16 percent for the first half of 1995. This compares
to 0.21 percent and 0.26 percent, respectively, for the same periods in 1994.
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Net charge-offs increased slightly in the second quarter of 1995, compared
to the prior year. This increase was due to a single large commercial
charge-off on a national credit. Real estate loans were in a net recovery
position for the second quarter due to two large recoveries. For the six months
ended June 30, 1995, net charge-offs have declined $2.0 million, 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 has continued to reduce the level
of nonperforming assets over the last year. Nonperforming assets declined $7.9
million to $35.8 million at June 30, 1995, compared to June 30, 1994.
Nonperforming assets have declined $2.2 million in the first half of 1995, as
nonaccrual loans in the commercial loan and commercial real estate portfolios'
have continued to decline. The percentage of nonperforming loans to
end-of-period loans declined to 0.50 percent from 0.56 percent at December 31,
1994. Loans past-due 90 days or more and still accruing interest decreased
$1.7 million in the first six months of 1995, and $5.1 million compared to June
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.
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 June 30, 1995 was adequate to absorb all
anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at June 30, 1995 was $27.8 million
with a related valuation allowance calculated under SFAS No. 114 of $2.8
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.
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.
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<TABLE>
<CAPTION>
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Second Quarter, 1995 Second Quarter,1994
Daily Average Daily Average
Average Interest Rate Average Interest Rate
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Commercial loans.......................$2,170,551 $ 50,385 9.31 % $1,850,488 $ 38,253 8.29 %
Real estate loans.......................2,517,039 53,158 8.45 2,145,443 41,803 7.80
Retail loans............................1,914,470 42,800 8.96 1,591,582 33,107 8.34
Total loans........................6,602,060 146,343 8.88 5,587,513 113,163 8.11
Taxable investment securities...........1,787,189 29,125 6.52 1,625,466 21,025 5.17
Non-taxable investment securities....... 14,593 281 7.69 28,535 560 7.95
Federal funds sold and securities
purchased under agreements to resell.. 7,191 120 6.67 20,466 240 4.71
Interest bearing deposits in banks...... 100 1 4.76 1,748 16 3.50
Total interest earning assets......8,411,133 $ 175,870 8.37 % 7,263,728 $135,004 7.44 %
Cash and due from banks................. 400,895 356,034
Allowance for loan losses............... (103,284) (88,298)
Other assets............................ 496,919 273,329
Total assets......................$9,205,663 $7,804,793
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW........................$1,928,262 $ 10,723 2.23 % $1,800,671 $ 9,267 2.06 %
Money market deposit accounts........... 675,870 6,014 3.57 720,116 4,477 2.49
Time deposits $100,000 and over......... 437,248 6,510 5.97 340,820 3,484 4.10
Time deposits under $100,000............2,839,259 40,227 5.68 2,024,880 21,367 4.23
Short-term borrowings...................1,128,631 15,967 5.67 916,266 7,929 3.47
Long-term debt.......................... 166,161 2,970 7.17 180,523 2,461 5.47
Total interest bearing liabilities.7,175,431 $ 82,411 4.60 % 5,983,276 $ 48,985 3.28 %
Noninterest-bearing deposits............1,118,779 1,047,602
Other liabilities....................... 142,076 77,999
Shareholders' equity.................... 769,377 695,916
Total liabilities and
shareholders' equity............$9,205,663 $7,804,793
Net interest margin.................... 4.44 % 4.74 %
Interest rate spread................... 3.77 4.16
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable
equivalent 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.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Six Months, 1995 Six Months,1994
Daily Average Daily Average
Average Interest Rate Average Interest Rate
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Commercial loans.......................$2,128,218 $ 98,119 9.29 % $1,830,865 $ 72,424 7.97 %
Real estate loans.......................2,461,187 102,155 8.31 2,111,557 82,488 7.82
Retail loans............................1,877,440 82,474 8.83 1,534,181 64,223 8.42
Total loans........................6,466,845 282,748 8.78 5,476,603 219,135 8.04
Taxable investment securities...........1,998,021 64,073 6.42 1,677,175 41,685 4.98
Non-taxable investment securities....... 16,902 583 6.90 29,827 1,249 8.48
Federal funds sold and securities
purchased under agreements to resell.. 14,672 475 6.52 33,147 617 3.75
Interest-bearing deposits in banks...... 100 2 4.62 9,216 157 3.43
Total interest earning assets......8,496,540 $ 347,881 8.22 % 7,225,968 $262,843 7.30 %
Cash and due from banks................. 396,055 358,326
Allowance for loan losses............... (101,180) (87,338)
Other assets............................ 497,819 265,954
Total assets......................$9,289,234 $7,762,910
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW........................$1,951,736 $ 21,537 2.23 % $1,806,524 $ 18,593 2.08 %
Money market deposit accounts........... 669,675 11,388 3.43 725,523 8,646 2.40
Time deposits $100,000 and over......... 514,686 14,959 5.86 352,462 6,931 3.97
Time deposits under $100,000............2,869,140 78,327 5.51 2,020,923 42,260 4.22
Short-term borrowings...................1,124,479 31,131 5.58 878,816 13,932 3.20
Long-term debt.......................... 166,325 5,512 6.68 143,497 4,857 6.82
Total interest-bearing liabilities.7,296,041 $ 162,854 4.50 % 5,927,745 $ 95,219 3.24 %
Noninterest-bearing deposits............1,108,097 1,051,945
Other liabilities....................... 127,385 91,699
Shareholders' equity.................... 757,711 691,521
Total liabilities and
shareholders' equity............$9,289,234 $7,762,910
Net interest margin.................... 4.35 % 4.64 %
Interest rate spread................... 3.72 4.06
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable
equivalent are calculated utilizing marginal federal income tax rate of 35 percent for 1995 and
1994. The total of nonaccruing loans is included in average amount outstanding.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
Second Quarter Six Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Average loans - net of unearned
interest......................$ 6,602,060 $ 5,587,513 $ 6,466,845 $ 5,476,603
Allowance for loan losses:
Balance - beginning of period.$ 99,298 $ 85,403 $ 95,979 $ 83,156
Charge-offs:
Commercial.................. (4,814) (2,578) (7,071) (6,275)
Real estate................. (92) (370) (1,169) (680)
Retail...................... (2,898) (3,439) (5,837) (6,575)
Total charge-offs......... (7,804) (6,387) (14,077) (13,530)
Recoveries:
Commercial.................. 2,356 1,088 4,390 1,855
Real estate................. 506 332 943 546
Retail...................... 1,759 2,051 3,651 3,988
Total recoveries.......... 4,621 3,471 8,984 6,389
Net charge-offs......... (3,183) (2,916) (5,093) (7,141)
Provision charged to earnings. 6,924 5,820 12,153 12,292
Balance - end of period......$ 103,039 $ 88,307 $ 103,039 $ 88,307
Ratio of net charge-offs to average
loans - net of unearned interest 0.19% 0.21% 0.16% 0.26%
</TABLE>
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<TABLE>
<CAPTION>
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 33,823 $ 34,990 $ 39,441
Loans which have been
renegotiated................. 33 261 285
Total nonperforming loans.... 33,856 35,251 39,726
Other real estate owned........ 1,963 2,793 3,979
Total nonperforming assets... $ 35,819 $ 38,044 $ 43,705
Percentage of nonperforming
loans to loans* ............. 0.50% 0.56% 0.69%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.53% 0.61% 0.76%
Loans past due 90 days
or more...................... $ 6,556 $ 8,264 $ 11,661
* Net of unearned interest.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
June 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
Commercial:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate.................$19,668 $33 $19,701 1.14 % $1,550 $20,813 $261 $21,074 1.26 % $1,213
Asset-based lending....... -- -- -- -- -- -- -- -- -- --
Commercial leasing........ 21 -- 21 0.01 -- 25 -- 25 0.01 --
Total commercial loans.. 19,689 33 19,722 0.91 1,550 20,838 261 21,099 1.03 1,213
Real estate loans:
Residential............... 5,016 -- 5,016 0.38 2,152 4,431 -- 4,431 0.38 1,906
Commercial mortgage....... 7,287 -- 7,287 0.70 930 8,268 -- 8,268 0.84 2,090
Construction/land
development............. 404 -- 404 0.19 449 404 -- 404 0.18 1,446
Total real estate loans. 12,707 -- 12,707 0.49 3,531 13,103 -- 13,103 0.55 5,442
Retail loans:
Installment............... 704 -- 704 0.05 443 651 -- 651 0.05 801
Credit cards.............. 644 -- 644 0.24 1,006 297 -- 297 0.13 765
Retail leasing............ 79 -- 79 0.02 26 101 -- 101 0.04 43
Total retail loans...... 1,427 -- 1,427 0.07 1,475 1,049 -- 1,049 0.06 1,609
Total loans.............$33,823 $33 $33,856 0.50 % $6,556 $34,990 $261 $35,251 0.56 % $8,264
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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 June 30, 1995. The
Corporation's consolidated long-term debt, which includes senior and promissory
notes, declined $3.2 million to $163 million at June 30, 1995. The decrease in
long-term debt was due to scheduled principal payments.
Total shareholders' equity increased $54 million in the first six months to
$772 million at June 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 June 30, 1995 were 8.84 percent and 12.21 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 June 30, 1995 the Corporation's leverage ratio was 6.84 percent compared
to 6.27 percent at December 31, 1994. The Corporation's leverage ratio improved
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 June 30, 1995, the Corporation has
repurchased 663,000 shares, of which 53,000 had not yet been reissued.
As shown in the Condensed Consolidated Statements of Cash Flows, cash and
cash equivalents declined $93 million in the first six months of 1995,
compared to a decline of $118 million for the same period in 1994. Cash flows
provided by operating activities amounted to $35 million for the six months
ended June 30, 1995 compared to $121 million for the same period in 1994.
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</page>
The decrease was attributable to a $50 million investment in bank owned life
insurance in the first quarter of 1995, in addition to a $22 million net change
in mortgage loans held for sale in the first six months of 1995, compared to the
same period in 1994. Investing activities provided $137 million in cash flows
in the first half of 1995, compared to a use of $456 million in the first six
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.
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 $265 million in the first six months of 1995 as a
result of the decline in deposit levels.
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<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(B) There were no Current Reports on Form 8-K filed by the Corporation
during the second quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
August 14, 1995 /s/ David M. Moffett
------------------- ----------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
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</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share data)
Second Quarter Six Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income......................$ 33,770 $ 28,527 $ 66,536 $ 56,376
Preferred dividends.............. 37 102 64 231
Income available to common
shareholders..................$ 33,733 $ 28,425 $ 66,472 $ 56,145
Weighted average of common
stock equivalents............... 30,051 29,975 30,020 29,883
Weighted average of preferred
stock convertable to common
stock equivalents.............. 105 343 117 548
Weighted average of fully
diluted common stock equivalents 30,156 30,318 30,137 30,431
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents)..................$ 1.12 $ 0.95 $ 2.21 $ 1.88
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents).....$ 1.12 $ 0.94 $ 2.21 $ 1.85
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
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 390,586 390,586
<INT-BEARING-DEPOSITS> 100 100
<FED-FUNDS-SOLD> 2,645 2,645
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 62,771 62,771
<INVESTMENTS-CARRYING> 1,683,402 1,683,402
<INVESTMENTS-MARKET> 1,680,647 1,680,647
<LOANS> 6,708,268 6,708,268
<ALLOWANCE> 103,039 103,039
<TOTAL-ASSETS> 9,229,825 9,229,825
<DEPOSITS> 6,984,644 6,984,64
<SHORT-TERM> 1,161,634 1,161,634
<LIABILITIES-OTHER> 147,942 147,942
<LONG-TERM> 163,222 163,222
<COMMON> 150,802 150,802
0 0
1,437 1,437
<OTHER-SE> 620,142 620,142
<TOTAL-LIABILITIES-AND-EQUITY> 9,229,825 9,229,825
<INTEREST-LOAN> 145,572 281,273
<INTEREST-INVEST> 29,318 64,452
<INTEREST-OTHER> 121 477
<INTEREST-TOTAL> 175,011 346,202
<INTEREST-DEPOSIT> 63,474 126,211
<INTEREST-EXPENSE> 82,411 162,854
<INTEREST-INCOME-NET> 92,600 183,348
<LOAN-LOSSES> 6,924 12,153
<SECURITIES-GAINS> (98) 1,184
<EXPENSE-OTHER> 68,519 138,074
<INCOME-PRETAX> 50,669 99,827
<INCOME-PRE-EXTRAORDINARY> 50,669 99,827
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 33,770 66,536
<EPS-PRIMARY> 1.12 2.21
<EPS-DILUTED> 1.12 2.21
<YIELD-ACTUAL> 8.37 8.22
<LOANS-NON> 33,823 33,823
<LOANS-PAST> 6,556 6,556
<LOANS-TROUBLED> 33 33
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 99,298 95,979
<CHARGE-OFFS> 7,804 14,077
<RECOVERIES> 4,621 8,984
<ALLOWANCE-CLOSE> 103,039 103,039
<ALLOWANCE-DOMESTIC> 103,039 103,039
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
