<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1996
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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<PAGE>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Third Quarter Year through September 30,
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Net income...............................$ 38,217 $ 34,197 11.8 % $ 116,115 $ 100,733 15.3 %
Per share:
Primary earnings.......................$ 1.30 $ 1.14 14.0 % $ 3.92 $ 3.35 17.0 %
Fully diluted earnings................. 1.30 1.14 14.0 3.92 3.34 17.4
Common dividends declared.............. 0.47 0.40 17.5 1.41 1.20 17.5
Preferred dividends declared........... -- 1.50 -- 3.00 4.50 (33.3)
Book value per common share............ 28.85 26.35 9.5 28.85 26.35 9.5
Market value per common share.......... 85.13 53.50 59.1 85.13 53.50 59.1
Average balances:
Total assets...........................$ 9,667,317 $ 9,507,859 1.7 % $ 9,642,508 $ 9,362,910 3.0 %
Earning assets......................... 8,833,357 8,638,367 2.3 8,745,795 8,544,335 2.4
Loans, net of unearned interest........ 7,331,866 6,793,289 7.9 7,162,514 6,576,855 8.9
Deposits............................... 7,634,497 7,482,081 2.0 7,621,182 7,237,600 5.3
Total shareholders' equity............. 837,283 788,224 6.2 828,924 767,994 7.9
Ratios:
Return on average assets............... 1.57 % 1.43 % 1.61 % 1.44 %
Return on average equity............... 18.16 17.21 18.71 17.54
Average total shareholders' equity
to average total assets.............. 8.66 8.29 8.60 8.20
Risk-based capital ratios:
Tier 1............................... 7.66 7.73 7.66 7.73
Total................................ 10.74 11.01 10.74 11.01
Leverage - average assets(a)........... 6.57 6.10 6.57 6.10
Net interest margin.................... 4.91 4.53 4.73 4.41
Noninterest expense to net revenue..... 53.49 54.22 52.43 54.64
Noninterest income as a percent
of net revenue....................... 29.06 24.70 29.00 25.89
(a) - defined by regulatory authorities as tier 1 equity to the current quarters adjusted average assets
</TABLE>
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<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 September 30, 1996, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1996 and 1995, and the condensed
consolidated statements of changes in shareholders' equity and cash flows for
the nine-month periods ended September 30, 1996 and 1995. 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, 1995 (not presented herein), and, in our report dated
January 10, 1996, 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, 1995, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
October 9, 1996
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS:
Cash and Due From Banks.............................$ 455,536 $ 463,693
Money Market Investments............................ 25,100 22,500
Investment Securities:
Available-for-Sale................................ 1,268,031 1,517,868
Held-to-Maturity(market value of $176,557 at
September 30, 1996 and $186,064 at December 31,
1995............................................ 176,897 184,687
Total Securities.................................. 1,444,928 1,702,555
Loans:
Commercial Loans.................................. 2,476,379 2,234,847
Real Estate Loans................................. 2,605,030 2,576,186
Retail Loans...................................... 2,538,258 2,213,036
Total Loans..................................... 7,619,667 7,024,069
Less: Unearned Interest......................... 118,206 98,288
7,501,461 6,925,781
Allowance for Loan Losses................. 116,557 106,909
Net Loans....................................... 7,384,904 6,818,872
Premises and Equipment.............................. 134,516 134,386
Acceptances - Customers' Liability.................. 18,482 20,965
Other Assets........................................ 411,130 410,361
Total Assets....................................$ 9,874,596 $ 9,573,332
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits......................$ 1,460,994 $ 1,371,888
Interest-Bearing Deposits......................... 6,339,440 6,322,110
Total Deposits................................ 7,800,434 7,693,998
Short-term Borrowings............................... 908,499 735,016
Long-term Debt...................................... 148,556 161,190
Acceptances Outstanding............................. 18,482 20,965
Other Liabilities................................... 157,979 141,986
Total Liabilities............................... 9,033,950 8,753,155
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - None at September 30, 1996
and 3,387 at December 31, 1995.................. -- 281
Common Stock:
Shares Authorized - 100,000,000
Shares Issued - 30,160,458 at September 30, 1996
and at December 31, 1995........................ 150,802 150,802
Surplus............................................. 76,111 76,937
Retained Earnings................................... 673,793 599,005
Treasury Stock, at cost - 1,024,287 shares at
September 30, 1996 and 326,870 at December 31,
1995.............................................. (60,438) (12,805)
Net Unrealized Gain/(Loss) on Available-for-Sale
Securities........................................ 378 5,957
Total Shareholders' Equity...................... 840,646 820,177
Total Liabilities and Shareholders' Equity......$ 9,874,596 $ 9,573,332
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in thousands, except per share data)
Third Quarter Nine Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans..............$161,646 $151,241 $469,401 $432,514
Interest on Investment Securities:
Taxable............................... 23,360 30,113 73,029 94,186
Non-Taxable........................... 801 143 2,263 522
Interest on Money Market Investments.... 361 182 780 659
Total Interest Income................. 186,168 181,679 545,473 527,881
INTEREST EXPENSE:
Interest on Deposits.................... 65,357 69,611 197,143 195,822
Interest on Short-Term Borrowings....... 10,529 12,370 31,928 43,501
Interest on Long-Term Debt.............. 2,560 2,815 8,764 8,327
Total Interest Expense................ 78,446 84,796 237,835 247,650
Net Interest Income................. 107,722 96,883 307,638 280,231
Provision for Loan Losses............... 12,100 7,288 29,623 19,441
Net Interest Income after
Provision for Loan Losses......... 95,622 89,595 278,015 260,790
NONINTEREST INCOME:
Trust Income............................ 11,736 10,602 34,533 30,616
Service Charges on Deposits............. 14,164 11,074 40,830 32,013
Other Service Charges and Fees.......... 13,299 10,309 36,822 29,336
Investment Securities Gains/(Losses)-Net (2) 3 (6) 1,187
All Other Income........................ 5,256 69 14,469 5,611
Total Noninterest Income.............. 44,453 32,057 126,648 98,763
NONINTEREST EXPENSE:
Salaries................................ 30,376 29,092 90,418 83,537
Pension and Other Employee Benefits..... 4,369 4,588 14,577 14,740
Equipment Expense....................... 4,403 3,964 12,752 11,858
Occupancy Expense - Net................. 5,693 5,429 16,152 15,790
All Other Expense....................... 31,981 27,301 90,075 82,523
76,822 70,374 223,974 208,448
SAIF Assessment......................... 5,000 -- 5,000 --
Total Noninterest Expense............. 81,822 70,374 228,974 208,448
INCOME BEFORE TAX....................... 58,253 51,278 175,689 151,105
Income Tax.............................. 20,036 17,081 59,574 50,372
NET INCOME..............................$ 38,217 $ 34,197 $116,115 $100,733
PER SHARE:
Primary Earnings........................$ 1.30 $ 1.14 $ 3.92 $ 3.35
Fully Diluted Earnings.................. 1.30 1.14 3.92 3.34
Common Stock Cash Dividends Declared.... 0.47 0.40 1.41 1.20
Preferred Stock Cash Dividends Declared. -- 1.50 3.00 4.50
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Series B Unrealized
Preferred Common Retained Treasury Gain/(Loss) Total
Stock Stock Surplus Earnings Stock on Securitie Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 2,466 $ 150,529 $ 78,037 $ 510,268 $ (9,445) $ (13,637) $ 718,218
Net income................. 100,733 100,733
Cash dividends declared
on common stock........... (35,918) (35,918)
Cash dividends declared
on Series B Preferred
Stock..................... (70) (70)
Issuance of common stock
and treasury shares....... 273 800 2,301 3,374
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... (2,103) (2,727) 4,829 (1)
Purchase of treasury
stock..................... (9,363) (9,363)
Shares reserved to meet
deferred compensation
obligations............... 982 (46) 936
Change in net unrealized
gain/(loss) on securities
available for sale........ 8,986 8,986
Balance, September 30, 1995 $ 363 $ 150,802 $ 77,092 $ 575,013 $ (11,724) $ (4,651) $ 786,895
Balance, January 1, 1996 $ 281 $ 150,802 $ 76,937 $ 599,005 $ (12,805) $ 5,957 $ 820,177
Net income................. 116,115 116,115
Cash dividends declared
on common stock........... (41,322) (41,322)
Cash dividends declared
on Series B Preferred
Stock..................... (5) (5)
Issuance of common stock
and treasury shares....... (2,056) 8,838 6,782
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... (281) (643) 924 --
Purchase of treasury
stock..................... (57,199) (57,199)
Shares reserved to meet
deferred compensation
obligations............... 1,599 (196) 1,403
Amortization of stock
awards granted............ 274 274
Change in net unrealized
gain/(loss) on securities
available-for-sale........ (5,579) (5,579)
Balance, September 30, 1996 $ -- $ 150,802 $ 76,111 $ 673,793 $ (60,438) $ 378 $ 840,646
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 116,115 $ 100,733
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 28,576 23,994
Provision for loan losses............................ 29,623 19,441
Provision for deferred taxes......................... (9,958) 11,918
(Gain)/loss on sale of premises and equipment - net.. (150) (209)
(Gain)/loss on sale of securities - net.............. 6 (1,187)
(Gain)/loss on sale of residential real estate loans. (1,637) 3,206
Proceeds from sale of mortgage loans ................ 254,820 113,738
Mortgage Loans originated for sale on secondary
market............................................. (225,374) (138,564)
Net change in other assets........................... (5,583) (91,039)
Net change in other liabilities...................... 21,950 30,087
Total adjustments.................................. 92,273 (28,615)
Net cash provided by operating activities.......... 208,388 72,118
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities.. 42,182 150,838
Proceeds from maturities of available-for-sale securities 247,338 104,663
Proceeds from sales of available-for-sale securities..... 651 422,791
Purchase of held-to-maturity securities.................. (34,583) (39,551)
Purchase of available-for-sale securities................ (5,217) (168,729)
Net change in loans...................................... (617,174) (652,796)
Proceeds from sales of loans............................. 14,535 13,483
Proceeds from sales of premises and equipment............ 936 1,844
Purchase of premises and equipment....................... (11,326) (13,161)
Net change due to acquisition of branches................ 32,513 568,488
Net cash provided by/(used in) investing activities.... (330,145) 387,870
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits................................... 44,089 (391,614)
Net change in short-term borrowings...................... 173,483 (29,585)
Principal payments on long-term debt..................... (12,780) (5,470)
- -
Proceeds from issuance of common stock................... 6,782 3,373
Purchase of treasury stock............................... (57,199) (9,363)
Shares reserved to meet deferred compensation obligations 1,403 936
Dividends paid........................................... (39,578) (35,918)
Net cash provided by/(used in) financing activities.... 116,200 (467,641)
Net change in cash and cash equivalents.................. (5,557) (7,653)
Cash and cash equivalents at beginning of year........... 486,193 486,112
Cash and cash equivalents at September 30................$ 480,636 $ 478,459
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for nine months ended September 30 1996 1995
Interest...............................................$ 248,286 $ 234,509
Income Taxes........................................... 29,633 32,584
Noncash transfer of loans to other real estate owned..... 1,162 1,238
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<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, 1995, filed with the
Securities and Exchange Commission.
These condensed consolidated financial statements include the accounts of the
Corporation and all of its subsidiaries and reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for the periods reported. All such adjustments are of a normal recurring
nature.
Note 2. Investment Securities
The following table summarizes unrealized gains and losses for held-to-maturity
and available-for-sale securities at September 30, 1996 and December 31, 1995.
(Dollars are in thousands)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
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
Mortgage-backed
securities $ 118,747 $ -- $ 953 $ 117,794 $ 144,701 $ -- $ 1,118 $ 143,583
Obligations of state and
political subdivisions 58,150 1,530 917 58,763 39,986 2,500 5 42,481
Other debt securities -- -- -- -- -- -- -- --
Total held-to-
maturity securities $ 176,897 $ 1,530 $ 1,870 $ 176,557 $ 184,687 $ 2,500 $ 1,123 $ 186,064
Available-for-Sale
U.S. Treasuries and
agencies $ 17,160 $ 92 $ 22 $ 17,230 $ 18,933 $ 419 $ 4 $ 19,348
Mortgage-backed
securities 1,201,323 12,169 11,660 1,201,832 1,449,217 14,896 6,021 1,458,092
Other debt securities 1,435 3 1 1,437 1,435 9 1 1,443
Federal Reserve/FHLB
stock and other
equity securities 47,532 -- -- 47,532 38,985 -- -- 38,985
Total available-for-
sale securities $1,267,450 $12,264 $11,683 $1,268,031 $1,508,570 $15,324 $ 6,026 $1,517,868
</TABLE>
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<PAGE>
As of September 30, 1996 the Corporation reported a net unrealized gain of
$581,000 for available-for-sale securities. For the first nine months of 1996,
the after-tax net unrealized gain/(loss) reported as a separate component of
equity changed from an unrealized gain of $5.9 million to an unrealized gain of
$378,000, decreasing shareholders' equity $5.6 million.
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at September 30, 1996.
(Dollars in thousands)
Amortized Fair
Held-to-Maturity Cost Value
One year or less $ 57,737 $ 57,683
After one year through five years 97,005 96,495
After five years through ten years 6,661 6,728
After ten years 15,494 15,651
Total $ 176,897 $ 176,557
Available-for-Sale
One year or less $ 304,497 $ 304,653
After one year through five years 718,029 718,354
After five years through ten years 153,985 154,059
After ten years 43,407 43,433
Total $ 1,219,918 $ 1,220,499
Note: Maturity information related to mortgage-backed securities included above
is presented based upon weighted average maturities anticipating future
prepayments.
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<PAGE>
Note 3. Loans
The following table summarizes the composition of the loan portfolio, net of
unearned interest, as of September 30, 1996 and December 31, 1995. (Dollars
are in thousands)
September 30, December 31,
1996 1995
Commercial loans:
Corporate loans $1,859,092 $1,697,350
Asset-based lending 300,104 220,346
Commercial leasing 252,934 240,699
Industrial revenue bonds 26,626 34,482
Total commercial loans 2,438,756 2,192,877
Real estate loans:
Residential mortgage 1,210,208 1,243,718
Commercial mortgage 1,111,691 1,082,001
Construction and land development 283,131 250,467
Total real estate loans 2,605,030 2,576,186
Retail loans:
Installment 1,489,163 1,400,362
Credit cards 392,029 338,138
Retail leasing 576,483 418,218
Total retail loans 2,457,675 2,156,718
Total loans, net of unearned interest $7,501,461 $6,925,781
Note 4. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses is shown in the
following table. (Dollars are in thousands)
Nine Months Ended Year Ended
September 30, December 31,
1996 1995 1995
Balance - beginning of period $ 106,909 $ 95,979 $ 95,979
Loans charged-off (30,614) (20,764) (28,248)
Recoveries on loans previously charged-off 10,639 11,363 14,077
Net charge-offs (19,975) (9,401) (14,171)
Provision charged to earnings 29,623 19,441 25,101
Balance - end of period $ 116,557 $ 106,019 $ 106,909
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<PAGE>
Note 5. Impaired Loans
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at September 30, 1996 and December 31, 1995. (Dollars
are in thousands)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
<S> <C> <C> <C> <C>
Impaired Loans:
Valuation allowance required $ 8,503 $ 4,338 $ 15,688 $ 3,922
No valuation allowance required 27,289 -- 14,171 --
Total impaired loans $ 35,792 $ 4,338 $ 29,859 $ 3,922
</TABLE>
The average recorded investment in impaired loans for the nine months ended
September 30, 1996 was $32 million, compared to $28 million for the same period
in 1995. 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
1996 or 1995.
Note 6. Deposits
The following table summarizes the composition of deposits of the Corporation
as of September 30, 1996 and December 31, 1995. (Dollars are in thousands)
September 30, December 31,
1996 1995
Noninterest-bearing deposits $1,460,994 $1,371,888
Interest-bearing deposits:
Savings 934,273 975,143
NOW accounts 192,819 1,039,213
Money market deposit accounts 1,796,923 895,956
Time deposits $100,000 and over - domestic 407,714 409,515
Foreign deposits $100,000 and over 40,179 44,421
All other deposits 2,967,532 2,957,862
Total interest-bearing deposits 6,339,440 6,322,110
Total Deposits $7,800,434 $7,693,998
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<PAGE>
Note 7. Income Tax
The components of the net deferred tax liability included in the Corporation's
consolidated balance sheets at September 30, 1996 and December 31, 1995 are
shown in the following table. (Dollars are in thousands)
September 30, December 31,
1996 1995
Allowance for loan losses $ 40,942 $ 37,567
Deferred compensation 3,289 2,522
Intangible asset amortization 1,797 845
Deferred loan fees and costs 1,288 1,749
Other 3,077 3,011
Total deferred tax asset 50,393 45,694
Leased assets (72,284) (55,343)
Fixed asset depreciation (5,379) (5,379)
Pension liabilities (5,372) (4,945)
Unrealized gain on securities (203) (3,208)
FHLB stock dividends (1,556) (1,038)
Purchase accounting/intangible assets (356) (580)
Other (1,780) (1,780)
Total deferred tax liability (86,930) (72,273)
Net deferred tax liability $ (36,537) $(26,579)
The Corporation has not recorded a valuation reserve related to deferred tax
assets.
Note 8. Noninterest Income and Other Noninterest Expense
The following are included in other service charges and fees, and all other
income for the three months and nine months ended September 30, 1996 and 1995.
(Dollars are in thousands)
Three Months Nine Months
1996 1995 1996 1995
Credit card fees $ 4,966 $ 3,904 $13,545 $10,944
ATM fees 2,802 2,073 7,128 5,574
Mortgage banking income 1,743 (2,195) 5,555 (330)
The following are included in all other expense for the three months and nine
months ended September 30, 1996 and 1995.
Three Months Nine Months
1996 1995 1996 1995
Amortization of intangible assets $ 4,414 $ 3,939 $12,753 $ 9,878
Outside processing services 3,038 2,563 8,596 7,648
State taxes 2,823 2,239 8,222 6,703
Marketing 2,238 3,074 6,727 7,099
-13-
<PAGE>
Note 9. Mortgage Servicing Rights
Effective January 1, 1996, the Corporation adopted 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 the
Corporation to capitalize mortgage servicing rights on originated mortgage
loans when the loans are sold or securitized and servicing is retained. When a
mortgage loan is purchased or originated to be sold or securitized with
servicing retained, the total cost of the loan is allocated to the mortgage
servicing right and the loan based on their relative fair values. Under SFAS
No. 122, capitalized servicing rights are assessed for impairment based on the
fair value of those rights. In addition, capitalized mortgage servicing rights
must be stratified based on one or more predominant risk characteristics of the
underlying loans and impairment is recognized through a valuation allowance for
each impaired stratum.
The value of pre-SFAS No. 122 purchased mortgage servicing rights (PMSRs) was
established using the amount of consideration paid, which is based on current
market conditions at the time the loan was purchased. Beginning in 1996, the
value of servicing rights is established based on either the amount of
consideration paid for loans purchased or pricing determined using a valuation
model which calculates the present value of estimated future cash flows based
on the market rate at the time of the loan for originated loans. Mortgage
servicing rights are amortized as noninterest expense over the period of their
estimated lives in proportion with estimated net servicing income.
In estimating fair value for the purposes of impairment evaluation and
measurement, mortgage servicing rights capitalized in 1996 are stratified based
on fixed and variable rate products by 200 basis point rate bands, while
pre-SFAS No. 122 PMSRs are measured separately. Quarterly impairment testing
is performed using a discounted cash flow methodology assuming current national
prepayment speeds and a current discount rate. At September 30, 1996 an 8.0
percent discount rate was assumed. Impairment will be recognized through a
valuation allowance for each impaired stratum.
The following is a summary of mortgage servicing rights at September 30, 1996.
(Dollars are in thousands)
Mortgage Servicing Rights:
Balance at December 31, 1995 $ 6,819
Amount capitalized 2,844
Amortization (1,075)
Balance at September 30, 1996 $ 8,588
Fair Value at September 30, 1996 $ 11,269
There was no valuation allowance established related to mortgage servicing
rights at September 30, 1996.
-14-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Net income of Star Banc Corporation ("the Corporation") for the quarter
ended September 30, 1996, was $38,217,000, an 11.8 percent increase over the
third quarter of 1995. Net income for the first nine months of 1996 was
$116,115,000, a 15.3 percent increase over 1995. Primary and fully diluted
earnings per share, were both $1.30 for the third quarter of 1996, compared to
$1.14 for the third quarter of 1995. For the nine months ended September 30,
1996, earnings per share were $3.92 on both a primary and fully diluted basis,
compared to primary earnings per share of $3.35 and fully diluted earnings per
share of $3.34 for the same period of 1995.
On September 30, 1996, a special one-time assessment to recapitalize the
Savings Association Insurance Fund (SAIF) was signed into law. The
Corporation's pretax SAIF assessment of $5 million was recorded at the end of
the third quarter of 1996, and reduced fully diluted earnings per share in the
third quarter by $0.11. Excluding this one-time assessment, net income of the
Corporation for the quarter ended September 30, 1996, was $41,467,000, a 21.3
percent increase compared to the same period in 1995. On the same basis, net
income for the nine months ended September 30, 1996 was $119,365,000, a 18.5
percent increase compared to the same period in 1995. Primary and fully
diluted earnings per share, excluding the SAIF assessment, were both $1.41 for
the third quarter of 1996, compared to $1.14 for the third quarter of 1995.
This represents an increase of 23.7 percent for both primary and fully diluted
earnings per share. For the nine months ended September 30, 1996, earnings per
share were $4.03 on both a primary and fully diluted basis, excluding the SAIF
assessment, an increase of 20.7 percent compared to the same period of 1995.
Earnings results for the third quarter of 1996 were a result of an 17.9
percent increase in tax equivalized net revenues, driven by a 38 basis point
increase in net interest margin, and a 38.7 percent increase in noninterest
income. The increase in noninterest income was a result of double digit
percentage increases in all major lines of business including trust, retail
deposits, credit cards, international, ATM service, cash management and
mortgage banking.
Excluding the $5 million SAIF assessment, return on average assets, was 1.71
percent for the third quarter of 1996, and 1.65 percent for the nine months
ended September 30, 1996, compared to 1.43 percent and 1.44 percent,
respectively, for the same periods in 1995. On the same basis, return on
average equity increased to 19.70 percent for the third quarter and 19.24
percent for the nine months ended September 30, 1996, compared to 17.21 percent
and 17.54 percent for the same periods in 1995.
Financial Condition
Total assets at September 30, 1996 amounted to $9.87 billion, up from $9.57
billion at December 31, 1995. Total loans, net of unearned interest, increased
to $7.50 billion at September 30, 1996, compared to $6.93 billion at December
31, 1995. The Corporation experienced increases in loan volumes in most
lending areas for the first nine months of 1996, with retail loans up $301
million or 14.0 percent and commercial loans and leasing up $246 million or
11.2 percent. Residential mortgage loans declined $34 million or 2.7 percent
in the first nine months of 1996, as the Corporation continued to sell a larger
percentage of loan originations in the secondary market and used the proceeds
from paydowns and sales of residential mortgages to help fund growth in other
loan areas.
-15-
<PAGE>
Investment securities declined $258 million to $1.44 billion at September
30, 1996, compared to $1.70 billion at December 31, 1995. This decrease was
due to scheduled maturities and paydowns on mortgage- backed securities. As of
September 30, 1996, the Corporation's investment securities portfolio included
$1.27 billion in securities classified as available-for-sale, a decline of $250
million from December 31, 1995, and $177 million classified as
held-to-maturity. At September 30, 1996, the Corporation reported a net
unrealized gain of $581 thousand on available-for-sale securities, with an
offsetting increase to shareholders' equity of $378 thousand (net of tax). For
the first nine months ended September 30, 1996, the after-tax net unrealized
gain/(loss) reported as a separate component of equity changed from an
unrealized gain of $5.9 million to an unrealized gain of $378 thousand,
decreasing equity $5.6 million from December 31, 1995.
Deposits increased $106 million to $7.80 billion at September 30, 1996, from
$7.69 billion at December 31, 1995. This was due primarily to an $89 million
increase in demand deposits in the first nine months of 1996. Interest-bearing
deposits were up slightly in the first nine months of 1996 due to a $10
million increase in small CDs. The Corporation has also seen a shift in
customer deposits from savings accounts into tiered rate money market accounts.
Short-term borrowings increased $173 million to $908 million at September
30, 1996. This increase was the result of loan growth exceeding increases in
deposits and maturities and paydowns of securities.
Results of Operations
Net interest income, the Corporation's principal source of earnings,
increased $10.8 million or 11.2 percent in the third quarter and $27.4 million
or 9.8 percent for the first nine months of 1996, compared to the same periods
in 1995. The increase in 1996 was due to a change in the mix of earning
assets, as loan growth has been funded in part from sales, maturities and
principal pay downs in the investment portfolio. In addition, growth in demand
deposits reduced the cost of funding sources. Average loans were up $586
million or 8.9 percent, while average investment securities declined $389
million or 19.9 percent for the first nine months of 1996, compared to the same
period in 1995.
Net interest margin increased 38 basis points to 4.91 percent in the third
quarter of 1996, compared to 4.53 percent for the same period in 1995. For the
nine months ended September 30, 1996, net interest margin has increased 32
basis points to 4.73 percent, as compared to the same period in 1995. The
increase in net interest margin for 1996 was the result of increases in yields
on earning assets, primarily as a result of the change in mix of earning assets
described above, in addition to declines in the cost of supporting funds from
the improved mix of funding sources and lower reserves. Tables 1 and 2 provide
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 an
increase in the provision for loan losses of $4.8 million in the third quarter
and $10.2 million for the nine months ended September 30, 1996, compared to the
same periods in 1995. As discussed further in the Asset Quality section, the
provision has trended upward over the last eighteen months due to the increases
in loans outstanding and consumer loan charge-offs, in addition to an overall
change in loan mix toward consumer loans. Additionally, recoveries have been
lower in the first nine months of 1996, compared to the prior year.
-16-
<PAGE>
Noninterest income continues to be a growing source of revenue for the
Corporation, representing 29.1 percent of tax-equivalent net revenues in the
third quarter and 29.0 percent of net revenues for the nine months ended
September 30, 1996, compared to 24.7 percent and 25.9 percent, respectively, in
the same periods in 1995. Noninterest income increased 38.7 percent to $44.5
million in the third quarter of 1996, compared to $32.1 million for the third
quarter of 1995. For the nine months ended September 30, 1996, noninterest
income totaled $126.6 million, an increase of 28.2 percent, as compared to the
first nine months of 1995. Contributing to the improvement in noninterest
income in the third quarter was a $3.1 million increase in service charges on
deposits, due in part to higher retail and corporate banking fees and higher
activity levels, and a $1.1 million increase in trust income. Included in the
third quarter of 1995 was a $2.8 million loss related to the transfer of
residential loans into the held-for-sale category. Excluding this loss,
mortgage banking income increased $1.1 million in the third quarter of 1996.
In addition, fees from ATM services and credit cards increased, $729,000 and
$1.1 million, respectively, in the third quarter of 1996, as compared to 1995.
Effective January 1, 1996 the Corporation adopted 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 the servicing is retained. The adoption of SFAS No. 122 has resulted in
$1.8 million in additional mortgage banking income for the first nine months of
1996.
Noninterest expense, excluding the $5.0 million one-time SAIF assessment,
totaled $76.8 million in the third quarter of 1996, a 9.2 percent increase from
$70.4 million for the same period of 1995. For the nine months ended September
30, 1996, noninterest expenses were up 7.4 percent to $224.0 million.
Noninterest expenses are up in 1996 due in part to recent branch acquisitions
in Columbus, Ohio (Household Bank offices) and Connersville, Indiana (National
City Bank offices). Increases related to these acquisitions include salaries,
occupancy, equipment, supplies and amortization of intangibles. Increases were
also incurred in state taxes, professional fees and outside processing due to
higher credit card and ATM volumes.
The Corporation's noninterest expense ratio, excluding the SAIF assessment,
declined in the third quarter of 1996 to 50.2 percent, compared to 54.2 percent
for the same period of 1995. For the nine months ended September 30, 1996, the
noninterest expense ratio declined 336 basis points to 51.3 percent, compared
to 54.6 percent in 1995.
The Corporation's effective tax rates for the third quarter and nine months
ended September 30, 1996, were 34.4 percent and 33.9 percent, respectively, up
slightly from 33.3 percent for the same periods in 1995.
Asset Quality
As of September 30, 1996, the allowance for loan losses was $116.6 million
or 1.55 percent of loans, net of unearned interest. This compares to an
allowance of $106.9 million or 1.54 percent of loans, net of unearned interest,
at December 31, 1995. The allowance as a percentage of nonperforming loans
decreased slightly to 271 percent at September 30, 1996, compared to 289
percent at December 31, 1995.
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Third Quarter, 1996 Third Quarter, 1995
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$2,340,167 $ 51,105 8.69 % $2,173,825 $ 50,014 9.14 %
Real estate loans.................... 2,597,646 55,343 8.52 2,598,568 55,555 8.54
Retail loans......................... 2,394,053 55,684 9.27 2,020,896 46,462 9.15
Total loans..................... 7,331,866 162,132 8.82 6,793,289 152,031 8.91
Taxable investment securities........ 1,422,619 23,360 6.57 1,823,326 30,112 6.60
Non-taxable investment securities.... 52,718 1,107 8.37 9,725 203 8.36
Money market investments............. 26,154 361 5.49 12,027 182 6.01
Total interest-earning assets... 8,833,357 $ 186,960 8.44 % 8,638,367 $ 182,528 8.42 %
Cash and due from banks.............. 395,109 421,757
Allowance for loan losses............ (114,978) (105,429)
Other assets......................... 553,829 553,164
Total assets....................$9,667,317 $9,507,859
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$1,129,414 $ 7,063 2.49 % $1,979,896 $ 11,225 2.25 %
Money market deposit accounts........ 1,816,991 12,914 2.83 845,441 8,163 3.83
Time deposits $100,000 and over...... 413,269 5,569 5.36 437,488 6,485 5.88
Time deposits under $100,000......... 2,927,316 39,811 5.41 3,004,167 43,739 5.78
Short-term borrowings................ 891,448 10,529 4.70 921,731 12,370 5.32
Long-term debt....................... 152,351 2,560 6.72 161,418 2,815 6.92
Total interest-bearing
liabilities................... 7,330,789 $ 78,446 4.26 % 7,350,141 $ 84,797 4.58 %
Noninterest-bearing deposits......... 1,347,507 1,215,089
Other liabilities.................... 151,738 154,405
Shareholders' equity................. 837,283 788,224
Total liabilities and
shareholders' equity..........$9,667,317 $9,507,859
Net interest margin.................. 4.91 % 4.53 %
Interest rate spread................. 4.18 3.84
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. The total of nonaccruing
is included in average amounts outstanding.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Year through September 30, 1996 Year through September 30, 1995
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$2,291,029 $ 149,173 8.70 % $2,143,588 $ 148,133 9.24 %
Real estate loans.................... 2,583,915 163,847 8.46 2,507,483 157,709 8.39
Retail loans......................... 2,287,570 157,752 9.20 1,925,784 128,935 8.94
Total loans..................... 7,162,514 470,772 8.77 6,576,855 434,777 8.83
Taxable investment securities........ 1,514,115 73,029 6.43 1,939,150 94,186 6.48
Non-taxable investment securities.... 50,568 3,334 8.80 14,483 786 7.24
Money market investments............. 18,598 780 5.60 13,847 659 6.36
Total interest-earning assets... 8,745,795 $ 547,915 8.36 % 8,544,335 $ 530,408 8.29 %
Cash and due from banks.............. 452,104 404,716
Allowance for loan losses............ (112,379) (102,612)
Other assets......................... 556,988 516,471
Total assets....................$9,642,508 $9,362,910
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$1,669,604 $ 28,361 2.27 % $1,961,226 $ 32,762 2.23 %
Money market deposit accounts........ 1,288,494 32,105 3.33 728,907 19,550 3.59
Time deposits $100,000 and over...... 422,553 17,214 5.44 488,670 21,444 5.87
Time deposits under $100,000......... 2,914,887 119,463 5.47 2,914,644 122,066 5.60
Short-term borrowings................ 885,787 31,928 4.81 1,056,153 43,501 5.51
Long-term debt....................... 158,257 8,764 7.38 164,671 8,327 6.76
Total interest-bearing
liabilities................... 7,339,582 $ 237,835 4.33 % 7,314,271 $ 247,650 4.53 %
Noninterest-bearing deposits......... 1,325,644 1,144,153
Other liabilities.................... 148,358 136,492
Shareholders' equity................. 828,924 767,994
Total liabilities and
shareholders' equity..........$9,642,508 $9,362,910
Net interest margin.................. 4.73 % 4.41 %
Interest rate spread................. 4.03 3.76
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. The total of nonaccruing
is included in average amounts outstanding.
</TABLE>
-19-
<PAGE>
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 $8.1
million in the third quarter of 1996, a $3.8 million increase over the third
quarter of 1995. Net charge-offs for the nine months ended September 30, 1996,
were $20.0 million, compared to $9.4 million for the same period of 1995.
Annualized net charge-offs as a percentage of average outstanding loans were
also up, increasing to 0.44 percent for the third quarter of 1996, compared to
0.25 percent for the same period in 1995.
The amount of net charge-offs and percentage of net charge-offs to average
loans were at historically low levels in the first nine months of 1995 and have
trended upward over the last eighteen months primarily in the retail loan area.
The increase in net charge-offs has also been a result of higher levels of
loans outstanding and a change in overall loan mix toward consumer loans.
Consistent with industry trends, consumer loan charge-offs have increased in
recent quarters. Net charge-offs for retail loans increased $2.6 million in
the third quarter and $8.5 million for the first nine months of 1996, as
compared to the same periods in 1995. This is due primarily to increases in
net charge-offs on credit cards of $1.8 million in the third quarter and $5.4
million for the first nine months of 1996. The increase in credit card net
charge-offs is consistent with national trends, however, net charge-off levels
on credit cards for the Corporation have remained below national averages in
1996. Also contributing to the increase in credit card charge-offs are higher
loan volumes and an increase in customer base. Net charge-offs on commercial
loans were $3.1 million in the third quarter of 1996, up $1.2 million compared
to the third quarter of 1995.
As shown in Tables 4 and 5, nonperforming asset levels increased $8.2
million to $45.8 million at September 30, 1996, compared to $37.6 million at
September 30, 1995. Nonperforming assets were up $5.8 million compared to
December 31, 1995. Although nonperforming assets and nonperforming loans have
increased since the third quarter of 1995, they have not increased as rapidly
as net charge-offs since most retail loans are charged-off before becoming
classified as a nonperforming loan. The percentage of nonperforming loans to
end-of-period loans increased eight basis points to 0.57 percent, compared to
0.49 at September 30, 1995, and was up four basis points since December 31,
1995. Loans past-due 90 days or more and still accruing interest increased
$7.3 million in the first nine months of 1996, and $7.7 million compared to
September 30, 1995. These increases occurred primarily within the commercial
real estate and retail loan portfolios.
The specific valuation allowance recorded on impaired loans, as prescribed
by Statement of Financial Accounting Standards No. 114 (as amended by SFAS No.
118), is included in the total allowance for loan losses. In addition to the
valuation allowance on impaired loans, the adequacy of the total allowance for
loan losses is monitored on a continual basis and is based on management's
evaluation of several key factors: the quality of the current loan portfolio,
current economic conditions, evaluation of significant problem loans, an
analysis of periodic internal loan reviews, delinquency trends and ratios,
changes in the mix and levels of various loan types, historical charge-off and
recovery experience and other pertinent information. These estimates are
reviewed continually and, as adjustments become necessary, they are reported in
earnings in the period in which they become known. It is management's opinion
that the allowance for loan losses at September 30, 1996, was adequate to
absorb all anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at September 30, 1996, was $35.8
million, with a related valuation allowance (as calculated under SFAS No. 114)
of $4.3 million.
-20-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
For the Periods Ended September 30,
(Dollars in thousands)
Third Quarter Nine Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Average loans - net of unearned
interest....................... $ 7,331,866 $ 6,793,289 $ 7,162,514 $ 6,576,855
Allowance for loan losses:
Balance - beginning of period.. $ 112,585 $ 103,039 $ 106,909 $ 95,979
Charge-offs:
Commercial................... (4,152) (2,461) (10,948) (9,532)
Real estate.................. (188) (104) (815) (1,273)
Retail....................... (6,956) (4,122) (18,851) (9,959)
Total charge-offs.......... (11,296) (6,687) (30,614) (20,764)
Recoveries:
Commercial................... 1,098 569 4,341 4,959
Real estate.................. 70 68 504 1,011
Retail....................... 2,000 1,742 5,794 5,393
Total recoveries........... 3,168 2,379 10,639 11,363
Net charge-offs.......... (8,128) (4,308) (19,975) (9,401)
Provision charged to earnings.. 12,100 7,288 29,623 19,441
Balance - end of period........ $ 116,557 $ 106,019 $ 116,557 $ 106,019
Ratio of net charge-offs to average
loans - net of unearned interest 0.44% 0.25% 0.37% 0.19%
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 42,987 $ 36,875 $ 34,066
Loans which have been
renegotiated................. 81 87 89
Total nonperforming loans.... 43,068 36,962 34,155
Other real estate owned........ 2,685 3,006 3,484
Total nonperforming assets.... $ 45,753 $ 39,968 $ 37,639
Percentage of nonperforming
loans to loans* ............. 0.57% 0.53% 0.49%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.61% 0.58% 0.54%
Loans past due 90 days
or more...................... $ 15,035 $ 7,750 $ 7,358
* Net of unearned interest.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
September 30, 1996 December 31, 1995
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............. $25,963 $81 $26,044 1.19 % $2,035 $23,371 $87 $23,458 1.20 % $958
Commercial leasing.... 6,701 -- 6,701 2.65 -- 216 -- 216 0.09 --
Total commercial
loans............. 32,664 81 32,745 1.34 2,035 23,587 87 23,674 1.08 958
Real estate loans:
Residential........... 4,267 -- 4,267 0.35 2,671 5,618 -- 5,618 0.45 2,589
Commercial mortgage... 2,747 -- 2,747 0.25 2,477 5,722 -- 5,722 0.53 949
Construction/land
development......... -- -- -- -- 3,050 99 -- 99 0.04 433
Total real estate
loans............. 7,014 -- 7,014 0.27 8,198 11,439 -- 11,439 0.44 3,971
Retail loans:
Installment........... 1,750 -- 1,750 0.12 890 978 -- 978 0.07 962
Credit cards.......... 1,355 -- 1,355 0.35 3,783 743 -- 743 0.22 1,822
Retail leasing........ 204 -- 204 0.04 129 128 -- 128 0.03 37
Total retail loans.. 3,309 -- 3,309 0.13 4,802 1,849 -- 1,849 0.09 2,821
Total loans......... $42,987 $81 $43,068 0.57 % $15,035 $36,875 $87 $36,962 0.53 % $7,750
</TABLE>
-23-
<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 its banking subsidiary can borrow, subject to the Corporation's
ability to borrow funds in the capital markets in an efficient and cost
effective manner. Star Bank, N.A. (the Bank), is a member of the Federal Home
Loan Bank of Cincinnati and is able to issue national market retail and
institutional certificates of deposits as a funding source. 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 has maintained in the past year, a
presence in the national fed funds, repurchase agreement, certificate of
deposit and Eurodollar markets.
In the third quarter of 1995, the Corporation prepared a private placement
memorandum in order to issue commercial paper notes up to a maximum aggregate
amount of $150 million, with maturities of up to 270 days. The proceeds of
the notes from the commercial paper program are used for general corporate
purposes and to provide funding to Star Banc Finance, Inc. As of September 30,
1996, there was $109 million in commercial paper outstanding. The
Corporation's consolidated long-term debt, which currently consists of
subordinate notes, declined $12.5 million to $149 million at September 30,
1996. This decline was the result of the Corporation calling its senior debt
which was prepaid in July.
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. In January of 1996, the board of directors approved the
purchase of an additional two million shares under the buyback program over the
next three years. The repurchased shares are held as treasury shares for
reissue in connection with employee stock options and other corporate
purposes. Through September 30, 1996, the Corporation has repurchased a total
of 1,756,000 shares under the buyback program, of which 834,000 had not yet
been reissued.
Total shareholders' equity increased $20 million in the first nine months of
1996 to $841 million at September 30, 1996. The Corporation also raised its
quarterly dividend rate per common share from $0.40 in 1995 to $0.47 in 1996, a
17.5 percent increase.
The Corporation's tier 1 and total risk-based capital ratios at September
30, 1996 were 7.66 percent and 10.74 percent, respectively, well above the
regulatory defined minimum requirements of 4.0 percent for tier 1 capital to
risk-adjusted assets and 8.0 percent for total capital to risk-adjusted assets.
These compare to tier 1 and total ratios of 7.97 percent and 11.23 percent at
December 31, 1995. Regulatory authorities have also established a minimum
adjusted equity-to-average quarterly assets ("leverage") ratio of 3.00 percent.
As of September 30, 1996, the Corporation's leverage ratio was 6.57 percent,
up from 6.23 percent at December 31, 1995. The slight decreases in the
Corporation's tier 1 and total capital ratios in the first nine months of 1996
were due to a 9.7 percent increase in risk-adjusted assets, while tier 1 and
total equity increased at lower rates of 5.5 percent and 5.0 percent,
respectively. The lower rate of increase in tier 1 and total equity were the
result of a higher volume of buyback activity.
-24-
<PAGE>
As shown in the Condensed Consolidated Statements of Cash Flows, cash flows
provided by operating activities amounted to $208 million for the nine months
ended September 30, 1996, compared to $72 million for the same period in 1995.
The increase in 1996, was due in part to a $30 million decline in mortgage
loans held-for-sale in 1996, as compared to a $25 million increase in the first
nine months of 1995. Additionally, other assets increased in 1995, due
primarily to a $50 million investment in a bank owned life insurance plan.
Recently Issued Accounting Standards
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial-components approach that focuses
on control. SFAS No. 125 applies to transactions occurring after December 31,
1996. Management has not yet determined the impact of the adoption of SFAS
No. 125 on the financial statements of the Corporation.
-25-
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
(B) No Current Report on Form 8-K was filed by the Corporation
in the third quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
November 14, 1996 /s/ Jerry A. Grundhofer
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
November 14, 1996 /s/ David M. Moffett
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-26-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
For the Periods Ended September 30,
(Dollars in thousands except per share data)
Third Quarter Nine Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income......................$ 38,217 $ 34,197 $ 116,115 $ 100,733
Preferred dividends............. -- 7 6 70
Income available to common
shareholders..................$ 38,217 $ 34,190 $ 116,109 $ 100,663
Weighted average of common
stock equivalents.............. 29,372 30,052 29,596 30,031
Weighted average of preferred
stock convertible to common
stock equivalents............. -- 59 9 97
Weighted average of fully
diluted common stock
equivalents.................... 29,372 30,111 29,605 30,128
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents)..................$ 1.30 $ 1.14 $ 3.92 $ 3.35
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents).....$ 1.30 $ 1.14 $ 3.92 $ 3.34
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>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 455,536 455,536
<INT-BEARING-DEPOSITS> 100 100
<FED-FUNDS-SOLD> 25,000 25,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,268,031 1,268,031
<INVESTMENTS-CARRYING> 176,987 176,897
<INVESTMENTS-MARKET> 176,557 176,557
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<TOTAL-ASSETS> 9,874,596 9,874,596
<DEPOSITS> 7,800,434 7,800,434
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150,802 150,802
0 0
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<INTEREST-TOTAL> 186,168 545,473
<INTEREST-DEPOSIT> 65,357 197,143
<INTEREST-EXPENSE> 78,446 237,835
<INTEREST-INCOME-NET> 107,722 307,638
<LOAN-LOSSES> 12,100 29,623
<SECURITIES-GAINS> (2) (6)
<EXPENSE-OTHER> 81,822 228,974
<INCOME-PRETAX> 58,253 175,689
<INCOME-PRE-EXTRAORDINARY> 58,253 175,689
<EXTRAORDINARY> 0 0
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<NET-INCOME> 28,217 116,115
<EPS-PRIMARY> 1.30 3.92
<EPS-DILUTED> 1.30 3.92
<YIELD-ACTUAL> 8.44 8.36
<LOANS-NON> 42,987 42,987
<LOANS-PAST> 15,035 15,035
<LOANS-TROUBLED> 81 81
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<CHARGE-OFFS> 11,296 30,614
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