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 September 30, 1997
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.
85,387,287 common shares, par value $5, outstanding at November 1, 1997
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STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1997
Page
Table of Contents Number
Part I. Financial Information:
Financial Highlights......................................... 3
Report of Independent Public Accountants..................... 4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements............. 5 - 8
Notes to Condensed Consolidated Financial Statements.... 9 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................16 - 25
Part II. Other Information:
Item 1. Legal Proceedings.................................... none
Item 2. Changes in Securities................................ none
Item 3. Defaults Upon Senior Securities...................... none
Item 4. Submission of Matters to a Vote of Security Holders.. none
Item 5. Other Information.................................... none
Item 6. Exhibits and Reports on Form 8-K..................... 26
Signatures............................................................. 26
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<TABLE>
PART I. FINANCIAL INFORMATION
STAR BANC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
<CAPTION>
Third Quarter Year through September 30,
Percent Percent
1997 1996(b) Change 1997 1996(b) Change
--------- ---------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income...............................$ 50,145 $ 38,217 31.2 % $ 143,031 $ 116,115 23.2 %
Per share:
Earnings per common share..............$ 0.58 $ 0.43 34.9 % $ 1.66 $ 1.31 26.7 %
Common dividends declared.............. 0.20 0.16 25.0 0.60 0.47 27.7
Preferred dividends declared........... -- -- -- -- 3.00 --
Book value per common share............ 10.36 9.62 7.7 10.36 9.62 7.7
Market value per common share.......... 45.94 28.38 61.9 45.94 28.38 61.9
Average balances:
Total assets...........................$ 10,462,431 $ 9,667,317 8.2 % $ 10,251,727 $ 9,642,508 6.3 %
Earning assets......................... 9,480,821 8,833,357 7.3 9,329,600 8,745,795 6.7
Loans, net of unearned interest........ 8,117,122 7,331,866 10.7 7,902,509 7,162,514 10.3
Deposits............................... 7,886,982 7,634,497 3.3 7,847,397 7,621,182 3.0
Total shareholders' equity............. 864,995 837,283 3.3 850,166 828,924 2.6
Ratios:
Return on average assets............... 1.90 % 1.57 % 1.87 % 1.61 %
Return on average equity............... 23.00 18.16 22.49 18.71
Average total shareholders' equity
to average total assets.............. 8.27 8.66 8.29 8.60
Risk-based capital ratios:
Tier 1............................... 8.74 7.66 8.74 7.66
Total................................ 12.67 10.74 12.67 10.74
Leverage - average assets (a).......... 7.90 6.57 7.90 6.57
Net interest margin.................... 4.93 4.91 4.95 4.73
Noninterest expense to net revenue..... 47.46 53.49 47.84 52.43
Noninterest income as a percent
of net revenue....................... 31.55 29.06 30.18 29.00
Net income to net revenue.............. 29.33 24.98 28.89 26.59
(a) - defined by regulatory authorities as tier 1 equity to the current quarter's adjusted average
assets.
(b) - per share amounts and number of shares issued and outstanding have been restated to reflect
a 3-for-1 stock split in December 1996.
</TABLE>
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ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Star Banc Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
STAR BANC CORPORATION (an Ohio corporation) as of September 30, 1997, and the
related condensed consolidated statements of income for the three month and
nine-month periods ended September 30, 1997 and 1996, and the condensed
consolidated statements of changes in shareholders' equity and cash flows for
the nine-month periods ended September 30, 1997 and 1996. 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, 1996 (not presented herein), and, in our report dated
January 13, 1997, 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, 1996, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
October 10, 1997
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<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS: ----------- -----------
Cash and due from banks.............................$ 529,401 $ 508,831
Money market investments............................ 137,947 50,170
Investment securities:
Available-for-sale................................ 1,086,472 1,332,312
Held-to-maturity (market value of $159,381 at
September 30, 1997 and $168,326 at December 31,
1996............................................ 159,355 167,957
Total securities.................................. 1,245,827 1,500,269
Loans:
Commercial loans.................................. 2,697,466 2,406,540
Real estate loans................................. 2,758,544 2,599,079
Retail loans...................................... 3,050,687 2,726,561
Total loans..................................... 8,506,697 7,732,180
Less: Unearned interest......................... 180,720 145,002
8,325,977 7,587,178
Allowance for loan losses................. 129,853 118,689
Net loans....................................... 8,196,124 7,468,489
Premises and equipment.............................. 139,855 136,045
Acceptances - customers' liability.................. 19,149 19,257
Other assets........................................ 504,134 410,754
Total assets....................................$10,772,437 $10,093,815
LIABILITIES:
Deposits:
Noninterest-bearing deposits......................$ 1,522,249 $ 1,571,080
Interest-bearing deposits......................... 6,353,755 6,305,181
Total deposits................................ 7,876,004 7,876,261
Short-term borrowings............................... 1,302,728 921,317
Long-term debt...................................... 318,698 247,359
Trust preferred securities.......................... 148,566 --
Acceptances outstanding............................. 19,149 19,257
Other liabilities................................... 223,794 174,549
Total liabilities............................... 9,888,939 9,238,743
SHAREHOLDERS' EQUITY:
Preferred stock:
Shares authorized - 1,000,000
Shares outstanding - none at September 30, 1997
and at December 31, 1996........................ -- --
Common stock:
Shares authorized - 100,000,000
Shares issued - 90,481,374 at September 30, 1997
and at December 31, 1996........................ 452,407 452,407
Surplus............................................. 80,570 76,045
Retained earnings................................... 492,621 400,838
Treasury stock, at cost - 5,185,167 shares at
September 30, 1997 and 3,722,931 at
December 31, 1996................................. (153,719) (81,344)
Net unrealized gain/(loss) on available-for-sale
securities....................................... 11,619 7,126
Total shareholders' equity...................... 883,498 855,072
Total liabilities and shareholders' equity......$10,772,437 $10,093,815
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Third Quarter Nine Months
1997 1996(a) 1997 1996(a)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans..............$181,048 $161,646 $523,214 $469,401
Interest on investment securities:
Taxable............................... 21,195 23,360 67,612 73,029
Non-taxable........................... 919 801 2,625 2,263
Interest on money market investments.... 1,321 361 2,624 780
Total interest income................. 204,483 186,168 596,075 545,473
INTEREST EXPENSE:
Interest on deposits.................... 67,853 65,357 199,572 197,143
Interest on short-term borrowings....... 12,897 10,529 36,615 31,928
Interest on long-term debt.............. 7,549 2,560 16,717 8,764
Total interest expense................ 88,299 78,446 252,904 237,835
Net interest income................. 116,184 107,722 343,171 307,638
Provision for loan losses............... 14,250 12,100 41,614 29,623
Net interest income after
provision for loan losses......... 101,934 95,622 301,557 278,015
NONINTEREST INCOME:
Trust income............................ 14,617 11,736 41,580 34,533
Retail deposit income................... 11,132 10,125 30,899 29,131
Credit card income...................... 6,434 4,966 17,110 13,545
Cash management income.................. 5,123 4,039 14,081 11,699
Electronic banking income............... 4,022 2,802 11,417 7,128
Mortgage banking income................. 2,920 1,743 9,855 5,555
Investment securities gains/(losses)-net (482) (2) (4,238) (6)
All other income........................ 10,177 9,044 28,709 25,063
Total noninterest income.............. 53,943 44,453 149,413 126,648
NONINTEREST EXPENSE:
Salaries................................ 32,802 30,376 94,984 90,418
Pension and other employee benefits..... 5,205 4,369 15,723 14,577
Equipment expense....................... 5,005 4,403 14,441 12,752
Occupancy expense - net................. 5,847 5,693 17,003 16,152
All other expense....................... 32,292 31,981 94,720 90,075
81,151 76,822 236,871 223,974
SAIF Special Assessment................. -- 5,000 -- 5,000
Total noninterest expense............. 81,151 81,822 236,871 228,974
INCOME BEFORE TAX....................... 74,726 58,253 214,099 175,689
Income tax.............................. 24,581 20,036 71,068 59,574
NET INCOME..............................$ 50,145 $ 38,217 $143,031 $116,115
PER SHARE:
Earnings per common share...............$ 0.58 $ 0.43 $ 1.66 $ 1.31
Common stock cash dividends declared.... 0.20 0.16 0.60 0.47
Preferred stock cash dividends declared. -- -- -- 3.00
(a) Per share amounts have been restated to reflect a 3-for-1 stock split in
December 1996.
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<CAPTION>
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, 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..................... 274 274
Change in net unrealized
gain/(loss) on available-
for-sale securities........ (5,579) (5,579)
Balance, September 30, 1996.. $ -- $ 150,802 $ 76,111 $ 673,793 $ (60,438) $ 378 $ 840,646
Balance, January 1, 1997..... $ -- $ 452,407 $ 76,045 $ 400,838 $ (81,344) $ 7,126 $ 855,072
Net income.................. 143,031 143,031
Cash dividends declared
on common stock............ (51,248) (51,248)
Issuance of common stock
and treasury shares........ 1,730 13,236 14,966
Purchase of treasury
stock...................... (84,828) (84,828)
Shares reserved to meet
deferred compensation
obligations................ 2,474 (783) 1,691
Amortization of stock
awards..................... 321 321
Change in net unrealized
gain/(loss) on available-
for-sale securities........ 4,493 4,493
Balance, September 30, 1997.. $ -- $ 452,407 $ 80,570 $ 492,621 $(153,719) $ 11,619 $ 883,498
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 143,031 $ 116,115
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 29,439 28,576
Provision for loan losses............................. 41,614 29,623
Provision for deferred taxes.......................... 24,731 6,955
(Gain)/loss on sale of premises and equipment - net... (174) (150)
(Gain)/loss on sale of securities - net............... 4,234 6
(Gain)/loss on sale of mortgage loans................. (4,987) (1,637)
Proceeds from sale of mortgage loans ................. 211,424 254,820
Mortgage Loans originated for sale on the secondary
market.............................................. (207,524) (225,374)
Net change in other assets............................ (96,541) (5,583)
Net change in other liabilities....................... 16,488 5,037
Total adjustments................................... 18,704 92,273
Net cash provided by operating activities........... 161,735 208,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 40,250 42,182
Proceeds from maturities of available-for-sale securities. 243,951 247,338
Proceeds from sales of available-for-sale securities...... 189,632 651
Purchase of held-to-maturity securities................... (31,879) (34,583)
Purchase of available-for-sale securities................. (185,156) (5,217)
Net change in loans....................................... (841,936) (617,174)
Proceeds from sales of loans.............................. 71,521 14,535
Proceeds from sales of premises and equipment............. 349 936
Purchase of premises and equipment........................ (15,673) (11,326)
Net change due to acquisition of branch offices........... 83,711 32,513
Net cash (used in) investing activities............... (445,230) (330,145)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... (93,268) 44,089
Net change in short-term borrowings....................... 381,411 173,483
Principal payments on long-term debt...................... - (12,780)
Proceeds from issuance of long-term debt.................. 71,098 -
Proceeds from issuance of capital securities.............. 148,554 -
Proceeds from issuance of common stock.................... 14,966 6,782
Purchase of treasury stock................................ (84,828) (57,199)
Shares reserved to meet deferred compensation obligations. 1,691 1,403
Dividends paid............................................ (47,782) (39,578)
Net cash provided by/(used in) financing activities..... 391,842 116,200
Net change in cash and cash equivalents................... 108,347 (5,557)
Cash and cash equivalents at beginning of year............ 559,001 486,193
Cash and cash equivalents at September 30.................$ 667,348 $ 480,636
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for nine months ended September 30 1997 1996
Interest................................................$ 257,489 $ 248,286
Income Taxes............................................ 30,935 29,633
Noncash transfer of loans to other real estate owned...... 897 1,162
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
These condensed consolidated financial statements have been prepared by Star
Banc Corporation ("the Corporation") pursuant to the rules and regulations of
the Securities and Exchange Commission and, therefore, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Corporation's annual
report on Form 10-K for the year ended December 31, 1996, 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.
DERIVATIVE FINANCIAL INSTRUMENTS
As noted in the footnotes to its annual report on Form 10-K, the Corporation
utilizes derivative financial instruments, primarily interest rate swaps and
foreign exchange forward contracts for hedging purposes to reduce exposure to
adverse changes in interest rates and foreign currency exchange rates.
Substantially all derivatives of the Corporation are accounted for as "hedges."
Interest rate swap transactions are analyzed as to the spread, asset yield or
liability cost being protected. The specific asset or liability or class of
assets or liabilities are identified and the correlation between the hedged
item, the derivative instrument and the associated interest rate risk is
documented. The Corporation periodically reviews the correlation between the
rates on the derivative and the hedged items, in addition to the changes in the
market value of the derivative and the changes in the fair value of the hedged
item. If the underlying designated hedged item were to mature or be sold, the
related derivative instrument would be marked-to-market or terminated with any
gain or loss recognized in the current period.
NOTE 2. INVESTMENT SECURITIES
The following table summarizes unrealized gains and losses for
held-to-maturity and available-for-sale securities at September 30,
1997 and December 31, 1996. (Dollars are in thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------------------- -------------------------------------
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 $ 94,720 $ -- $ 821 $ 93,899 $ 113,754 $ -- $ 1,045 $ 112,709
Obligations of state and
political subdivisions 64,635 847 -- 65,482 54,203 1,920 506 55,617
Other debt securities -- -- -- -- -- -- -- --
Total held-to-
maturity securities $ 159,355 $ 847 $ 821 $ 159,381 $ 167,957 $ 1,920 $ 1,551 $ 168,326
</TABLE>
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Note 2. (cont.)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------------------- -------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasuries and
agencies $ 16,490 $ 116 $ 34 $ 16,572 $ 20,282 $ 160 $ 7 $ 20,435
Mortgage-backed
securities 978,134 17,839 33 995,940 1,250,598 15,828 4,998 1,261,428
Other debt securities 1,935 13 15 1,933 1,434 6 1 1,439
Federal Reserve/FHLB
stock and other
equity securities 72,027 -- -- 72,027 49,010 -- -- 49,010
Total available-for-
sale securities $1,068,586 $17,968 $ 82 $1,086,472 $1,321,324 $15,994 $ 5,006 $1,332,312
</TABLE>
As of September 30, 1997, the Corporation reported a net unrealized gain of
$17.9 million for available-for-sale securities. For the first nine months of
1997, the after-tax net unrealized gain/(loss) reported as a separate component
of equity increased from a net unrealized gain of $7.1 million to a net
unrealized gain of $11.6 million, increasing shareholders' equity $4.5 million.
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at September 30, 1997.
(Dollars in thousands)
Amortized Fair
Held-to-Maturity Cost Value
One year or less $ 62,310 $ 62,320
After one year through five years 69,799 69,810
After five years through ten years 14,714 14,716
After ten years 12,532 12,535
Total $ 159,355 $ 159,381
Available-for-Sale
One year or less $ 262,781 $ 267,179
After one year through five years 542,369 551,446
After five years through ten years 189,630 192,804
After ten years 73,806 75,043
Total $1,068,586 $1,086,472
Note: Maturity information related to mortgage-backed securities included above
is presented based upon weighted average maturities anticipating future
prepayments.
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NOTE 3. LOANS
The following table summarizes the composition of the loan portfolio, net of
unearned interest, as of September 30, 1997 and December 31, 1996. (Dollars
are in thousands)
September 30, December 31,
1997 1996
Commercial loans: ---------- ----------
Corporate loans $2,034,714 $1,805,964
Asset-based lending 288,142 266,307
Commercial leasing 299,740 262,187
Industrial revenue bonds 26,452 28,916
Total commercial loans 2,649,048 2,363,374
Real estate loans:
Residential mortgage 1,222,400 1,203,790
Commercial mortgage 1,191,020 1,134,707
Construction and land development 345,124 260,582
Total real estate loans 2,758,544 2,599,079
Retail loans:
Installment 1,610,786 1,506,818
Credit cards 434,637 420,427
Retail leasing 872,962 697,480
Total retail loans 2,918,385 2,624,725
Total loans, net of unearned interest $8,325,977 $7,587,178
NOTE 4. 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, 1997 and December 31, 1996. (Dollars
are in thousands)
September 30, 1997 December 31, 1996
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired Loans: -------- -------- --------- --------
Valuation allowance required $ 5,026 $ 1,104 $ 2,215 $ 785
No valuation allowance required 16,111 -- 29,018 --
Total impaired loans $ 21,137 $ 1,104 $ 31,233 $ 785
The average recorded investment in impaired loans for the nine months ended
September 30, 1997 was $24 million, compared to $32 million for the same period
in 1996. 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 nine months of
1997 or 1996.
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<PAGE>
NOTE 5. 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,
1997 1996 1996
-------- -------- ---------
Balance - beginning of period $ 118,689 $ 106,909 $ 106,909
Loans charged-off (42,348) (30,614) (43,653)
Recoveries on loans previously charged-off 11,898 10,639 14,660
Net charge-offs (30,450) (19,975) (28,993)
Provision charged to earnings 41,614 29,623 40,773
Balance - end of period $ 129,853 $ 116,557 $ 118,689
NOTE 6. DEPOSITS
The following table summarizes the composition of deposits of the
Corporation as of September 30, 1997 and December 31, 1996. (Dollars are
in thousands)
September 30, December 31,
1997 1996
---------- ----------
Noninterest-bearing deposits $1,522,249 $1,571,080
Interest-bearing deposits:
Savings 810,715 920,555
NOW accounts 185,630 194,564
Money market deposit accounts 2,159,883 1,838,578
Time deposits $100,000 and over - domestic 345,724 397,322
Foreign deposits $100,000 and over 28,440 42,859
All other deposits 2,823,363 2,911,303
Total interest-bearing deposits 6,353,755 6,305,181
Total deposits $7,876,004 $7,876,261
NOTE 7. TRUST PREFERRED SECURITIES
In the second quarter of 1997, the Corporation formed Star Capital I ("the
Trust"), a wholly owned Delaware business trust, which issued $150 million of
Corporation-obligated mandatorily redeemable Floating Rate Capital Securities
("Capital Securities"). The Trust used the proceeds from the issuance of the
Capital Securities to purchase a like amount of Floating Rate Junior
Subordinated Debentures ("the Debentures") of the parent company. The
Debentures are the sole assets of the Trust and are eliminated, along with
the related income statement effects, in the consolidated financial statements
of the Corporation. The Corporation used the proceeds from the sale of the
Debentures for general corporate purposes, which may include repurchase of
common equity of the Corporation, the repayment of indebtedness, investments in
or extensions of credit to its subsidiaries and the financing of possible
acquisitions.
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<PAGE>
The Capital Securities accrue and pay distributions quarterly at an annual
rate equal to three month LIBOR plus 0.765% of the liquidation amount of $1,000
per Capital Security. The parent company has fully and unconditionally
guaranteed the obligations of the Trust. The guarantee covers the payment of
distributions and payments on liquidation of the Trust or the redemption of the
Capital Securities, but only to the extent of the funds held by the Trust.
The Capital Securities are mandatorily redeemable upon the maturity of the
Debentures on June 15, 2027, or upon earlier redemption as provided by the
indenture. The parent company can redeem the Debentures in whole or in part on
or after June 15, 2007 or any time in whole upon the occurrence of a Special
Event (as defined in the offering circular). For financial reporting purposes
the Corporation treats the Capital Securities as debt and the distributions to
the security holders are recorded as interest expense.
NOTE 8. INCOME TAX
The components of the net deferred tax liability included in other
liabilities on the Corporation's consolidated balance sheets at September 30,
1997 and December 31, 1996 are shown in the following table. (Dollars are in
thousands)
September 30, December 31,
1997 1996
--------- ----------
Allowance for loan losses $ 45,667 $ 41,689
Deferred compensation 4,393 3,391
Deferred loan fees and costs 796 1,133
Intangible asset amortization 476 458
Other 3,228 3,044
Total deferred tax asset 54,560 49,715
Leased assets (112,253) (84,868)
Fixed asset depreciation (5,953) (5,953)
Pension liabilities (6,172) (5,559)
Unrealized gain on securities (6,257) (3,862)
FHLB stock dividends (2,304) (1,735)
Purchase accounting/intangible assets (348) (277)
Other (2,992) (2,052)
Total deferred tax liability (136,279) (104,306)
Net deferred tax liability $ (81,719) $ (54,591)
The Corporation has not recorded a valuation reserve related to deferred tax
assets.
NOTE 9. OTHER NONINTEREST EXPENSE
The following are included in all other expense for the three months and
nine months ended September 30, 1997 and 1996. (Dollars
are in thousands)
Three Months Nine Months
1997 1996 1997 1996
------- ------- ------- -------
Amortization of intangible assets $ 4,255 $ 4,414 $13,023 $12,753
Outside processing services 2,968 3,038 9,448 8,596
State taxes 2,692 2,823 7,736 8,222
Marketing 2,638 2,238 7,384 6,727
-13-
<PAGE>
NOTE 10. MORTGAGE SERVICING RIGHTS
Effective January 1, 1997, the Corporation adopted 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 supersedes SFAS No. 122 "Accounting for Mortgage Servicing Rights" which
was adopted by the Corporation in 1996. SFAS No. 125 requires that a servicing
asset (or servicing liability) be recognized each time the Corporation
undertakes the obligation to service a financial asset. Currently
the Corporation recognizes servicing assets on mortgage loans to be sold on the
secondary market.
SFAS No. 125 requires that at the time a loan is sold or securitized the
servicing asset is measured by allocating the total cost of the loan between
the mortgage servicing right and the loan based on their relative fair values.
SFAS No. 125 requires that servicing assets are assessed for impairment based
on their fair value. In addition, mortgage servicing assets 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. In 1996, the
value of mortgage servicing assets was 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 the loan was originated. Beginning
in 1997, the Corporation began selling all mortgage servicing assets to a third
party on a quarterly basis, therefore the value of these assets are established
based on the future sale commitment. Mortgage servicing assets are amortized
as a reduction of servicing revenues, over the period of the estimated lives of
the underlying loans, in proportion with estimated net servicing income.
In estimating fair value for the purposes of impairment evaluation and
measurement, all pre-SFAS No. 122 mortgage servicing assets are measured
separately. During 1997, all mortgage servicing rights originated in 1996 were
sold, while all 1997 mortgage servicing assets are valued based on a future
sale commitment. Quarterly impairment testing of all pre-1996 mortgage
servicing assets is performed using a discounted cash flow methodology assuming
current national prepayment speeds and a current discount rate. The
discount rates assumed were 9.5 percent at September 30, 1997 and 8.0 percent
at December 31, 1996. Impairment will be recognized through a valuation
allowance for each impaired stratum.
The following is a summary of mortgage servicing assets included in other
assets at September 30, 1997 and December 31, 1996. (Dollars are in thousands)
Sept. 30, Dec. 31,
1997 1996
Mortgage Servicing Assets: -------- --------
Balance at beginning of year $ 12,820 $ 10,344
Amount capitalized 2,215 4,685
Amount sold (4,817) --
Amortization (1,203) (2,209)
Balance at end of period $ 9,015 $ 12,820
Fair Value at end of period $ 10,803 $ 15,455
There was no valuation allowance established related to mortgage servicing
rights at September 30, 1997 or December 31, 1996.
-14-
<PAGE>
NOTE 11. EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings
per Share." SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) for all publicly held companies. SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS and
requires the presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. Basic EPS
excludes all dilution, while diluted EPS reflects the potential dilution that
could occur if securities, stock options or other contracts to issue common
stock were exercised resulting in the issuance of common stock.
The adoption of SFAS No. 128 is required for financial statements issued
after December 15, 1997 and requires restatement of all prior period EPS data.
The following table shows reported earnings per share and pro forma basic and
diluted EPS of the Corporation under SFAS No. 128 for the three months and
nine months ended September 30, 1997 and 1996.
Three Months Nine Months
1997 1996 1997 1996
------ ------ ------ ------
Reported earnings per common share $ 0.58 $ 0.43 $ 1.66 $ 1.31
Pro forma under SFAS No. 128:
Basic EPS 0.58 0.43 1.66 1.31
Diluted EPS 0.57 0.43 1.61 1.29
NOTE 12. ACQUISITION
On September 15, 1997, the Corporation announced that it had signed a
definitive merger agreement to acquire Great Financial Corporation ("Great
Financial"). Under the agreement the Corporation would acquire Great Financial
for stock and cash, 70 percent of the outstanding shares of Great Financial
will be exchanged for common shares of Star Banc Corporation stock at an
exchange ratio of 0.949 Star Banc shares for each share of Great Financial.
The remaining 30 percent of Great Financial shares will be exchanged for
$44 in cash for each share.
Based on Star Banc's closing price on September 12, 1997 of $46.375 per
share, the value of this transaction is approximately $655 million. This
transaction is structured as a tax-free exchange for shareholders receiving
stock and will be accounted for as a purchase transaction. This acquisition is
expected to be completed in the first quarter of 1998.
-15-
<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, 1997, was $50,145,000, a 31.2 percent increase over the
third quarter of 1996. Net income for the first nine months of 1997 was
$143,031,000, a 23.2 percent increase compared to the same period in 1996.
Earnings per common share was $0.58 for the third quarter of 1997, compared to
$0.43 for the third quarter of 1996, an increase of 34.9 percent. For the
first nine months of 1997 earnings per share was $1.66, a 26.7 percent increase
over the same period in 1996.
Earnings for 1996 included a special one-time assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") of $5 million pre-tax. Excluding
this assessment in 1996, earnings per share increased 23.4 percent in the third
quarter of 1997 and 23.9 percent for the first nine months of 1997, as compared
to the same periods in 1996.
Earnings results for 1997 reflect strong increases in net interest income
and noninterest income, as tax equivalized net revenues increased 11.8 percent
for the third quarter and 13.4 percent for the first nine months of 1997,
compared to the same periods of 1996. Return on average assets was 1.90 for
the third quarter and 1.87 percent for the first nine months of 1997, compared
to 1.71 percent and 1.65 percent, respectively, for the same periods of 1996
(excluding the SAIF assessment). Return on average equity increased to 23.00
percent for the third quarter of 1997 compared to 19.70 percent in the prior
year.
On September 15, 1997, the Corporation announced that it had signed a
definitive merger agreement to acquire Great Financial Corporation ("Great
Financial"). Under the agreement 70 percent of Great Financial's outstanding
shares will be exchanged for common shares of Star Banc stock at an exchange
rate of 0.949 shares of Star Stock for each share of Great Financial, the
remaining 30 percent of Great Financial shares will be exchanged for $44 in
cash for each share. This transaction will accounted for as a purchase. Great
Financial has approximately $3 billion in total assets and 45 branches in
Kentucky and Indiana.
FINANCIAL CONDITION
Total assets at September 30, 1997 amounted to $10.77 billion, up $679
million from $10.09 billion at December 31, 1996. Total loans, net of unearned
interest, increased to $8.33 billion at September 30, 1997, compared to $7.59
billion at December 31, 1996. The Corporation has experienced increases in
loan volumes for most lending areas for the first nine months of 1997, led by
retail loans up $294 million or 11.2 percent, and commercial loans up $286
million or 12.1 percent.
Investment securities declined $254 million to $1.25 billion at September
30, 1997, compared to $1.50 billion at December 31, 1996. This decrease was
due to the sale of approximately $190 million of available-for-sale securities,
in addition to scheduled maturities and paydowns on mortgage-backed securities.
As of September 30, 1997, the Corporation's investment securities portfolio
included $1.09 billion in securities classified as available-for-sale, a
decline of $246 million from December 31, 1996, and $159 million classified as
held-to-maturity. At September 30, 1997, the Corporation reported a net
unrealized gain of $17.9 million on available-for-sale securities, with an
offsetting increase to shareholders' equity of $11.6 million (net of tax). For
the first nine months of 1997, the after-tax net unrealized gain/(loss)
reported as a separate component of equity increased from an unrealized gain of
$7.1 million to an unrealized gain of $11.6 million, increasing equity $4.5
million.
-16-
<PAGE>
Deposits declined $381 million in the third quarter of 1997 from $8.26
billion at June 30, 1997 to $7.88 billion at September 30, 1997. The decrease
in the third quarter was across most product lines, with noninterest bearing
deposits down $145 million primarily in nonpersonal DDAs and interest-bearing
deposits down $236 million. Deposits were flat compared to December 31, 1996,
with noninterest bearing deposits down $49 million, while interest-bearing
deposits are up $49 million. The increase in interest-bearing deposits was
primarily in money market deposit accounts. This increase is the result of a
continued shift in customer deposits from CDs, savings and NOW accounts into
tiered rate money market accounts, in addition to the introduction of a new
money market account in 1997. The decline in noninterest-bearing deposits was
due to lower official check balances as Star Bank transferred the processing
and clearing of official checks to a third party, in addition to fluctuations
in trust cash balances. Those declines were partially offset by increases in
both nonpersonal and personal DDAs of 3.3 percent and 2.9 percent,
respectively, as compared to December 31, 1996.
RESULTS OF OPERAIONS
Tax equivalized net interest income, the Corporation's principal source of
earnings, increased $8.5 million or 7.9 percent in the third quarter and $35.6
million or 11.5 percent for the first nine months of 1997, compared to the same
periods in 1996. The increase in 1997 was due to an increase in earning asset
volumes as a result of continued strong loan growth , growth in noninterest
bearing deposits and improved yields on earning assets. Average loans
increased $740 million or 10.3 percent, while investment securities declined
$199 million or 12.7 percent and noninterest bearing deposits increased $134
million or 10.1 percent in the first nine months of 1997, compared to the same
period in 1996.
Net interest margin increased two basis points to 4.93 percent in the third
quarter of 1997, compared to 4.91 percent for the same period in 1996. For the
first nine months of 1997, net interest margin increased 22 basis points to
4.95 percent, compared to 4.73 percent for 1996. These increases were
primarily the result of an increase in the yield on earning assets, as retail
loan, residential mortgage and investment security yields improved in 1997. The
increase in the yield on earning assets was also a result of the continued
change in mix of earning assets, with loan growth being partially funded by
declines in the investment portfolio. The cost of supporting funds was up in
the third quarter , but was flat for the first nine months of 1997 as compared
to 1996. The increase in the third quarter was due to higher rates paid on
money market accounts and short-term borrowings, partially offset by an
increase in non-interest bearing deposits. Tables 1 and 2 provide detailed
information on 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 affected by an
increase in the provision for loan losses of $2.2 million in the third quarter
and $12.0 million for the first nine months of 1997, as compared to 1996. As
discussed further in the Asset Quality section, the provision has continued to
trend upward due to increases in loans outstanding, a change in loan mix
toward consumer loans and an increase in consumer loan charge-offs.
Noninterest income continues to be a growing source of revenue for the
Corporation, representing 31.55 percent of tax-equivalent net revenues in the
third quarter and 30.18 percent in the first nine months of 1997, increases of
249 and 118 basis points respectively, compared to the same periods in 1996.
Excluding gains and losses on sales of securities, noninterest income
increased $10 million or 22.4 percent in the third quarter of 1997, compared to
the third quarter of 1996. Included in 1997 was $4.2 million in losses on
sales of securities which was partially offset by a $1.6 million gain on the
sale of $3.6 million in mortgage servicing rights.
-17-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
<CAPTION>
Third Quarter, 1997 Third Quarter, 1996
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans....................$ 2,558,418 $ 55,662 8.64 % $2,340,167 $ 51,105 8.69 %
Real estate loans................... 2,691,723 58,491 8.68 2,597,646 55,343 8.52
Retail loans........................ 2,866,981 67,317 9.35 2,394,053 55,684 9.27
Total loans.................... 8,117,122 181,470 8.90 7,331,866 162,132 8.82
Taxable investment securities....... 1,209,931 21,195 7.00 1,422,619 23,360 6.57
Non-taxable investment securities... 62,807 1,359 8.61 52,718 1,107 8.37
Money market investments............ 90,961 1,321 5.76 26,154 361 5.49
Total interest-earning assets.. 9,480,821 $ 205,345 8.63 % 8,833,357 $ 186,960 8.44 %
Cash and due from banks............. 458,259 395,109
Allowance for loan losses........... (127,960) (114,978)
Other assets........................ 651,311 553,829
Total assets...................$10,462,431 $9,667,317
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.....................$ 1,042,849 $ 6,537 2.49 % $1,129,414 $ 7,063 2.49 %
Money market deposit accounts....... 2,110,859 16,938 3.18 1,816,991 12,914 2.83
Time deposits $100,000 and over..... 402,102 5,437 5.36 413,269 5,569 5.36
Time deposits under $100,000........ 2,844,233 38,941 5.43 2,927,316 39,811 5.41
Short-term borrowings............... 1,049,659 12,897 4.87 891,448 10,529 4.70
Long-term debt...................... 451,963 7,549 6.66 152,351 2,560 6.72
Total interest-bearing
liabilities.................. 7,901,665 $ 88,299 4.44 % 7,330,789 $ 78,446 4.26 %
Noninterest-bearing deposits........ 1,486,939 1,347,507
Other liabilities................... 208,832 151,738
Shareholders' equity................ 864,995 837,283
Total liabilities and
shareholders' equity.........$10,462,431 $9,667,317
Net interest margin................. 4.93 % 4.91 %
Interest rate spread................ 4.19 4.18
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of
nonaccruing loans is included in average amounts outstanding.
</TABLE>
-18-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
<CAPTION>
Year through September 30, 1997 Year through September 30, 1996
Daily Average Daily Average
Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans....................$ 2,473,308 $ 161,100 8.71 % $2,291,029 $ 149,173 8.70 %
Real estate loans................... 2,655,796 170,997 8.59 2,583,915 163,847 8.46
Retail loans........................ 2,773,405 192,402 9.26 2,287,570 157,752 9.20
Total loans.................... 7,902,509 524,499 8.86 7,162,514 470,772 8.77
Taxable investment securities....... 1,306,292 67,612 6.90 1,514,115 73,029 6.43
Non-taxable investment securities... 59,466 3,891 8.74 50,568 3,334 8.80
Money market investments............ 61,333 2,624 5.72 18,598 780 5.60
Total interest-earning assets.. 9,329,600 $ 598,626 8.57 % 8,745,795 $ 547,915 8.36 %
Cash and due from banks............. 445,703 452,104
Allowance for loan losses........... (124,984) (112,379)
Other assets........................ 601,408 556,988
Total assets...................$10,251,727 $9,642,508
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.....................$ 1,086,217 $ 20,661 2.54 % $1,669,604 $ 28,361 2.27 %
Money market deposit accounts....... 2,005,882 45,604 3.04 1,288,494 32,105 3.33
Time deposits $100,000 and over..... 409,813 16,425 5.36 422,553 17,214 5.44
Time deposits under $100,000........ 2,885,784 116,882 5.42 2,914,887 119,463 5.47
Short-term borrowings............... 1,009,505 36,615 4.85 885,787 31,928 4.81
Long-term debt...................... 340,425 16,717 6.55 158,257 8,764 7.38
Total interest-bearing
liabilities.................. 7,737,626 $ 252,904 4.37 % 7,339,582 $ 237,835 4.33 %
Noninterest-bearing deposits........ 1,459,701 1,325,644
Other liabilities................... 204,234 148,358
Shareholders' equity................ 850,166 828,924
Total liabilities and
shareholders' equity.........$10,251,727 $9,642,508
Net interest margin................. 4.95 % 4.73 %
Interest rate spread................ 4.20 4.03
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of
nonaccruing loans is included in average amounts outstanding.
</TABLE>
-19-
<PAGE>
Excluding these transactions in 1997, noninterest income increased $25.3 million
or 20.0 percent in the first nine months of 1997, compared to 1996. The
improvement in noninterest income in 1997 was the result of a 20.4 percent
increase in trust income due to new business in all product lines and improved
market conditions, in addition to significant increases in electronic banking
income, credit card income cash management income and gains on sales of
residential mortgages.
Noninterest expenses totaled $81.2 million in the third quarter and $236.9
million in the first nine months of 1997. Excluding the SAIF assessment in
the third quarter of 1996, noninterest expenses increased 5.6 percent and 5.8
percent over the same periods in 1996. These increases are a result of the
AmeriFirst and Connersville branch acquisitions, the opening of new retail
facilities and expansion of Star Banc Finance, Inc., the Corporation's consumer
finance company. Additionally, equipment expense is up due to new retail and
data processing equipment and technology, while credit card processing and
outside services expenses are up due to additional transaction volumes. The
Corporation's noninterest expense ratio has continued to decline in 1997,
improving to 47.46 percent in the third quarter and 47.84 percent for the first
nine months of 1997, compared to 50.22 percent and 51.28 percent for the same
periods in 1996 (excluding SAIF). The improvement in the efficiency ratio
reflects management's continued efforts to improve on this key performance
measurement.
The Corporation's effective tax rate was 32.9 percent for the third quarter
and 33.2 percent for the first nine months of 1997, compared to 34.4 percent
and 33.9 percent for the same periods in 1996. These declines are due to higher
levels of tax-exempt revenues in 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all earnings per
share amounts presented in the previous reported periods. Refer to Footnote
No. 11 in the consolidated financial statements for further discussion on the
impact of SFAS No. 128 and disclosure of proforma earnings per share amounts.
ASSET QUALITY
As of September 30, 1997, the allowance for loan losses was $129.9 million
or 1.56 percent of loans, net of unearned interest. This compares to an
allowance of $118.7 million or 1.56 percent of loans, net of unearned interest,
at December 31, 1996. The allowance as a percentage of nonperforming loans
increased 138 basis points to 439 percent at September 30, 1997 compared to 301
percent at December 31, 1996.
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 $9.9
million in the third quarter of 1997, a $1.8 million increase over the third
quarter of 1996. As a percentage of average outstanding loans, annualized net
charge-offs increased four basis points to 0.48 percent for the third quarter
of 1997, as compared to 0.44 percent for the third quarter of 1996. This was
the second consecutive quarterly decline in this ratio from 0.52 percent for
the second quarter and 0.54 percent in the first quarter of 1997.
-20-
<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
For the Periods Ended September 30
(Dollars in thousands)
Third Quarter Nine Months
1997 1996 1997 1996
---------- ---------- ---------- ----------
Average loans - net of unearned
interest..................... $ 8,117,122 $ 7,331,866 $ 7,902,509 $ 7,162,514
Allowance for loan losses:
Balance - beginning of
period..................... $ 125,489 $ 112,585 $ 118,689 $ 106,909
Charge-offs:
Commercial................. (2,615) (4,152) (10,842) (10,948)
Real estate................ (340) (188) (958) (815)
Retail..................... (10,173) (6,956) (30,548) (18,851)
Total charge-offs........ (13,128) (11,296) (42,348) (30,614)
Recoveries:
Commercial................. 890 1,098 4,164 4,341
Real estate................ 307 70 656 504
Retail..................... 2,045 2,000 7,078 5,794
Total recoveries......... 3,242 3,168 11,898 10,639
Net charge-offs........ (9,886) (8,128) (30,450) (19,975)
Provision charged to
earnings................... 14,250 12,100 41,614 29,623
Balance - end of period...... $ 129,853 $ 116,557 $ 129,853 $ 116,557
Ratio of net charge-offs to
average loans - net of
unearned interest............ 0.48% 0.44% 0.52% 0.37%
-21-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
----------- ------------ -------------
<S> <C> <C> <C>
Loans on nonaccrual status....... $ 29,541 $ 39,375 $ 42,987
Loans which have been
renegotiated................... 12 80 81
Total nonperforming loans...... 29,553 39,455 43,068
Other real estate owned.......... 1,927 1,923 2,685
Total nonperforming assets..... $ 31,480 $ 41,378 $ 45,753
Percentage of nonperforming
loans to loans* ............... 0.35% 0.52% 0.57%
Percentage of nonperforming
assets to loans* and other
real estate owned.............. 0.38% 0.55% 0.61%
Loans past due 90 days
or more........................ $ 12,542 $ 11,909 $ 15,035
* Net of unearned interest.
</TABLE>
-22-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
<CAPTION>
September 30, 1997 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.................$15,070 $12 $15,082 0.64 % $323 $23,379 $80 $23,459 1.28 % $937
Commercial leasing........ 1,357 -- 1,357 0.45 -- 4,998 -- 4,998 1.91 1
Total commercial loans.. 16,427 12 16,439 0.62 323 28,377 80 28,457 1.20 938
Real estate loans:
Residential............... 5,636 -- 5,636 0.46 3,405 4,132 -- 4,132 0.34 3,421
Commercial mortgage....... 3,980 -- 3,980 0.33 551 2,412 -- 2,412 0.21 1,142
Construction/land
development............. -- -- -- -- 265 -- -- -- -- 1,018
Total real estate loans. 9,616 -- 9,616 0.35 4,221 6,544 -- 6,544 0.25 5,581
Retail loans:
Installment............... 1,040 -- 1,040 0.06 1,586 1,928 -- 1,928 0.12 849
Credit cards.............. 2,100 -- 2,100 0.48 6,335 2,272 -- 2,272 0.54 4,392
Retail leasing............ 358 -- 358 0.04 77 254 -- 254 0.03 149
Total retail loans...... 3,498 -- 3,498 0.12 7,998 4,454 -- 4,454 0.17 5,390
Total loans.............$29,541 $12 $29,553 0.35 % $12,542 $39,375 $80 $39,455 0.52 % $11,909
</TABLE>
-23-
<PAGE>
The amount of net charge-offs and percentage of charge-offs to average loans
have declined over the last two quarters of 1997 following an upward trend over
the last two years, primarily in the retail loan area. The increase in net
charge-offs, as compared to 1996, is due to several factors including: higher
levels of loans outstanding, a change in loan mix toward consumer loans and an
increase in the levels of credit card losses. Net charge-offs for retail loans
increased $3.2 million in the third quarter of 1997, compared to the prior
year, as net charge-offs on credit cards increased $1.9 million due in part to
higher loan volumes and an increase in customer base. For the first nine
months of 1997, retail net charge-offs are up $10.4 million or 37 basis points
on an annualized basis as a percent of average loans.
As shown in Tables 4 and 5, nonperforming loan levels continued to decline
through the third quarter of 1997. Nonperforming loans decreased $9.9 million
from December 31, 1996 to $29.6 million at September 30, 1997, which was $13.5
million below the September 30, 1996 amount of $43.1 million. Nonperforming
assets also decreased $9.9 million from December 31, 1996 to $31.5 million at
September 30, 1997. The percentage of nonperforming loans to end of period
loans was 0.35 percent at September 30, 1997, a decline of 17 basis points
compared to 0.52 at December 31, 1996 and down 22 basis compared to September
31, 1996 . The decline in nonperforming assets in 1997 was due in part to
continued improvement in economic conditions for businesses, resulting in
decreases in the commercial loan and commercial leasing portfolios. Loans past
due 90 days or more and still accruing interest increased slightly in 1997
compared to December 31, 1996 and declined $2.5 million compared to September
30, 1996. The decline in past due loans since September 30, 1996 was in
commercial real estate loans partially offset by an increase in credit cards.
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. Estimates are reviewed continually and, as
adjustments become necessary, they are reported in earnings in the period in
which they become known. Management believes that the allowance for loan
losses at September 30, 1997 was adequate to absorb all anticipated losses in
the loan portfolio at that date.
The recorded investment in impaired loans at September 30, 1997 was $21
million with a related valuation allowance calculated under SFAS No. 114 of
$1.1 million.
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. 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 deposit as a funding source. In 1994, the Bank prepared an
offering circular in order to issue senior or subordinated bank notes of up to
$500 million with terms that can vary from 30 days to 30 years. In December
1996, the Bank issued $100 million in subordinated notes under this offering
circular. In addition to these funding alternatives, the Corporation maintains
a presence in the national fed funds, repurchase agreements, and eurodollar
markets.
The Corporation issues commercial paper notes through a private placement
memorandum up to a maximum aggregate amount of $150 million, with maturities
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<PAGE>
of up to 270 days. The Corporation also issues medium term notes through a
private placement memorandum up to a maximum aggregate amount of $250 million,
with maturities of 12 to 60 months. The proceeds of the notes from the
commercial paper and medium term notes programs are used for general corporate
purposes and to provide funding to Star Banc Finance, Inc. As of September 30,
1997, $112 million in commercial paper was outstanding. The Corporation's
consolidated long-term debt, which consists of the medium term notes issued by
the parent and subordinated notes issued by the Bank, increased $71 million to
$319 million at September 30, 1997.
In June 1997, the Corporation formed Star Capital I, a wholly owned Delaware
business trust, which issued $150 million of Corporation-obligated mandatorily
redeemable Floating Rate Capital Securities. The $149 million outstanding at
September 30, 1997 qualifies as tier 1 capital for regulatory capital purposes.
The proceeds from the sale of these securities were used for general corporate
purposes.
In January of 1996, the Board of Directors approved the purchase of six
million shares under the Corporation's buyback program over the next three
years. In December 1996, the board of directors approved the purchase of an
additional three million shares under the buyback program. The repurchased
shares are held as treasury shares for reissue in connection with employee
stock options. Through September 30, 1997, the Corporation has repurchased
5,194,000 shares under the current buyback program, of which 4,584,000 had not
yet been reissued.
Total shareholders' equity increased $28 million in the first nine months to
$883 million at September 30, 1997. This increase was due to a $4 million
increase in the unrealized gain/(loss) on available-for-sale securities and
retention of net income after dividends, partially offset by a $72 million
increase in treasury stock related to buyback activity. The Corporation also
raised its quarterly dividend rate per common share from $0.16 in 1996 to $0.20
in 1997, a 25.0 percent increase.
Banking industry regulators define minimum capital requirements for banks
and bank holding companies. The Corporation's tier 1 and total risk-based
capital ratios at September 30, 1997 were 8.74 percent and 12.67 percent,
respectively, well above the minimum requirements of 4.0 percent for tier 1
capital to risk-weighted assets and 8.0 percent for total capital to
risk-weighted assets. These compare to tier 1 and total ratios of 7.64 percent
and 11.88 percent at December 31, 1996. As of September 30, 1997 the
Corporation's leverage ratio was 7.90 percent compared to 6.53 percent at
December 31, 1996. The increases in the Corporation's leverage, tier 1 and
total capital ratios for the first nine months of 1997 were due primarily to
the issuance of the capital securities discussed above.
As shown in the Condensed Consolidated Statements of Cash Flows, cash flows
provided by operating activities amounted to $162 million for the nine months
ended September 30, 1997 compared to $208 million for the same period in 1996.
This decline was primarily attributable to an $80 million investment in bank
owned life insurance in June 1997.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
With the exception of historical information, the matters discussed or
incorporated by reference in this report on Form 10-Q may be forward-looking
statements that involve risk and uncertainties including, but not limited to,
economic conditions, product demand and industry capability, competitive
products and pricing, new product development, the regulatory and trade
environment and other risks indicated in filings with the Securities and
Exchange Commission.
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<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) A Current Report on Form 8-K was filed on September 25, 1997,
announcing the signing of a merger agreement to purchase
Great Financial Corporation.
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, 1997 /s/ Jerry A. Grundhofer
----------------- ------------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
November 14, 1997 /s/ David M. Moffett
----------------- -----------------------------
Date David M. Moffett
Executive Vice President
and CFO
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<TABLE>
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
For the Periods Ended September 30
(Dollars in thousands except per share data)
<CAPTION>
Third Quarter Nine Months
1997 1996 (a) 1997 1996 (a)
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income................... $ 50,145 $ 38,217 $ 143,031 $ 116,115
Preferred dividends.......... -- -- -- 5
Income available to common
shareholders............... $ 50,145 $ 38,217 $ 143,031 $ 116,110
Weighted average of primary
common shares............... 85,999 88,116 86,284 88,788
Weighted average of preferred
stock convertible to common
shares .................... -- -- -- 27
Weighted average of fully
diluted common shares....... 85,999 88,116 86,284 88,815
Primary earnings per share
(income available to common
shareholders divided by
weighted average of common
shares).................... $ 0.58 $ 0.43 $ 1.66 $ 1.31
Fully diluted earnings per
share (net income divided
by weighted average of
fully diluted common
shares).................... $ 0.58 $ 0.43 $ 1.66 $ 1.31
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.
(a) Per share amounts and weighted average shares have been restated to reflect
a 3-for-1 stock split in December 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, THE CONSOLIDATED BALANCE SHEETS, AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 529,401 529,401
<INT-BEARING-DEPOSITS> 12,697 12,697
<FED-FUNDS-SOLD> 125,250 125,250
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 1,086,472 1,086,472
<INVESTMENTS-CARRYING> 159,355 159,355
<INVESTMENTS-MARKET> 1,245,853 1,245,853
<LOANS> 8,325,977 8,325,977
<ALLOWANCE> 129,853 129,853
<TOTAL-ASSETS> 10,772,437 10,772,437
<DEPOSITS> 7,876,004 7,876,004
<SHORT-TERM> 1,302,728 1,302,728
<LIABILITIES-OTHER> 242,943 242,943
<LONG-TERM> 318,698 318,698
0 0
0 0
<COMMON> 452,407 452,407
<OTHER-SE> 431,091 431,091
<TOTAL-LIABILITIES-AND-EQUITY> 10,772,437 10,772,437
<INTEREST-LOAN> 181,048 523,214
<INTEREST-INVEST> 22,114 70,237
<INTEREST-OTHER> 1,321 2,624
<INTEREST-TOTAL> 204,483 596,075
<INTEREST-DEPOSIT> 67,853 199,572
<INTEREST-EXPENSE> 88,299 252,904
<INTEREST-INCOME-NET> 116,184 343,171
<LOAN-LOSSES> 14,250 41,614
<SECURITIES-GAINS> (482) (4,238)
<EXPENSE-OTHER> 81,151 236,871
<INCOME-PRETAX> 74,726 214,099
<INCOME-PRE-EXTRAORDINARY> 50,145 143,031
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 50,145 143,031
<EPS-PRIMARY> 0.58 1.66
<EPS-DILUTED> 0.58 1.66
<YIELD-ACTUAL> 8.63 8.57
<LOANS-NON> 29,541 29,541
<LOANS-PAST> 12,542 12,542
<LOANS-TROUBLED> 12 12
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 125,489 118,689
<CHARGE-OFFS> 13,128 42,348
<RECOVERIES> 3,242 11,898
<ALLOWANCE-CLOSE> 129,853 129,853
<ALLOWANCE-DOMESTIC> 129,853 129,853
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
