UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-7601
-----------------------------
STAR BANC CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0838189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
425 Walnut Street, Cincinnati, OH 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 632-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
29,212,249 common shares, par value $5, outstanding at July 31, 1996
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STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 1996
Page
Table of Contents Number
- -----------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights..........................................3
Report of Independent Public Accountants......................4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements.......5 - 8
Notes to Condensed Consolidated Financial
Statements.......................................9 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............15 - 24
Part II. Other Information:
Item 1. Legal Proceedings..................................none
Item 2. Changes in Securities..............................none
Item 3. Defaults Upon Senior Securities....................none
Item 4. Submission of Matters to a Vote of Security
Holders............................................none
Item 5. Other Information..................................none
Item 6. Exhibits and Reports on Form 8-K.....................25
Signatures...........................................................25
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
Second Quarter Year through June
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Net income..........................$ 39,770 $ 33,770 17.8 % $ 77,898 $ 66,536 17.1 %
Per share:
Primary earnings..................$ 1.34 $ 1.12 19.6 % $ 2.62 $ 2.21 18.6 %
Fully diluted earnings............ 1.34 1.12 19.6 2.62 2.21 18.6
Common stock dividends declared... 0.47 0.40 17.5 0.94 0.80 17.5
Preferred dividends declared...... 1.50 1.50 -- 3.00 3.00 --
Book value per common share....... 27.99 25.75 8.7 27.99 25.75 8.7
Market value per common share..... 67.38 46.00 46.5 67.38 46.00 46.5
Average balances:
Total assets......................$ 9,660,899 $ 9,205,663 4.9 % $ 9,629,967 $ 9,289,234 3.7 %
Earning assets.................... 8,739,604 8,411,133 3.9 8,701,533 8,496,540 2.4
Loans, net of unearned interest... 7,167,637 6,602,060 8.6 7,076,908 6,466,845 9.4
Deposits.......................... 7,604,713 6,999,418 8.6 7,614,449 7,113,334 7.0
Shareholders' equity.............. 831,229 769,377 8.0 824,699 757,711 8.8
Ratios:
Return on average assets......... 1.66 % 1.47 % 1.63 % 1.44 %
Return on average equity......... 19.24 17.61 19.00 17.71
Average shareholders' equity
to average assets.............. 8.60 8.36 8.56 8.16
Risk-based capital ratios:
Tier 1......................... 7.77 8.84 7.77 8.84
Total.......................... 10.92 12.21 10.92 12.21
Leverage......................... 6.44 6.84 6.44 6.84
Net interest margin.............. 4.69 4.44 4.64 4.35
Noninterest expense to net revenue. 51.85 53.96 51.86 54.85
Noninterest income as a percent
of net revenue................. 29.29 26.39 28.97 26.50
</TABLE>
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<TABLE>
<CAPTION>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
1996 1995
<S> <C> <C>
ASSETS:
Cash and Due From Banks..................................$ 411,398 $ 463,693
Money Market Investments.................................. 19,375 22,500
Investment Securities:
Available-for-Sale...................................... 1,323,776 1,517,868
Held-to-Maturity(market value of $174,713 at June 30,
1996 and $186,064 at December 31, 1995)............... 174,897 184,687
Total Securities........................................ 1,498,673 1,702,555
Loans:
Commercial Loans........................................ 2,367,829 2,234,847
Real Estate Loans....................................... 2,591,972 2,576,186
Retail Loans............................................ 2,390,276 2,213,036
Total Loans........................................... 7,350,077 7,024,069
Less: Unearned Interest............................... 107,560 98,288
7,242,517 6,925,781
Allowance for Loan Losses....................... 112,585 106,909
Net Loans............................................. 7,129,932 6,818,872
Premises and Equipment.................................... 133,463 134,386
Acceptances - Customers' Liability........................ 18,786 20,965
Other Assets.............................................. 401,176 410,361
Total Assets.........................................$ 9,612,803 $ 9,573,332
LIABILITIES:
Deposits:
Noninterest-Bearing Deposits...........................$ 1,359,912 $ 1,371,888
Interest-Bearing Deposits:
Savings and NOW....................................... 1,088,208 2,014,356
Time Deposits $100,000 and Over....................... 396,953 453,936
All Other Deposits.................................... 4,720,793 3,853,818
Total Deposits...................................... 7,565,866 7,693,998
Short-term Borrowings..................................... 914,885 735,016
Long-term Debt............................................ 161,287 161,190
Acceptances Outstanding................................... 18,786 20,965
Other Liabilities......................................... 132,867 141,986
Total Liabilities..................................... 8,793,691 8,753,155
SHAREHOLDERS' EQUITY:
Preferred Stock:
Shares Authorized - 1,000,000
Shares Outstanding - 301 at June 30, 1996
and 3,387 at December 31, 1995........................ 25 281
Common Stock:
Shares Authorized - 100,000,000
Shares Issued - 30,160,458 at June 30, 1996
and 30,160,458 at December 31, 1995................... 150,802 150,802
Surplus................................................... 76,052 76,937
Retained Earnings......................................... 649,273 599,005
Treasury Stock, at cost - 895,522 shares at June
30, 1996 and 326,870 at December 31, 1995............... (50,473) (12,805)
Net Unrealized Gain/(Loss) on Available-for-sale Securitie (6,567) 5,957
Total Shareholders' Equity............................ 819,112 820,177
Total Liabilities and Shareholders' Equity...........$ 9,612,803 $ 9,573,332
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
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans..............$155,598 $145,572 $307,755 $281,273
Interest on Investment Securities:
Taxable................................ 24,083 29,125 49,669 64,073
Non-Taxable............................ 742 193 1,462 379
Interest on Money Market Investments..... 197 121 419 477
Total Interest Income..................180,620 175,011 359,305 346,202
INTEREST EXPENSE:
Interest on Savings and NOW.............. 10,356 10,723 21,298 21,537
Interest on Time Deposits
$100,000 and Over...................... 5,573 6,510 11,645 14,959
Interest on Other Deposits............... 48,738 46,241 98,843 89,715
Interest on Short-Term Borrowings........ 10,965 15,967 21,399 31,131
Interest on Long-Term Debt............... 3,445 2,970 6,204 5,512
Total Interest Expense................. 79,077 82,411 159,389 162,854
Net Interest Income..................101,543 92,600 199,916 183,348
Provision for Loan Losses................ 8,700 6,924 17,523 12,153
Net Interest Income after
Provision for Loan Losses.......... 92,843 85,676 182,393 171,195
NONINTEREST INCOME:
Trust Income............................. 11,618 10,279 22,797 20,014
Service Charges on Deposits.............. 13,532 10,501 26,666 20,939
Other Service Charges and Fees........... 12,339 10,010 23,523 19,027
Investment Securities Gains-Net.......... (4) (98) (4) 1,184
All Other Income......................... 4,919 2,820 9,213 5,542
Total Noninterest Income............... 42,404 33,512 82,195 66,706
NONINTEREST EXPENSE:
Salaries................................. 30,093 27,340 60,042 54,445
Pension and Other Employee Benefits...... 5,263 4,411 10,208 10,152
Equipment Expense........................ 4,208 4,088 8,349 7,894
Occupancy Expense - Net.................. 5,403 5,226 10,459 10,361
All Other Expense........................ 30,095 27,454 58,094 55,222
Total Noninterest Expense.............. 75,062 68,519 147,152 138,074
INCOME BEFORE TAX........................ 60,185 50,669 117,436 99,827
Income Tax............................... 20,415 16,899 39,538 33,291
NET INCOME..............................$ 39,770 $ 33,770 $ 77,898 $ 66,536
PER SHARE:
Primary Earnings........................$ 1.34 $ 1.12 $ 2.62 $ 2.21
Fully Diluted Earnings................... 1.34 1.12 2.62 2.21
Common Stock Cash Dividends Declared..... 0.47 0.40 0.94 0.80
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
(Dollars in Thousands)
(Unaudited)
Series B Unrealized
Preferred Common Retained Treasury Gain/(Loss) Total
Stock Stock Surplus Earnings Stock on Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 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
available for sale........ 8,686 8,686
Balance, June 30, 1995......$ 1,437 $ 150,802 $ 78,389 $ 552,828 $ (6,124) $ (4,951) $ 772,381
Balance, January 1, 1996....$ 281 $ 150,802 $ 76,937 $ 599,005 $ (12,805) $ 5,957 $ 820,177
Net income................. 77,898 77,898
Cash dividends declared
on common stock........... (27,625) (27,625)
Cash dividends declared
on Series B Preferred
Stock..................... (5) (5)
Issuance of common stock
and treasury shares....... (1,700) 6,608 4,908
Conversion of Series B
Preferred Stock into
common stock, including
treasury stock issued..... (256) (587) 843 --
Purchase of treasury
stock..................... (44,990) (44,990)
Shares reserved to meet
deferred compensation
obligations............... 1,219 (129) 1,090
Amortization of stock
awards granted............ 183 183
Change in net unrealized
gain/(loss) on securities
available-for-sale........ (12,524) (12,524)
Balance, June 30, 1996......$ 25 $ 150,802 $ 76,052 $ 649,273 $ (50,473) $ (6,567) $ 819,112
See Notes to Condensed Consolidated Financial Statements
</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
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 77,898 $ 66,536
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 19,382 15,483
Provision for loan losses............................. 17,523 12,153
Provision for deferred taxes.......................... 588 9,182
(Gain)/loss on sale of premises and equipment - net... (165) (162)
(Gain)/loss on sale of securities - net............... 4 (1,184)
(Gain)/loss on sale of residential real estate loans.. (1,344) 85
Proceeds from sale of mortgage loans ................. 196,573 26,373
Mortgage Loans originated for sale on secondary market (163,208) (42,576)
Net change in other assets............................ 1,889 (53,260)
Net change in other liabilities....................... (4,772) 2,473
Total adjustments................................... 66,470 (31,433)
Net cash provided by operating activities........... 144,368 35,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 33,611 83,000
Proceeds from maturities of available-for-sale securities. 174,085 96,584
Proceeds from sales of available-for-sale securities...... 491 422,623
Purchase of held-to-maturity securities................... (23,946) (1,831)
Purchase of available-for-sale securities................. (2,491) (6,064)
Net change in loans....................................... (377,253) (453,323)
Proceeds from sales of loans.............................. 15,047 5,135
Proceeds from sales of premises and equipment............. 768 1,203
Purchase of premises and equipment........................ (7,333) (10,562)
- -
Net cash provided by/(used in) investing activities..... (187,021) 136,765
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... (127,824) (379,061)
Net change in short-term borrowings....................... 179,869 126,934
Principal payments on long-term debt...................... - (3,340)
- -
Proceeds from issuance of common stock.................... 4,908 1,095
Purchase of treasury stock................................ (44,990) (553)
Conversion of preferred stock............................. - (1)
Shares reserved to meet deferred compensation obligations. 1,090 753
Dividends paid............................................ (25,820) (10,476)
Net cash provided by/(used in) financing activities..... (12,767) (264,649)
Net change in cash and cash equivalents................... (55,420) (92,781)
Cash and cash equivalents at beginning of year............ 486,193 486,112
Cash and cash equivalents at June 30.....................$ 430,773 $ 393,331
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for six months ended June 30 1996 1995
Interest...............................................$ 167,328 $ 154,133
Income Taxes............................................ 18,433 23,382
Noncash transfer of loans to other real estate owned...... 121 655
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 June 30, 1996 and December 31,
1995. (Dollars are in thousands)
<TABLE>
<CAPTION>
June 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 $ 124,440 $ -- $ 1,032 $ 123,408 $ 144,701 $ -- $ 1,118 $ 143,583
Obligations of
state and political
subdivisions 50,457 852 4 51,305 39,986 2,500 5 42,481
Other debt securities -- -- -- -- -- -- -- --
--------- ------ ------- -------- --------- ------ ------ --------
Total held-to-
maturity securities$ 174,897 $ 852 $ 1,036 $ 174,713 $ 184,687 $ 2,500 $ 1,123 $ 186,064
========= ===== ====== ======== ======== ====== ======= ========
AVAILABLE-FOR-SALE
U.S. Treasuries and
agencies $ 16,058 $ 183 $ 67 $ 16,174 $ 18,933 $ 419 $ 4 $ 19,348
Mortgage-backed
securities 1,275,079 7,277 17,499 1,264,857 1,449,217 14,896 6,021 1,458,092
Other debt securities 1,434 4 1 1,437 1,435 9 1 1,443
Federal Reserve/FHLB
stock and other
equity securities 41,308 -- -- 41,308 38,985 -- -- 38,985
--------- ----- ------ --------- --------- ------ ----- ---------
Total available-for-
sale securities $1,333,879 $7,464 $17,567 $1,323,776 $1,508,570 $15,324 $6,026 $1,517,868
========== ===== ====== ========= ========= ====== ===== =========
</TABLE>
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As of June 30, 1996 the Corporation reported a net unrealized loss of
$10.1 million for available-for-sale securities. For the first six 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 loss of $6.6 million decreasing shareholders' equity $12.5 million.
The following table presents the amortized cost and fair value of held-
to-maturity and available-for-sale debt securities at June 30, 1996.
(Dollars in thousands)
Amortized Fair
Held-to-Maturity Cost Value
-------- --------
One year or less $ 49,242 $ 49,298
After one year through five years 89,836 89,470
After five years through ten years 25,509 25,465
After ten years 10,310 10,480
-------- --------
Total $ 174,897 $ 174,713
======== ========
Available-for-Sale
One year or less $ 299,750 $ 297,454
After one year through five years 781,466 775,299
After five years through ten years 161,436 160,166
After ten years 49,919 49,549
--------- --------
Total $1,292,571 $1,282,468
========= =========
Note: Maturity information related to mortgage-backed securities
included above is presented based upon weighted average
maturities anticipating future prepayments.
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Note 3. Loans
The following table summarizes the composition of the loan portfolio,
net of unearned interest, as of June 30, 1996 and December 31, 1995.
(Dollars are in thousands)
June 30, December 31,
1996 1995
Commercial loans:
Corporate loans $1,799,281 $1,697,350
Asset-based lending 256,819 220,346
Commercial leasing 245,343 240,699
Industrial revenue bonds 27,800 34,482
--------- ---------
Total commercial loans 2,329,243 2,192,877
Real estate loans:
Residential mortgage 1,198,889 1,243,718
Commercial mortgage 1,118,554 1,082,001
Construction and
land development 274,529 250,467
--------- ---------
Total real estate loans 2,591,972 2,576,186
Retail loans:
Installment 1,457,528 1,400,362
Credit cards 356,489 338,138
Retail leasing 507,285 418,218
--------- ---------
Total retail loans 2,321,302 2,156,718
Total loans, net of
unearned interest $7,242,517 $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)
Six Months Ended Year Ended
June 30, December 31,
1996 1995 1995
Balance - beginning of period $ 106,909 $ 95,979 $ 95,979
Loans charged-off (19,318) (14,077) (28,248)
Recoveries on loans
previously charged-off 7,471 8,984 14,077
-------- -------- --------
Net charge-offs (11,847) (5,093) (14,171)
Provision charged to earnings 17,523 12,153 25,101
------- ------- -------
Balance - end of period $112,585 $103,039 $106,909
======= ======= =======
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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 June 30, 1996.
(Dollars are in thousands)
June 30, 1996 December 31, 1995
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired Loans:
Valuation allowance
required $ 11,202 $ 2,903 $ 15,688 $3,922
No valuation allowance
required 18,078 -- 14,171 --
-------- ------ ------- -----
Total impaired loans $ 29,280 $2,903 $29,859 $3,922
The average recorded investment in impaired loans for the six months
ended June 30, 1996 was $30 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. Income Tax
The components of the net deferred tax liability included in the Corporation's
consolidated balance sheets at June 30, 1996 and December 31, 1995 are shown
in the following table. (Dollars are in thousands)
June 30, December 31,
1996 1995
Allowance for loan losses $ 39,552 $ 37,567
Deferred compensation 3,187 2,522
Intangible asset amortization 1,629 845
Deferred loan fees and costs 1,477 1,749
Unrealized loss on securities 3,536 --
Other 3,048 3,011
Total deferred tax asset 52,429 45,694
Leased assets (64,226) (55,343)
Fixed asset depreciation (5,379) (5,379)
Pension liabilities (5,233) (4,945)
Unrealized gain on securities -- (3,208)
FHLB stock dividends (1,379) (1,038)
Purchase accounting/intangible assets (424) (580)
Other (1,779) (1,780)
Total deferred tax liability (78,420) (72,273)
Net deferred tax asset/(liability) $(25,991) $(26,579)
The Corporation has not recorded a valuation reserve related to deferred
tax assets.
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<PAGE>
Note 7. Noninterest Income and Other Noninterest Expense
The following are included in other service charges and fees, and all other
income for the three months and six months ended June 30, 1996 and 1995.
(Dollars are in thousands)
Three Months Six Months
1996 1995 1996 1995
------ ------ ------ ------
Credit card fees $4,652 $3,754 $8,579 $7,040
ATM fees 2,264 1,845 4,326 3,501
Mortgage banking income 1,981 924 3,812 1,864
The following are included in all other expense for the three months and
six months ended June 30, 1996 and 1995.
Three Months Six Months
1996 1995 1996 1995
------ ------ ------ ------
Amortization of intangible assets $4,222 $2,962 $8,339 $5,939
Outside processing services 2,903 2,451 5,558 5,085
State taxes 2,765 2,224 5,399 4,464
Marketing 2,116 2,094 4,489 4,025
FDIC insurance 935 3,929 1,791 7,858
Note 8. 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
now 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 should be assessed for impairment based on the fair value of those
rights. In addition, capitalized mortgage servicing rights should be
stratified based on one or more predominant risk characteristics of the
underlying loans and impairment should be 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 their estimated lives the period in proportion
with estimated net servicing income.
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<PAGE>
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 an 8.0 percent discount rate. Impairment
will be recognized through a valuation allowance for each impaired stratum.
The following is a summary of mortgage servicing rights at June 30, 1996.
(Dollars are in thousands)
Mortgage Servicing Rights Amount
Balance at December 31, 1995 $ 6,819
Amount capitalized 2,271
Amortization (642)
Valuation allowance --
Balance at June 30, 1996 $ 8,448
Fair Value at June 30, 1996 $ 10,464
There was no valuation allowance established related to mortgage
servicing rights at June 30, 1996.
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<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 June 30, 1996, was $39,770,000, a 17.8 percent increase over
the second quarter of 1995. Net income for the first six months of
1996 was $77,898,000, a 17.1 percent increase compared to the same
period in 1995. Primary and fully diluted earnings per share were
$1.34 for the second quarter of 1996, compared to $1.12 for the
second quarter of 1995. This represents an increase of 19.6 percent
for both primary and fully diluted earnings per share. For the first
half of 1996 earnings per share were $2.62 on both a primary and
fully-diluted basis, an increase of 18.6 percent compared to the
first half of 1995. Earnings results for the second quarter of 1996
are a result of a 9.7 percent increase in net interest income, as
reflected by a 25 basis point increase in net interest margin, and
a 26.5 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.
Return on average assets was 1.66 percent for the second
quarter of 1996, and 1.63 percent for the first half of 1996,
compared to 1.47 percent and 1.44 percent, respectively, for the
same periods in 1995. Return on average equity increased to
19.24 percent for the second quarter and 19.00 percent for the
first half of 1996, compared to 17.61 percent and 17.71 percent
for the same periods in 1995.
On July 26, 1996, Star Bank, N.A. ("the Bank"), acquired four
Connersville, Indiana branch offices from National City Bank,
Indiana. This transaction was 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 acquired $24 million in loans and $63 million in
deposits for a premium of $5 million.
FINANCIAL CONDITION
Total assets at June 30, 1996 amounted to $9.61 billion, up slightly
from $9.57 billion at December 31, 1995. Total loans, net of unearned
interest, increased to $7.24 billion at June 30, 1996, compared to
$6.93 billion at December 31, 1995. The Corporation has experienced
increases in loan volumes for most lending areas for the first six
months of 1996, led by retail loans up $165 million or 7.6 percent
and commercial loans and leasing up $136 million or 6.2 percent.
Residential mortgage loans declined $45 million or 3.6 percent in
the first six months on 1996, as the Corporation is selling a larger
percentage of loan origination's into the secondary market and
using the decline in the current portfolio to help fund growth in
other loan areas.
Investment securities declined $204 million to $1.50 billion at
June 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 June 30, 1996, the Corporation's investment securities
portfolio included $1.32 billion in securities classified as available
- -for-sale, a decline of $194 million from December 31, 1995, and $175
million classified as held-to-maturity. At June 30, 1996 the Corporation
reported a net unrealized loss of $10.1 million on available-for-sale
securities, with an offsetting decrease to shareholders' equity of $6.6
million (net of tax). For the first six 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 loss of $6.6
million, decreasing equity $12.5 million.
-15-
<PAGE>
Deposits declined $128 million to $7.57 billion at June 30,
1996 from $7.69 billion at December 31, 1995. This was due
primarily to decreases in certificates of deposits ("CDs"), as
small CDs declined $92 million and jumbo CDs and eurodollar
deposits declined $57 million in the first six months of 1996.
As CDs have matured into a lower rate environment over the last
year, the Corporation has seen a continued shift in customer
deposits from CDs into tiered rate money market accounts or
other higher yielding nonbank products. Core deposit levels
were up slightly over the first six months of 1996, as demand
deposits, savings, NOW and money market deposit accounts
increased $21 million. Demand deposits declined $12 million in
the first half of 1996 primarily as a result of seasonal
factors. Due to the traditional increase in level of business
activity during the fourth quarter of each year, demand deposits
increase significantly. This seasonal buildup in demand deposits
results in increases in cash and due from banks, and money
market instruments. As business activity slows following the
holiday season, demand deposits, money market instruments and
cash and due from banks decline.
Short-term borrowings increased $180 million in the first
half of 1996, to $915 million at June 30, 1996. This increase
was the result of loan growth exceeding maturities and paydowns
of securities, as well as, funding to replace the decline in CDs
over the first six months of 1996.
RESULTS OF OPERATIONS
Net interest income, the Corporation's principal source of
earnings, increased $8.9 million or 9.7 percent in the second
quarter and $16.6 million or 9.0 percent for the first half 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,
deposit growth from the Household branch acquisition in the
third quarter of 1995 was used to pay down higher cost borrowed
funds, reducing the cost of funding sources. Average loans were
up $610 million or 9.4 percent, while investment securities
declined $405 million or 20.1 percent for the first six months
of 1996, compared to the same period in 1995. Included in the
second quarter results was $680,000 in interest expense related
to the call during the quarterof the Corporation's senior debt
which was prepaid in July, 1996.
Net interest margin increased 25 basis points to 4.69 percent
in the second quarter of 1996, compared to 4.44 percent for the
same period in 1995. For the first six months of 1996 net
interest margin has increased 29 basis points to 4.64 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. 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 $1.8
million in the second quarter and $5.4 million for the first
half of 1996, compared to 1995. As discussed further in the
Asset Quality section, the provision has trended upward over the
last twelve months due to the increases in loans outstanding
and consumer loan charge-offs, in addition to a overall change
in loan mix toward consumer loans. Additionally, recoveries
have been lower in the first six months of 1996, compared to the
prior year.
-16-
<PAGE>
Noninterest income continues to be a growing source of revenue
for the Corporation, representing 29.3 percent of tax-equivalent
net revenues in the second quarter and 29.0 percent of net revenues
for the first half of 1996, compared to 26.4 percent and 26.5 percent,
respectively, in the same periods in 1995. Noninterest income
increased 26.5 percent to $42.4 million in the second quarter of
1996, compared to $33.5 million for the second quarter of 1995. For
the first six months of 1996 noninterest income totaled $82.2 million,
an increase of 23.2 percent, as compared to the first six months of 1995.
Excluding a $1.3 million gain on sale of securities in 1995, noninterest
income increased $16.7 million or 25.5 percent in the first half of 1996.
Contributing to the improvement in noninterest income in second quarter
was a $3.0 million increase in service charges on deposits, due in part
to the Household acquisition, a $1.3 million increase in trust fees and
a $1.1 million increase in mortgage banking income, as compared to the
prior year. In addition, fees from annuity sales, ATM services and
credit cards increased 111.7 percent, 22.7 percent and 23.9 percent,
respectively, in the second quarter of 1996.
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 now 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 resulted in approximately $1.5 million in additional
mortgage banking income for the first half of 1996.
Noninterest expense totaled $75.1 million in the second
quarter of 1996, a 9.5 percent increase from $68.5 million for
the same period of 1995. For the first half of 1996,
noninterest expenses were up 6.6 percent to $147.2 million. The
increase in noninterest expenses in 1996 was due in part to the
Household acquisition. Increases related to Household include
salaries, occupancy, equipment, supplies and amortization of
intangibles. Somewhat offsetting these increases was a $3.0
million decrease for the second quarter and $6.1 million
decrease in the first six months of 1996 in FDIC insurance due
to the 1995 reductions in premium rates. However, federal
legislation is pending that would assess banks a one-time
insurance premium on deposits insured by the Savings Association
Insurance Fund (SAIF). If this legislation is enacted, the
Corporation's assessment could range from $6 million to $11
million (pre-tax).
The Corporation's noninterest expense ratio declined
significantly for the second quarter of 1996 to 51.9 percent,
compared to 54.0 percent for the same period of 1995. For the
first six months of 1996, the noninterest expense ratio declined
almost 300 basis points to 51.9 percent, compared to 54.9
percent in 1995. Compared to the second quarter and first half
of 1995, net revenue has increased 14.0 percent and 12.7
percent, respectively, while noninterest expenses were up only
9.5 percent and 6.6 percent.
The Corporation's effective tax rate for the second quarter
and first half of 1996, was 33.9 percent and 33.7 percent,
respectively, up slightly from 33.4 percent for the same periods
in 1995.
ASSET QUALITY
As of June 30, 1996, the allowance for loan losses was $112.6
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 increased
slightly to 298 percent at June 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)
Second Quarter, 1996 Second Quarter, 1995
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$2,303,431 $ 49,830 8.70 % $2,170,551 $ 50,385 9.31 %
Real estate loans.....................2,588,620 54,473 8.42 2,517,039 53,158 8.45
Retail loans..........................2,275,586 51,723 9.12 1,914,470 42,800 8.96
Total loans......................7,167,637 156,026 8.73 6,602,060 146,343 8.88
Taxable investment securities.........1,507,359 24,083 6.39 1,787,189 29,125 6.52
Non-taxable investment securities..... 50,421 1,130 8.99 14,593 281 7.69
Money market investments.............. 14,187 197 5.57 7,291 121 6.66
Total interest earning assets....8,739,604 $ 181,436 8.33 % 8,411,133 $ 175,870 8.37 %
Cash and due from banks............... 479,501 400,895
Allowance for loan losses............. (113,010) (103,284)
Other assets.......................... 554,804 496,919
Total assets....................$9,660,899 $9,205,663
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$1,890,429 $ 10,356 2.20 % $1,928,262 $ 10,723 2.23 %
Money market deposit accounts.........1,085,036 9,929 3.68 675,870 6,014 3.57
Time deposits $100,000 and over....... 417,524 5,573 5.37 437,248 6,510 5.97
Time deposits under $100,000..........2,881,657 38,809 5.42 2,839,259 40,227 5.68
Short-term borrowings................. 919,972 10,965 4.79 1,128,631 15,967 5.67
Long-term debt........................ 161,264 3,445 8.55 166,161 2,970 7.17
Total interest bearing
liabilities...................7,355,882 $ 79,077 4.32 % 7,175,431 $ 82,411 4.60 %
Noninterest bearing deposits..........1,330,067 1,118,779
Other liabilities..................... 143,721 142,076
Shareholders' equity.................. 831,229 769,377
Total liabilities and
shareholders' equity..........$9,660,899 $9,205,663
Net interest margin.................. 4.69 % 4.44 %
Interest rate spread................. 4.01 3.77
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of nonaccruing
loans is included in average amount outstanding.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Six Months, 1996 Six Months, 1995
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans.....................$2,266,190 $ 98,069 8.70 % $2,128,218 $ 98,119 9.29 %
Real estate loans.....................2,576,974 108,503 8.43 2,461,187 102,155 8.31
Retail loans..........................2,233,744 102,068 9.17 1,877,440 82,474 8.83
Total loans......................7,076,908 308,640 8.75 6,466,845 282,748 8.78
Taxable investment securities.........1,560,365 49,669 6.37 1,998,021 64,073 6.42
Non-taxable investment securities..... 49,482 2,227 9.03 16,902 583 6.90
Interest bearing deposits in banks.... 14,778 419 5.70 14,772 477 6.51
Total interest earning assets....8,701,533 $ 360,955 8.32 % 8,496,540 $ 347,881 8.22 %
Cash and due from banks............... 480,915 396,055
Allowance for loan losses............. (111,064) (101,180)
Other assets.......................... 558,583 497,819
Total assets....................$9,629,967 $9,289,234
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW......................$1,942,666 $ 21,298 2.20 % $1,951,736 $ 21,537 2.23 %
Money market deposit accounts.........1,021,342 19,191 3.78 669,675 11,388 3.43
Time deposits $100,000 and over....... 427,245 11,645 5.48 514,686 14,959 5.86
Time deposits under $100,000..........2,908,604 79,652 5.51 2,869,140 78,327 5.51
Short-term borrowings................. 882,926 21,399 4.87 1,124,479 31,131 5.58
Long-term debt........................ 161,242 6,204 7.70 166,325 5,512 6.68
Total interest bearing
liabilities...................7,344,025 $ 159,389 4.36 % 7,296,041 $ 162,854 4.50 %
Noninterest bearing deposits..........1,314,592 1,108,097
Other liabilities..................... 146,651 127,385
Shareholders' equity.................. 824,699 757,711
Total liabilities and
shareholders' equity..........$9,629,967 $9,289,234
Net interest margin.................. 4.64 % 4.35 %
Interest rate spread................. 3.96 3.72
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of nonaccruing
loans is included in average amount 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
$5.5 million in the second quarter of 1996, a $2.3 million increase
over the second quarter of 1995. Net charge-offs for the first six
months of 1996 were $11.8 million, compared to $5.1 million for the
first half of 1995. Annualized net charge-offs as a percentage of
average outstanding loans were also up, increasing to 0.31 percent for
the second quarter of 1996, compared to 0.19 percent for the same period
in 1995. However, this is down slightly from 0.36 percent in the first
quarter of 1996.
The amount of net charge-offs and percentage of net charge-offs to
average loans were at historically low levels in the first half of 1995
and have trended upward over the last twelve 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 loan mix
toward consumer loans. In addition, the industry has seen an upward
trend in consumer loan charge-offs over recent quarters. Net charge-offs
for retail loans increased $3.1 million in the second quarter and $5.9
million for the first six months of 1996, as compared to the same periods
in 1995. Net charge-offs on credit cards were up $2.0 million in the
second quarter and $3.6 million for the first half of 1996 due in part
to higher loan volumes and an increase in customer base. Net charge-off
levels on credit cards for the Corporation have remained below national
averages in 1996. Net charge-offs on commercial loans were $1.2 million
in the second quarter of 1996, down $1.3 million compared to the second
quarter of 1995. This was due in part to a large recovery received in
the second quarter of 1996.
As shown in Tables 4 and 5, nonperforming asset levels increased
$3.5 million to $39.3 million at June 30, 1996, compared to $35.8 million
at June 30, 1995. However, nonperforming assets were down slightly
compared to December 31, 1995. Although nonperforming assets and
nonperforming loans have increased since the second 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
slightly to 0.52 percent, compared to 0.50 at June 30, 1995, but is down
one basis point since December 31, 1995. Loans past-due 90 days or more
and still accruing interest increased $2.0 million in the first six
months of 1996, and $3.1 million compared to June 30, 1995. These
increases occurred within both the commercial loan 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 June 30,
1996 was adequate to absorb all anticipated losses in the loan portfolio
as of that date.
The recorded investment in impaired loans at June 30, 1996 was $29.3
million with a related valuation allowance calculated under SFAS No. 114
of $2.9 million.
-20-
<PAGE>
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
Second Quarter Six Months
1996 1995 1996 1995
Average loans - net of
unearned interest...........$ 7,167,637 $ 6,602,060 $ 7,076,908 $ 6,466,845
Allowance for loan losses:
Balance - beginning
of period.................$ 109,416 $ 99,298 $ 106,909 $ 95,979
Charge-offs:
Commercial............... (3,269) (4,814) (6,796) (7,071)
Real estate.............. (349) (92) (627) (1,169)
Retail................... (6,192) (2,898) (11,895) (5,837)
Total charge-offs...... (9,810) (7,804) (19,318) (14,077)
Recoveries:
Commercial............... 2,062 2,356 3,243 4,390
Real estate.............. 285 506 434 943
Retail................... 1,932 1,759 3,794 3,651
Total recoveries....... 4,279 4,621 7,471 8,984
Net charge-offs...... (5,531) (3,183) (11,847) (5,093)
Provision charged to earnings 8,700 6,924 17,523 12,153
Balance - end of period....$ 112,585 $ 103,039 $ 112,585 $ 103,039
Ratio of net charge-offs to
average loans - net of
unearned interest........... 0.31% 0.19% 0.34% 0.16%
-21-
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
Loans on nonaccrual status..... $ 37,676 $ 36,875 $ 33,823
Loans which have been
renegotiated................. 82 87 33
Total nonperforming loans.... 37,758 36,962 33,856
Other real estate owned........ 1,564 3,006 1,963
Total nonperforming assets... $ 39,322 $ 39,968 $ 35,819
Percentage of nonperforming
loans to loans* ............. 0.52% 0.53% 0.50%
Percentage of nonperforming
assets to loans* and other
real estate owned............ 0.54% 0.58% 0.53%
Loans past due 90 days
or more...................... $ 9,705 $ 7,750 $ 6,556
* Net of unearned interest.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
June 30, 1996 December 31, 1996
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..............$23,646 $82 $23,728 1.24 % $2,210 $23,371 $87 $23,458 1.20 % $958
Commercial leasing..... 1,103 -- 1,103 0.45 -- 216 -- 216 0.09 --
Total commercial
loans 24,749 82 24,831 1.07 2,210 23,587 87 23,674 1.08 958
Real estate loans:
Residential............ 5,244 -- 5,244 0.44 2,950 5,618 -- 5,618 0.45 2,589
Commercial mortgage.... 3,784 -- 3,784 0.34 727 5,722 -- 5,722 0.53 949
Construction/land
development.......... -- -- -- -- 418 99 -- 99 0.04 433
Total real estate
loans 9,028 -- 9,028 0.35 4,095 11,439 -- 11,439 0.44 3,971
Retail loans:
Installment............ 2,197 -- 2,197 0.15 487 978 -- 978 0.07 962
Credit cards........... 1,377 -- 1,377 0.39 2,798 743 -- 743 0.22 1,822
Retail leasing......... 325 -- 325 0.06 115 128 -- 128 0.03 37
Total retail loans... 3,899 -- 3,899 0.17 3,400 1,849 -- 1,849 0.09 2,821
Total loans..........$37,676 $82 $37,758 0.52 % $9,705 $36,875 $87 $36,962 0.53 % $7,750
</TABLE>
-23-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 incertificates 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.
There is currently $75 million in commercial paper outstanding
at June 30, 1996. The Corporation's consolidated long-term
debt, which includes senior and promissory notes, remained at
$161 million for the first six months of 1996. At the end of
June, 1996 the Corporation called its senior debt which was
prepaid in July. At June 30, 1996 there was $12.8 million in
senior notes outstanding.
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 conversion of preferred
shares, employee stock options and other corporate purposes.
Through June 30, 1996, the Corporation has repurchased a total
of 1,588,000 shares under the buyback program, of which 708,000
had not yet been reissued.
Total shareholders' equity decreased $1 million in the first
six months to $819 million at June 30, 1996. This decrease was
the result of a $12.5 million decline in the net unrealized
gain/(loss) on available-for- sale securities, in addition to a
$37 million increase in treasury stock related to buyback
activity, in the first six months of 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 June 30, 1996 were 7.77 percent and 10.92 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 June 30, 1996 the Corporation's leverage ratio
was 6.44 percent up slightly from 6.23 percent at December 31,
1995. The slight decreases in the Corporation's tier 1 and
total capital ratios in the second quarter of 1996 were due to
an increase in risk-adjusted assets in addition to high volume
of buyback activity which resulted in a slight decline in tier
1 equity.
-24-
<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 were filed by the
Corporation in the second 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
August 13, /s/ Jerry A. Grundhofer
- ------------------ -------------------------
Date Jerry A. Grundhofer
Chairman, President, and
Chief Executive Officer
August 13, /s/ David M. Moffett
- ---------------- --------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-25-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share data)
Second Quarter Six Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income......................$ 39,770 $ 33,770 $ 77,898 $ 66,536
Preferred dividends.............. 0 37 5 64
Income available to common
shareholders..................$ 39,770 $ 33,733 $ 77,893 $ 66,472
Weighted average of common
stock equivalents............... 29,615 30,051 29,709 30,020
Weighted average of preferred
stock convertible to common
stock equivalents.............. 11 105 13 117
Weighted average of fully
diluted common stock equivalents 29,626 30,156 29,722 30,137
Primary earnings per share
(income available to common
shareholders divided by weighted
average of common stock
equivalents)..................$ 1.34 $ 1.12 $ 2.62 $ 2.21
Fully diluted earnings per share
(net income divided by weighted
average of fully diluted
common stock equivalents).....$ 1.34 $ 1.12 $ 2.62 $ 2.21
Note: The effect of stock options outstanding are not dilutive to earnings
per share as defined in APB 15 and therefore are not included with
the above calculations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996
<CASH> 428,302 411,398
<INT-BEARING-DEPOSITS> 100 100
<FED-FUNDS-SOLD> 11,990 19,275
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,421,972 1,323,776
<INVESTMENTS-CARRYING> 182,771 174,897
<INVESTMENTS-MARKET> 182,956 174,713
<LOANS> 7,106,082 7,242,517
<ALLOWANCE> 109,416 112,585
<TOTAL-ASSETS> 9,609,505 9,612,803
<DEPOSITS> 7,653,095 7,565,866
<SHORT-TERM> 818,601 914,885
<LIABILITIES-OTHER> 160,993 151,653
<LONG-TERM> 161,239 161,287
0 0
281 25
<COMMON> 150,802 150,802
<OTHER-SE> 664,494 668,285
<TOTAL-LIABILITIES-AND-EQUITY> 9,609,505 9,612,803
<INTEREST-LOAN> 152,157 307,755
<INTEREST-INVEST> 26,306 51,131
<INTEREST-OTHER> 222 419
<INTEREST-TOTAL> 178,685 359,305
<INTEREST-DEPOSIT> 67,119 131,786
<INTEREST-EXPENSE> 80,312 159,389
<INTEREST-INCOME-NET> 98,373 199,916
<LOAN-LOSSES> 8,823 17,523
<SECURITIES-GAINS> 0 (4)
<EXPENSE-OTHER> 72,090 147,152
<INCOME-PRETAX> 57,251 117,436
<INCOME-PRE-EXTRAORDINARY> 57,251 117,436
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 38,128 77,898
<EPS-PRIMARY> 1.28 2.62
<EPS-DILUTED> 1.28 2.62
<YIELD-ACTUAL> 8.31 8.32
<LOANS-NON> 38,212 37,676
<LOANS-PAST> 9,711 9,705
<LOANS-TROUBLED> 86 82
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 106,909 106,909
<CHARGE-OFFS> 9,508 19,318
<RECOVERIES> 3,192 7,471
<ALLOWANCE-CLOSE> 109,416 112,585
<ALLOWANCE-DOMESTIC> 109,416 112,585
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
