SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 12, 1997
STAR BANC CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 0-7601 31-0838189
(State or other jurisdiction of (Commission file number) (I.R.S. Employer
incorporation or organization) Identification No.)
425 Walnut Street, Cincinnati, Ohio 45202
(Address of principal executive offices)
Registrant's telephone number, including area code (513) 632-4000
Not Applicable
(Former name or former address, if changed since last report)
Page 1 of 2
<PAGE>
Item 5 Other Events
On March 1, 1997, the 1996 Consolidated Financial Statements of Star
Banc Corporation (as included in Exhibit 13) were published and mailed to
shareholders as part of Star Banc Corporation's 1996 Annual Report.
Item 7 Financial Statements and Exhibits
(a) & (b) Not Applicable
(c) Exhibits filed:
Exhibit 13 Consolidated Financial Statements and MD&A of the
Annual Report to Security Holders
Exhibit 23 Consent of Independent Public Accountants in regards
to the previously filed Registration Statements
No. 2-944845, No. 33-9494, No. 33-10085,
No. 33-24672, No. 33-46018 and No. 33-61308
Exhibit 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR BANC CORPORATION
Date March 12, 1997 /s/ David M. Moffett
David M. Moffett
Executive Vice President
and Chief Financial Officer
Page 2 of 2
<PAGE>
FIVE YEAR BAR CHARTS OF NET INCOME, EPS, DIVIDENDS, AVERAGE
BALANCES AND VARIOUS RATIOS:
1992 1993 1994 1995 1996
Net Income $76.1 $100.3 $116.6 $136.6 $161.6 *
(in millions of dollars)
Earnings Per Share Fully Diluted $0.84 $1.10 $1.29 $1.51 $1.82 *
(in dollars)
Common Dividends Declared Per Share $0.35 $0.39 $0.47 $0.53 $0.63
(in dollars)
Average Shareholders' Equity to
Average Total Assets 8.08% 8.50% 8.51% 8.24% 8.61%
(in percents)
Return on Average Equity 13.14% 15.65% 16.59% 17.57% 19.34%*
(in percents)
Return on Average Assets 1.06% 1.33% 1.41% 1.45% 1.67%*
(in percents)
Net Interest Margin 4.70% 4.67% 4.55% 4.44% 4.78%
(in percents)
Efficiency Ratio 61.34% 57.06% 55.84% 55.07% 51.22%*
(in percents)
Market Capitalization $1.05 $1.04 $1.08 $1.78 $2.66
(in billions of dollars)
Average Shareholders' Equity $579.5 $640.9 $702.6 $777.7 $835.6
(in millions of dollars)
Average Total Assets $7.17 $7.54 $8.25 $9.44 $9.71
(in billions of dollars)
Dividend Payout Ratio 40.35% 34.41% 35.89% 35.00% 34.69%
(in percents)
* Excluding SAIF assessment; see Financial Highlights on facing page.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
(dollars in thousands except per share data) 1996 % change 1995 % change 1994
<S> <C> <C> <C> <C> <C>
For The Year:
Net income $ 158,359 15.9% $ 136,603 17.2% $ 116,591
Per Share: (a)
Primary earnings $ 1.79 17.8% $ 1.52 16.9% $ 1.30
Fully diluted earnings 1.79 18.5 1.51 17.1 1.29
Common dividends declared 0.63 17.6 0.53 12.8 0.47
Preferred dividends declared 3.00 (50.0) 6.00 - 6.00
Year-end book value per common
share outstanding 9.86 7.6 9.16 14.4 8.01
Year-end market value per
common share 30.63 54.4 19.83 63.6 12.13
- -------------------------------------------------------------------------------------------------------------
Average Balances:
Total assets $ 9,705,620 2.8% $ 9,439,626 14.4% $ 8,252,244
Earning assets 8,817,559 2.7 8,588,587 12.0 7,665,037
Loans, net of unearned interest 7,255,113 8.8 6,669,806 16.6 5,721,667
Deposits 7,643,960 4.1 7,343,698 17.0 6,278,879
Shareholders' equity 835,566 7.4 777,674 10.7 702,605
- -------------------------------------------------------------------------------------------------------------
At Year-End:
Common shares issued and
outstanding (a) 86,758,443 89,500,764 89,408,388
Number of common shareholders 8,112 7,955 7,858
Number of employees 3,988 3,850 3,707
- -------------------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 1.63% 1.45% 1.41%
Return on average equity 18.95 17.57 16.59
Average shareholders' equity
to average total assets 8.61 8.24 8.51
Risk-based capital ratios:
Tier 1 7.64 7.97 8.66
Total 11.88 11.23 12.16
Leverage ratio 6.53 6.23 6.27
Net interest margin 4.78 4.44 4.55
Noninterest expense to net revenue 52.06 55.07 55.84
Noninterest income as a percent
of net revenue 28.80 26.58 25.10
Noninterest expense to total
average assets 3.18 3.03 3.15
- -------------------------------------------------------------------------------------------------------------
Excluding SAIF Assessment:
Net income $ 161,609 18.3% 136,603
Noninterest expense 303,211 5.9 286,214
Fully diluted earnings per share 1.82 20.5 1.51
Return on average assets 1.67% 1.45%
Return on average equity 19.34 17.57
Noninterest expense to net revenue 51.22 55.07
(a) Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
</TABLE>
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<PAGE>
Consolidated Six Year Selected Financial Data
<TABLE>
<CAPTION>
(dollars in thousands except per share data) 5 Year
Compound
1996 1995 1994 1993 1992 1991 Growth Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Interest income $ 735,525 $ 710,404 $ 569,724 $ 518,167 $ 541,421 $ 576,753 5.0%
Interest expense 317,326 332,196 223,618 194,691 233,038 307,333 0.6
Net interest income 418,199 378,208 346,106 323,476 308,383 269,420 9.2
Taxable equivalent
adjustment(a) 3,300 3,356 3,069 3,283 4,479 5,864 (10.9)
Taxable equivalent
net interest income 421,499 381,564 349,175 326,759 312,862 275,284 8.9
Noninterest income 170,522 138,124 117,015 112,890 99,644 81,981 15.8
Net revenue 592,021 519,688 466,190 439,649 412,506 357,265 10.6
Noninterest expense 308,211 286,214 260,311 250,849 253,011 215,528 7.4
Provision for loan losses 40,773 25,101 24,372 33,008 40,898 39,913 0.4
Net income 158,359 136,603 116,591 100,273 76,119 65,832 19.2
Per Share(b)
Primary earnings $ 1.79 $ 1.52 $ 1.30 $ 1.13 $ 0.87 $ 0.75 19.0%
Fully diluted earnings 1.79 1.51 1.29 1.10 0.84 0.74 19.3
Common stock cash
dividends declared 0.63 0.53 0.47 0.39 0.35 0.33 13.5
Year-end book value 9.86 9.16 8.01 7.44 6.70 6.19 9.7
Year-end market value 30.63 19.83 12.13 11.67 12.00 8.33 29.7
Average Balances
Loans, net of
unearned interest $7,255,113 $6,669,806 $5,721,667 $5,146,341 $4,926,900 $4,718,795 9.0%
Investment securities 1,531,349 1,901,722 1,900,290 1,592,210 1,341,917 883,411 11.6
Money market instruments 31,097 17,059 43,080 264,502 383,255 262,947 (34.8)
Total interest-earning assets 8,817,559 8,588,587 7,665,037 7,003,053 6,652,072 5,865,153 8.5
Total assets 9,705,620 9,439,626 8,252,244 7,542,798 7,171,898 6,336,096 8.9
Noninterest-bearing deposits 1,345,296 1,188,364 1,065,933 1,036,141 925,338 765,952 11.9
Interest-bearing deposits 6,298,664 6,155,334 5,212,946 5,085,718 4,955,133 4,426,203 7.3
Total deposits 7,643,960 7,343,698 6,278,879 6,121,859 5,880,471 5,192,155 8.0
Short-term borrowings 898,025 1,014,552 995,901 621,482 498,014 463,024 14.2
Long-term debt 162,840 163,788 155,172 54,308 59,906 45,937 28.8
Shareholders' equity 835,566 777,674 702,605 640,868 579,486 529,312 9.6
Ratios
Return on average assets 1.63% 1.45% 1.41% 1.33% 1.06% 1.04%
Return on average equity 18.95 17.57 16.59 15.65 13.14 12.44
Net interest margin 4.78 4.44 4.55 4.67 4.70 4.69
Noninterest expense to
net revenue 52.06 55.07 55.84 57.06 61.34 60.33
Dividend payout ratio 34.69 35.00 35.89 34.41 40.35 44.33
Tier 1 risk-based capital 7.64 7.97 8.66 11.10 10.64 10.70
Total risk-based capital 11.88 11.23 12.16 12.41 11.99 12.10
Leverage(c) 6.53 6.23 6.27 8.24 7.51 7.96
Average shareholders' equity
to average total assets 8.61 8.24 8.51 8.50 8.08 8.35
</TABLE>
(a) Taxable equivalent adjustment was calculated utilizing a marginal federal
income tax rate of 35 percent for 1993-1996 and 34 percent for the years
1991 and 1992.
(b) Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
(c) Defined as tier 1 equity as a percent of average fourth quarter assets.
- 3 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIVE YEAR BAR CHART OF FULLY DILUTED EARNINGS PER SHARE
(In Dollars)
1992 1993 1994 1995 1996
$0.84 $1.10 $1.29 $1.51 $1.79
OVERVIEW
Star Banc Corporation ("the Corporation") reported record earnings for 1996
with an increase of 15.9 percent to $158,359,000, compared to $136,603,000 in
1995 and $116,591,000 in 1994. Restated for a three-for-one stock split
declared in December, 1996, primary and fully diluted earnings per share for
1996 were $1.79. This compares to primary earnings per share of $1.52 in 1995
and $1.30 in 1994 and fully diluted earnings per share of $1.51 in 1995 and
$1.29 in 1994. Table 1 provides a summary of significant items affecting the
change in primary earnings per share for 1994 through 1996.
Included in 1996 was a special one-time assessment to recapitalize the Savings
Association Insurance Fund (SAIF). Star Banc Corporation's pre-tax SAIF
assessment was $5 million, which reduced fully diluted earnings per share by
$0.03. Excluding this assessment, net income for 1996 was $161,609,000, an
18.3 percent increase over 1995. On the same basis, fully diluted earnings per
share was $1.82, up 20.5 percent over 1995.
Earnings results for 1996 reflected a 14.8 percent increase in tax equivalized
net revenues (excluding gains/(losses) on sales of securities) in addition to
continued reduction in the Corporation's noninterest expense ratio. The
Corporation's return on average assets and return on average equity increased
to 1.63 percent and 18.95 percent, respectively, in 1996. This compares to a
return on average assets of 1.45 percent in 1995 and 1.41 percent in 1994 and a
return on average shareholders' equity of 17.57 percent in 1995 and 16.59
percent in 1994.
Tax equivalized net interest income increased $40 million or 10.5 percent in
1996. This increase was the result of a 34 basis point increase in net interest
margin and an improved mix of earning assets from securities into higher
yielding loans. Also contributing to the increase in net interest income was a
$229 million or 2.7 percent increase in average interest-earning assets.
Excluding gains/(losses) on sales of securities and the SAIF assessment,
noninterest income increased $37 million or 27.0 percent in 1996, while
noninterest expenses were up $17 million or 5.9 percent over 1995. Noninterest
expenses were up due in part to branch acquisitions in 1995 and 1996. The
provision for loan losses increased $16 million or 62.4 percent in 1996 as a
result of loan growth and increases in net charge-offs. Net charge-offs
increased to 0.40 percent of average loans in 1996, up 19 basis points from
1995, but still below historical and national levels.
Total assets at December 31, 1996, were $10.09 billion, up 5.4 percent from
$9.57 billion a year earlier. Total loans, net of unearned interest, were $7.59
billion at the end of 1996, compared to $6.93 billion at the end of 1995. Loan
growth was led by a 21.7 percent increase in retail loans in 1996. Deposits
totaled $7.88 billion and $7.69 billion at December 31, 1996 and 1995,
respectively. The increase in deposits was due to an increase in core deposit
levels, primarily demand deposit accounts.
- 4 -
<PAGE>
In 1995, the Corporation established Star Banc Finance, Inc., a new consumer
finance subsidiary. Star Banc Finance provides nontraditional consumer credit
products to a wider sphere of customers within our current markets and will
allow the Corporation to compete more effectively with other non-bank credit
providers. As of December 31, 1996, Star Banc Finance had reached $134 million
in loans outstanding, a $95 million increase over the previous year, and has
exceeded its earnings goals for 1995 and 1996.
MERGERS AND ACQUISITIONS
On June 14, 1996, the Corporation merged its Kentucky and Indiana banks into
Star Bank, N.A. This allows customers to make deposits and complete
transactions at over 260 branch offices in Ohio, Kentucky or Indiana.
On July 15, 1995, the Corporation's largest subsidiary, Star Bank, N.A. ("the
Bank"), acquired 24 Columbus, Ohio area branch offices from Household Bank,
Federal Savings Bank. This transaction was accounted for as a purchase, and
accordingly, all assets acquired and liabilities assumed were recorded at fair
value. In purchasing these branches, the Bank received $564 million in cash and
$645 million in deposits for a premium of $64 million. A portion of the cash
received was invested in U.S. Government Agency backed or Agency issued
mortgage-backed securities, with the remainder being used to reduce short-term
borrowings of the Bank.
This acquisition greatly enhanced the Corporation's Central Ohio operations and
made Star Bank one of the top five financial institutions in the Columbus
market. This acquisition had a positive impact on net income and earnings per
share since 1995.
The Corporation has continued to make acquisitions in order to enhance its
branch network. On July 14, 1996, the Bank completed a purchase of four branch
offices in Connersville, Indiana from National City Bank, adding $63 million in
deposits. In November 1996, the Bank announced the acquisition of seven branch
offices with approximately $100 million in deposits, from AmeriFirst Bank.
These branches are located in several communities in southwestern Ohio. This
acquisition will be completed in the first quarter of 1997.
Table 1 -- Analysis of Primary Earnings Per Share --
Dollar Change B/(W)
1996 vs. 1995 vs.
1996 1995(a) 1994(a) 1995 1994
Interest income $ 8.31 $ 7.89 $ 6.36 $ 0.42 $ 1.53
Interest expense (3.59) (3.69) (2.50) 0.10 (1.19)
Net interest income 4.72 4.20 3.86 0.52 0.34
Provision for loan losses (0.46) (0.28) (0.27) (0.18) (0.01)
Noninterest income 1.93 1.54 1.31 0.39 0.23
Noninterest expense (3.48) (3.18) (2.91) (0.30) (0.27)
Income taxes (0.92) (0.76) (0.69) (0.16) (0.07)
Primary earnings per share $ 1.79 $ 1.52 $ 1.30 $ 0.27 $ 0.22
(a) Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
- 5 -
<PAGE>
LINE OF BUSINESS RESULTS
For its internal reporting and planning process the Corporation has identified
three major lines of business: Consumer Banking, Wholesale Banking, and Trust/
Private Banking. Table 2 provides a condensed income statement, selected
average balances and performance ratios for each line of business in 1996. This
information is derived from the internal reporting system used by management to
review the financial performance of the various lines of business of the
Corporation.
Unlike financial reporting under generally accepted accounting principles,
there is no authoritative body or guidance in existence for internal financial
reporting. The internal reporting system uses internal management policies and
practices which support the structure of Star Banc Corporation and are not
necessarily comparable with similar information for other financial
institutions. Additionally, methodologies may change from time to time as
accounting and application systems are enhanced or business products change.
The financial results and performance ratios reflect direct revenues and
expenses of each line of business, in addition to allocations of revenues,
expenses, assets and liabilities. A match-funded transfer pricing system is
used to allocate interest income and interest expense. The allowance for loan
losses and associated provision are allocated based on risk weightings and net
charge-off experience for the various loan types within each business line's
portfolio. Capital is assigned to each line of business on a risk-adjusted
basis.
The Treasury/Other group includes the aggregate of interest rate risk from all
lines, in addition to the investment and residential mortgage portfolios.
Consolidated equity in excess of the equity assigned to the business lines is
shown in the Treasury/Other corporate group. A certain amount of the
Corporation's capital will remain unallocated at any point in time and can be
used to fund acquisitions, product expansion and internal growth in various
business lines.
A description of each of the Corporation's primary lines of business is
presented below.
Consumer Banking
Consumer Banking provides deposit, installment and credit card lending,
leasing, investment, payment system and other financial services to individuals
and small businesses. These services are provided through retail branch
offices, ATMs, voice banking, PC and video banking options, in addition to
Star's 24 hour customer service. The Consumer Banking division serves customers
in both our metropolitan and community banking markets. Included in the
Consumer Banking group is Star Banc Finance, Inc., the Corporation's new
consumer finance subsidiary.
Consumer Banking provided 44.5 percent of the line of business earnings in
1996. Earnings for Consumer Banking include allocations of intangible assets
and the associated amortization from all acquisitions of deposits and branch
offices.
Total average loans of the Consumer Banking group grew 15.1 percent in 1996,
led by retail leasing which was up 49.9 percent. Credit cards and other
installment lending were up 35.3 percent and 8.0 percent, respectively.
Included in 1996 were two credit card portfolio purchases totaling $17 million
in outstandings, in addition to a 12.0 percent increase in its customer base.
- 6 -
<PAGE>
Wholesale Banking
Wholesale Banking provides traditional commercial lending, asset based lending,
commercial real estate, equipment financing, cash management services and
international trade services to businesses and governmental entities.
Wholesale Banking provided 39.3 percent of the line of business earnings in
1996.
Average assets of the Wholesale Banking group grew 10.2 percent in 1996, led by
a 27.3 percent increase in asset-based lending. Also showing strong growth in
1996 were commercial leasing and commercial real estate lending with
increases of 11.7 percent and 9.5 percent, respectively.
The Wholesale Banking group includes corporate cash management and
international trade services, two areas that generate significant and growing
revenue streams for the Corporation. In 1996, cash management revenues
increased 24.4 percent, while international trade revenues, which includes
letters of credit, bankers acceptances, foreign exchange and foreign currency
trading, were up 20.5 percent.
Trust and Private Banking
Trust provides personal financial and asset management services, comprehensive
employee benefit plan services, mutual fund custody, corporate bond and stock
transfer services. In addition, Star Bank, N.A. serves as the investment
adviser to The Star Funds, a family of nine proprietary, professionally managed
mutual funds. The Private Banking group provides wealth management services
which meet the needs of high income and high net worth individuals and business
owners.
Trust income grew 13.0 percent in 1996. This growth was a result of record
asset growth, new product introductions and continued improvement in investment
markets. For the Private Banking group, loans increased 19.1 percent and
deposits were up 21.5 percent in 1996. Trust and Private Banking provided 16.2
percent of the line of business earnings in 1996. The negative provision amount
shown in Table 2 represents a high level of recoveries and a reduction in
nonperforming loans in the private banking group in 1996.
Total trust assets under administration at December 31, 1996, were over $30
billion, an increase of 40.3 percent compared to the prior year. In addition,
managed assets increased 26.4 percent to $7.4 billion. Assets in The Star Funds
family of mutual funds, increased 51.2 percent in 1996, ending the year at over
$1.9 billion.
Treasury/Other
The operating results of the Corporation's investments and residential mortgage
portfolios, the net effect of transfer pricing and the results from the
management of interest rate risk are included in this category. Also included
are unallocated portions of certain assets and liabilities, and any revenue and
expenses of certain administrative and support functions which are not
specifically allocated to the three primary lines of business. These support
functions include financial administration and treasury, credit administration,
internal audit, in-house legal counsel, human resources and bank properties
management.
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<PAGE>
Table 2 -- Line of Business Results --
For the year ended December 31, 1996 (dollars in thousands)
<TABLE>
<CAPTION>
Consumer Wholesale Trust/Private Treasury Consolidated
Banking Banking Banking /Other Star Banc
<S> <C> <C> <C> <C> <C>
Net interest income $ 269,413 $ 142,448 $ 26,406 $ (16,768) $ 421,499
Noninterest income 104,050 20,430 48,384 (2,342) 170,522
Net revenue 373,463 162,878 74,790 (19,110) 592,021
Noninterest expense 202,175 33,903 24,121 48,012 308,211
Provision for loan losses 31,282 5,160 (401) 4,732 40,773
Income taxes 49,002 43,335 17,875 (25,534) 84,678
Net income 91,004 80,480 33,195 (46,320) 158,359
Average Balances:
Total loans $2,920,088 $2,988,563 $220,406 $1,126,056 $7,255,113
Total assets 3,522,464 3,228,565 261,168 2,693,423 9,705,620
Total deposits 6,772,622 520,589 281,240 69,509 7,643,960
Equity 356,474 317,408 90,405 71,279 835,566
Ratios:
Return on average assets 2.6% 2.6% n/m n/m 1.6%
Return on allocated equity 26.2 26.0 39.3% n/m 18.9
Efficiency ratio 54.1 20.8 32.2 n/m 52.1
</TABLE>
n/m - not meaningful
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the difference between total interest income and total
interest expense, is the Corporation's principal source of earnings. The amount
of net interest income is determined by the volume of interest-earning assets,
the level of rates earned on those interest-earning assets, and the cost of
supporting funds. The difference between rates earned on interest-earning
assets (with an adjustment made to tax-exempt income to provide comparability
with taxable income) and the cost of supporting funds is measured by the net
interest margin.
Tax-equivalent net interest income increased 10.5 percent in 1996, following a
9.3 percent increase in 1995. The increase in 1996 was the result of a 34 basis
point improvement in net interest margin, as discussed below, in addition to a
$229 million or 2.7 percent increase in average interest-earning assets. The
increase in 1995 was due to an increase in the level of interest-earning
assets, as the Corporation experienced substantial loan growth in 1995. Average
earning assets were up 12.0 percent in 1995 led by a 16.6 percent increase in
average loans. This increase was partially offset by a decline in the net
interest margin and interest rate spreads in 1995.
FIVE YEAR BAR CHART OF NET INTEREST INCOME
(in millions of dollars)
1992 1993 1994 1995 1996
$313 $327 $349 $382 $421
- 8 -
<PAGE>
The net interest margin was 4.78 percent in 1996, 4.44 percent in 1995 and 4.55
percent in 1994. The improvement in 1996 was due in part to continued
improvement in the mix of earning assets as loan growth was funded primarily by
sales and maturities of lower yielding investment securities and residential
mortgages. Also contributing to the increase in margin was an improved mix of
funding sources, as short-term borrowings declined and core deposit levels
increased, in addition to lower required reserves. These factors contributed
to the 22 basis point decline in rates paid on interest-bearing liabilities
and a 27 basis point decline in cost of supporting funds in 1996.
The decrease in net interest margin in 1995 was primarily a result of the
TransOhio branch acquisition (in September, 1994), which reduced net interest
margin due to the proceeds from the deposits acquired being invested in
investment securities which have lower yields than the average yields of the
Corporation's interest-earning assets. The Corporation began to reverse this
trend in 1995 as loan growth began to be funded from sales and maturities of
lower yielding investment securities and residential mortgages. In addition,
the Household branch acquisition (in July, 1995) improved the Corporation's
funding mix by lowering short-term borrowings and increasing core deposits.
In order to reduce the Corporation's exposure to adverse changes in interest
rates, the Corporation has entered into interest rate swap agreements. The
notional amount of such swaps was $367 million at December 31, 1996, down from
$471 million at December 31, 1995. Interest rate swaps reduced net interest
income $3 million and net interest margin three basis points in 1996. The
effect of the interest rate swaps partially offset increases in yields on loans
that are indexed to the prime rate and one year U.S. Treasury bills, thus
stabilizing changes in net interest margin. In 1995, swaps lowered net
interest income $6 million and net interest margin seven basis points.
Table 3 provides detailed information as to average balances, interest income
and expense, and rates earned or paid by major balance sheet category for the
years 1994 through 1996. Table 4 provides an analysis of the changes in net
interest income attributable to changes in volume of interest-earning assets
or interest-bearing liabilities and to changes in rates earned or paid.
- 9 -
<PAGE>
Table 3 -- Average Balance Sheets and Average Rates --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
Daily Average Daily Average Daily Average
Average Interest Rate Average Interest Rate Average Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Commercial loans $2,316,087 $201,373 8.69% $2,156,869 $198,087 9.18% $1,885,126 $156,373 8.30%
Real estate loans 2,587,489 219,611 8.49 2,540,854 213,014 8.38 2,199,485 172,817 7.86
Retail loans 2,351,537 216,453 9.20 1,972,083 178,047 9.03 1,637,056 138,471 8.46
Total loans 7,255,113 637,437 8.79 6,669,806 589,148 8.83 5,721,667 467,661 8.17
Taxable investment
securities 1,479,146 95,080 6.43 1,879,480 121,724 6.48 1,871,693 100,986 5.40
Non-taxable invest-
ment securities 52,203 4,608 8.83 22,242 1,839 8.27 28,597 2,260 7.90
Money market
investments 31,097 1,700 5.47 17,059 1,049 6.15 43,080 1,886 4.38
Total interest-
earning assets 8,817,559 738,825 8.38 8,588,587 713,760 8.31 7,665,037 572,793 7.47
Cash and due
from banks 445,025 425,201 370,357
Allowance for
loan losses (114,179) (103,970) (90,426)
Other assets 557,215 529,808 307,276
Total assets $9,705,620 $9,439,626 $8,252,244
Liabilities and Shareholders' Equity:
Savings and
NOW deposits $1,533,759 $ 35,623 2.32% $1,969,280 $ 44,055 2.24% $1,878,803 $ 40,124 2.14%
Money market
deposit accounts 1,415,448 44,822 3.17 772,020 28,577 3.70 718,692 18,745 2.61
Time deposits $100,000
and over 428,249 23,217 5.42 480,055 28,097 5.85 389,456 17,390 4.47
Time deposits under
$100,000 2,921,208 159,013 5.44 2,933,979 165,243 5.63 2,225,995 98,961 4.45
Short-term borrowings 898,025 42,999 4.79 1,014,552 55,227 5.44 995,901 39,081 3.92
Long-term debt 162,840 11,652 7.16 163,788 10,997 6.71 155,172 9,317 6.00
Total interest-
bearing
liabilities 7,359,529 317,326 4.31 7,333,674 332,196 4.53 6,364,019 223,618 3.51
Noninterest-bearing
deposits 1,345,296 1,188,364 1,065,933
Other liabilities 165,229 139,914 119,687
Shareholders' equity 835,566 777,674 702,605
Total liabilities
and shareholders'
equity $9,705,620 $9,439,626 $8,252,244
Net interest margin 4.78% 4.44% 4.55%
Interest rate spread 4.07 3.78 3.96
</TABLE>
Note: Interest and average rate are presented on a fully-taxable equivalent
basis. Taxable equivalent amounts are calculated utilizing the marginal federal
income tax rate of 35 percent. The yield on available-for-sale securities
is computed based on historical cost balances. The total of nonaccrual loans
is included in the daily average balance.
- 10 -
<PAGE>
Table 4 -- Volume/Rate Variance Analysis --
<TABLE>
<CAPTION>
(dollars in thousands) Change from 1995 to 1996 Change from 1994 to 1995
Increase (decrease) in: Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Commercial loans $ 15,550 $(12,264) $ 3,286 $21,871 $19,843 $ 41,714
Real estate loans 5,672 925 6,597 26,539 13,658 40,197
Retail loans 35,295 3,111 38,406 29,476 10,100 39,576
Total loans 56,517 (8,228) 48,289 77,886 43,601 121,487
Taxable investment securities (25,928) (716) (26,644) 426 20,312 20,738
Non-taxable investment securities 2,477 292 2,769 (503) 82 (421)
Money market instruments 864 (213) 651 (1,136) 299 (837)
Total 33,930 (8,865) 25,065 76,673 64,294 140,967
Interest expense:
Savings and NOW deposits (9,743) 1,311 (8,432) 1,932 1,999 3,931
Money market deposit accounts 23,817 (7,572) 16,245 1,391 8,441 9,832
Time deposits $100,000 and over (3,032) (1,848) (4,880) 4,396 6,311 10,707
Time deposits under $100,000 (720) (5,510) (6,230) 31,475 34,807 66,282
Short-term borrowings (7,268) (4,960) (12,228) 526 15,620 16,146
Long-term debt (64) 719 655 478 1,202 1,680
Total 2,990 (17,860) (14,870) 40,198 68,380 108,578
Net variance $ 30,940 $ 8,995 $ 39,935 $36,475 $(4,086) $ 32,389
</TABLE>
Note: Interest on non-taxable loans and securities is computed on a
fully-taxable equivalent basis. Taxable equivalent amounts are calculated
utilizing the marginal federal income tax rate of 35 percent. The change in
interest due to both volume and rate has been allocated completely to changes
in rate.
Interest Rate Sensitivity
To minimize the volatility of net interest income and exposure to economic loss
that may result from fluctuating interest rates, the Corporation manages its
exposure to adverse changes in interest rates through asset and liability
management activities within guidelines established by its Asset/Liability
Policy Committee ("ALPC"). The ALPC has the responsibility for approving and
ensuring compliance with asset/liability management policies of the
Corporation, which encompass interest rate risk exposure, off-balance-sheet
activity, liquidity, capital adequacy and the investment portfolio position.
One of the primary tools of management to measure interest rate risk and the
effect of interest rate changes on net interest income and net interest margin
is simulation analysis. Through these simulations, management estimates the
impact on net interest income of a 300 basis point upward or downward gradual
change of market interest rates over a one year time period. Asset/liability
policy guidelines indicate that a 300 basis point up or down change in interest
rates cannot result in more than a 7.5 percent change in net interest income,
as compared to a base case, without Board approval and a strategy in place to
reduce interest rate risk below the maximum level. In simulations as of
December 31, 1996, the 300 basis point upward change resulted in an increase in
net interest income compared to the base case, while the 300 basis point
downward change reduced net interest income. These results were significantly
impacted by assumptions utilized for managed rate deposits. These changes were
well within policy guidelines.
- 11 -
<PAGE>
The Corporation also manages its interest rate sensitivity position in order to
maintain a balance between the amounts of interest-earning assets and
interest-bearing liabilities which are expected to mature or reprice at any
point in time. The interest rate sensitivity ("Gap"), Table 5, demonstrates
the repricing characteristics of the Corporation's interest-earning assets,
liabilities and interest rate swap positions as of December 31, 1996. Table 5
shows the Corporation in a slightly asset sensitive position through the one
year repricing period in the amount of $10 million or less than 0.1 percent of
total assets. Generally, an asset sensitive position indicates that rising
interest rates would positively impact net interest margin, while falling
interest rates would negatively affect net interest margin. The Corporation
calculates a one-year risk equivalent position which translates the earnings
risk for all periodic gap mismatches into an equivalent one-year risk adjusted
mismatched gap position. Asset/liability policy limits the one-year risk
equivalent position to a maximum of +/- 15 percent of total assets.
Although the periodic Gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity at a
specific point in time. Gap analysis does not take into consideration that
assets and liabilities with similar repricing characteristics may not reprice
at the same time or to the same degree and, therefore, does not necessarily
predict the impact of changes in general levels of interest rates on net
interest income.
The Corporation also utilizes market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of equity measures the
degree at which the market values of the Corporation's assets and liabilities
will change given a change in interest rates. Asset/liability policy guidelines
indicate that a 200 basis point upward or downward change in interest rates
cannot result in more than a 20 percent change in equity as compared to the
base case. As of December 31, 1996, the Corporation was well within this
guideline.
In order to manage interest rate risk, the Corporation may utilize interest
rate swaps. These swaps are treated as hedges, and accordingly, the income and
expense related to these transactions is recognized on the hedged instrument as
an adjustment to interest income or expense. In 1995, the Corporation
terminated one of its interest rate swap contracts in order to reduce its
liability rate sensitive position. The loss on the termination of this swap
was deferred and is being amortized as a yield adjustment over the life of the
hedged instrument. Two interest rate swaps which are treated as hedges of the
subordinate debt issuance at the Bank, were added in 1996. Additionally, two
swaps which hedged rate changes on the Corporation's prime rate based
commercial loan portfolio matured in 1996.
Disclosures of the Corporation's interest rate swap contracts as required by
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments," are
shown in Notes 17 and 23 of the Notes to Consolidated Financial Statements.
- 12 -
<PAGE>
Table 5 -- Interest Rate Sensitivity (Gap Analysis) --
As of December 31, 1996 (dollars in millions)
<TABLE>
<CAPTION>
0-30 31-90 91-180 181-365 1-5 Over 5
Total Days Days Days Days Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $7,587 $2,626 $ 616 $ 470 $ 854 $2,518 $ 503
Investment securities 1,501 132 71 246 328 496 228
Money market instruments 50 50 -- -- -- -- --
Total 9,138 2,808 687 716 1,182 3,014 731
Interest-Bearing Liabilities:
Deposits:
Savings, NOW and MMDA 2,954 637 387 117 232 1,581 --
Other interest-bearing deposits 3,351 479 465 750 1,054 574 29
Short-term borrowings 922 914 3 5 -- -- --
Long-term debt 247 -- -- -- -- -- 247
Total 7,474 2,030 855 872 1,286 2,155 276
Interest rate swap positions (100) (119) (132) 11 240 100
Total gap 1,664 678 (287) (288) (93) 1,099 555
Cumulative gap $ -- $ 678 $ 391 $ 103 $ 10 $1,109 $1,664
</TABLE>
Note: Savings, NOW and money market deposit accounts(MMDA) are subject to
immediate withdrawal. However, for the purpose of the above analysis these
accounts are reported based on an historical analysis of Star Bank accounts.
Noninterest Income
Noninterest income is a growing source of revenue for the Corporation,
representing 28.8 percent of tax equivalized net revenue in 1996, up from 26.6
percent in 1995. Noninterest income increased 23.5 percent to $171 million in
1996, compared to $138 million in 1995 and $117 million in 1994. Growth
occurred in several areas, led by service charges on deposits, credit card
fees, ATM fees, international and trust income.
Included in 1996 were $2.5 million in losses on sales of investment
securities. The funds from these sales were reinvested into higher yielding
and longer duration securities, which resulted in an increase to the total
investment portfolio yield and improved the Corporation's interest rate
sensitivity position. Excluding the losses from sales of securities,
noninterest income increased 27.0 percent in 1996. Additionally, 1995 included
a $1.2 million loss on $119 million in residential real estate loans which were
transferred from the portfolio and sold on the secondary market. This
transaction reflects the Corporation's strategy to reduce its residential
mortgage holdings and adverse prepayment risk, with funds being used to fund
higher yielding retail and commercial loans.
Service charges on deposits increased $12 million or 27.6 percent in 1996,
following a 23.4 percent increase in 1995. The second year of very strong
growth was due to continued increases in income from cash management services
and recent branch acquisitions. In addition, 1996 saw increases in the
Corporation's core deposit customer base and transaction volumes. The increase
in 1995 was primarily a result of the TransOhio and Household branch
acquisitions.
- 13 -
<PAGE>
Trust income increased 13.0 percent to $47 million in 1996, following a 13.6
percent increase in 1995. In both 1995 and 1996, the Corporation realized
significant increases in asset levels as a result of new business in each
trust area. Revenue growth was led by continued expansion of The Star Funds
family of proprietary mutual funds, an increase in custodial assets and higher
market values.
At year-end 1996, total trust assets (both discretionary and non-discretionary)
were $30.2 billion, up from $21.6 billion at the end of 1995 and $13.4 billion
at the end of 1994. Along with increases for new business and higher market
values, 1995 trust assets were up due to the addition of the Lindner Funds to
Star Bank, N.A.'s mutual fund custody business.
Credit card fees continued to show strong growth in 1996, increasing $4 million
or 26.9 percent, following a 21.2 percent increase in 1995. The strong growth
over the last two years is attributable in part to increases in the credit card
customer base of 12.0 percent in 1996 and 16.2 percent in 1995. In addition,
levels of interchange income, merchant activity and agent bank processing have
continued to increase.
ATM fees have had substantial growth in the last two years increasing $3
million or 33.7 percent in 1996, following a 49.9 percent increase in 1995. The
Corporation has added 137 automated teller machines in 1995 and 1996, as a
result of acquisitions and new installations.
In 1996, the Corporation adopted Statement of Financial Accounting Standards
No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights, an amendment
of FASB Statement No. 65." SFAS No. 122 requires a mortgage banking enterprise
to capitalize mortgage servicing rights on originated mortgaged loans, when
the underlying loans are sold or securitized and the servicing is retained. The
adoption of SFAS No. 122 resulted in over $2 million in additional gains on
sales of residential mortgage loans from capitalized originated mortgage
servicing rights ("OMSRs").
Mortgage banking income increased $5 million or 219 percent to $8 million in
1996, following a 45.1 percent decline in 1995. The increase in 1996 was due to
over $2 million in capitalized OMSRs, discussed above, in addition to a 23.1
percent increase in servicing income. The decline in 1995 was due in part to a
$1.2 million loss from the sale of $119 million in portfolio loans previously
discussed. The Corporation sold $311 million of residential mortgage loans into
the secondary market in 1996, compared to $230 million in 1995 (excluding the
$119 million sale) and $134 million in 1994.
All other income from other banking services increased 28.8 percent to $33.1
million in 1996, following a 30.8 percent increase in 1995. Included in 1996
was a 52.7 percent increase in net gains on disposition of leases due to higher
volumes of lease terminations and a strong used car market. International
income was up 20.5 percent in 1996 led by strong growth in foreign exchange
trading activity and letter of credit fees. Commissions on mutual fund and
annuity sales were up 79.1 percent following a down year in 1995. The increase
in other income in 1995 was led by a 45.7 percent increase in international
fees, in addition to income from corporate owned life insurance programs, which
began in 1995.
- 14 -
<PAGE>
Table 6 provides a summary of changes in noninterest income for the last three
years.
Table 6 -- Noninterest Income --
<TABLE>
<CAPTION>
For the years ended December 31 (dollars in thousands)
% Increase/ % Increase/
(decrease) (decrease)
1996 1995 1994 1996/1995 1995/1994
<S> <C> <C> <C> <C> <C>
Service charges on deposits $ 55,983 $ 43,870 $ 35,543 27.6% 23.4%
Trust income 46,917 41,512 36,539 13.0 13.6
Credit card income 19,183 15,118 12,475 26.9 21.2
ATM income 10,231 7,652 5,104 33.7 49.9
Mortgage banking 7,556 2,362 4,301 219.9 (45.1)
Other income:
International fees 5,948 4,935 3,388 20.5 45.7
Insurance commissions 3,888 3,298 2,897 17.9 13.8
Gains on disposition of leases-net 3,411 2,234 2,066 52.7 8.1
Mutual fund and annuity sales 2,620 1,463 2,889 79.1 (49.4)
All other income 17,236 13,770 11,803 25.2 16.7
Investment securities gains/(losses)--net (2,451) 1,910 10 n/m n/m
Total noninterest income $170,522 $138,124 $117,015 23.5% 18.0%
</TABLE>
n/m - not meaningful
Noninterest Expense
Total noninterest expense, increased 7.7 percent to $308 million in 1996,
compared to $286 million in 1995 and $260 million in 1994. The Corporation's
noninterest expense ratio showed significant improvement, decreasing 301 basis
points to 52.1 percent in 1996, compared to 55.1 percent in 1995 and 55.8
percent in 1994. The increase in noninterest expense in 1996 was due in part to
a full year's effect of the Household acquisition, in addition to increases in
performance based incentives, state taxes, professional services, credit card
processing and automation costs. The improvement in the efficiency ratio
reflects management's continued commitment to reducing operating costs of the
Corporation.
In 1996, the Corporation was charged a special one-time assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"). Star Banc
Corporation's pre-tax SAIF assessment was $5 million, which reduced fully
diluted earnings per share $0.03. Excluding this assessment, noninterest
expenses were up 5.9 percent in 1996, and the Corporation's efficiency ratio
declined 385 basis points to 51.2 percent.
- 15 -
<PAGE>
Salary expense increased 7.5 percent in 1996, following a 7.3 percent increase
in 1995. Pension and other employee benefits declined 1.8 percent in 1996,
following a 3.0 percent increase in 1995. Salaries were up in 1996 as a result
of a full year's effect of the Household acquisition, an increase in staff
levels and higher levels of performance based incentives. Benefit expenses were
down slightly in 1996 due primarily to lower postemployment benefits costs
related to workers' compensation. The increase in 1995 was due to a full year's
effect of the TransOhio acquisition, in addition to the increase in staff
levels in the second half of 1995 with the Household acquisition. Full-time
equivalent staff increased 138 FTE to 3,988 at December 31, 1996, compared to
3,850 at December 31, 1995 and 3,707 at December 31, 1994.
In 1994, the Corporation adopted Statement of Financial Accounting Standards
No. 112 (SFAS No. 112) related to employers' accounting for postemployment
benefits. Currently, the Corporation provides only workers' compensation as a
postemployment benefit. The adoption of SFAS No. 112 did not have a material
effect on the Corporation's financial condition or results of operations.
Equipment expense increased 6.4 percent in 1996, following an 8.4 percent
increase in 1995. Equipment expense was up in 1996 due to higher depreciation,
partially offset by lower equipment rental expense. Increases in depreciation
expense in 1996 and 1995 were a result of acquisitions and openings of new
branch offices, in addition to purchases of branch automation equipment, which
had previously been leased.
Occupancy expense was flat in 1996 at $22 million following a 17.0 percent
increase in 1995. Increased occupancy expenses related to recent branch
acquisitions, was offset by lower levels of write-offs related to unoccupied
space obligations. The increase in 1995 was due primarily to the TransOhio and
Household branch acquisitions, in addition to market value write-downs on
several lease obligations on unoccupied space.
Intangible amortization, outside processing and other operating expenses were
all up in 1995 and 1996 related primarily to branch acquisitions. Credit card
expenses were up the last two years due to increases in the cardholder base,
higher transaction volumes and the addition of the travel award program.
Marketing expense declined in 1996 following the increase in 1995 related
primarily to the introduction of the Corporation's new 24 hour remote banking
retail delivery system.
These increases were partially offset by declines in FDIC insurance (excluding
the one-time SAIF assessment) of $8 million in 1996 and $3 million in 1995.
Effective June 1, 1995 the FDIC deposit insurance rates declined from 23 basis
points on every $100 in deposits to 4 basis points. For 1996, deposits insured
by the bank insurance fund ("BIF") did not have an assessment for the best
capitalized banks, while deposits insured by the savings association insurance
fund ("SAIF") continued to be assessed at the current rate of 23 basis points,
in addition to the one-time assessment previously discussed. Currently the
Corporation has $1.5 billion in deposits insured under the SAIF fund. As a
result of the new legislation passed, "well-capitalized" institutions deposits
insured by SAIF will be assessed at a rate of 6.5 basis points on every $100
in deposits, while deposits insured by BIF will be assessed 1.3 basis points.
These rates are effective January 1, 1997.
- 16 -
<PAGE>
Table 7 provides a summary of changes in noninterest expense for the last three
years.
In 1996, the Corporation adopted Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which
establishes a "fair value" based method of accounting for stock-based
compensation plans. With the adoption of SFAS No. 123, the Corporation elected
to continue to follow the principles of APB Opinion No. 25 for expense
recognition purposes. The required disclosures of SFAS No. 123 are shown in
Note 13 of the Notes to Consolidated Financial Statements.
FIVE YEAR BAR CHART OF EFFICIENCY RATIO
(in percents)
1992 1993 1994 1995 1996
61.34% 57.06% 55.84% 55.07% 52.06%
Table 7 -- Noninterest Expense --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
% Increase/ % Increase/
(decrease) (decrease)
1996 1995 1994 1996/1995 1995/1994
<S> <C> <C> <C> <C> <C>
Salaries $121,366 $112,923 $105,279 7.5% 7.3%
Pension and other
employee benefits 19,905 20,273 19,692 (1.8) 3.0
Occupancy expense--net 22,019 22,059 18,852 (0.2) 17.0
Equipment expense 17,329 16,284 15,028 6.4 8.4
Amortization of goodwill
and other intangible assets 17,282 14,037 7,698 23.1 82.3
Outside processing services 11,537 10,655 9,530 8.3 11.8
State taxes 10,999 8,597 9,682 27.9 (11.2)
Marketing expense 8,418 10,257 8,391 (17.9) 22.2
FDIC insurance 2,172 9,783 13,176 (77.8) (25.8)
All other noninterest
expense 72,184 61,346 52,983 17.7 15.8
303,211 286,214 260,311 5.9 10.0
SAIF special assessment 5,000 -- -- -- --
Total noninterest expense $308,211 $286,214 $260,311 7.7% 10.0%
</TABLE>
Income Taxes
The Corporation's effective tax rate was 33.9 percent in 1996, compared to 33.4
percent in 1995 and 34.7 percent in 1994.
The decline in the effective rate for 1995 was due to tax benefits received
from Corporate and Bank owned life insurance programs established in the
beginning of 1995, in addition to benefits recorded on limited partnership
investments.
- 17 -
<PAGE>
BALANCE SHEET
Loans
Loans, net of unearned interest, increased $661 million to $7.59 billion at
December 31, 1996, compared to $6.93 billion at December 31, 1995. The
Corporation experienced substantial growth in the retail loan area with retail
leasing up $279 million or 66.8 percent and credit card loans up 24.3 percent
in 1996. Commercial loans also experienced strong growth in 1996, led by
asset-based lending and commercial leasing which were up 20.9 percent and 8.9
percent, respectively.
Table 8 provides a summary of loans by type at year-end for each of the past
five years. Table 9 provides maturity distribution data for selected types of
loans.
Residential mortgage loans declined 3.2 percent in 1996, following an increase
of 6.4 percent in 1995 despite the sale of $119 million in fixed rate portfolio
loans. The sale in 1995 and the decline in 1996 reflect the Corporation's
strategy to reduce its level of residential mortgages and the related adverse
prepayment risk, with the proceeds from sales and maturities being used to fund
growth in higher yielding commercial and retail loans.
Following this strategy, the Corporation has been selling a larger percentage
of its residential mortgage originations on the secondary market in 1996.
During 1996, the Corporation sold $311 million of residential mortgage loans
into the secondary market, compared to $349 million in 1995. As of December 31,
1996, the Corporation serviced $1.7 billion in mortgage loans for outside
investors, compared to $1.5 billion at December 31, 1995.
Table 8 -- Loans by Type --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial $2,101,187 $1,952,178 $1,847,848 $1,636,654 $1,606,251
Real estate construction and development 260,582 250,467 227,879 180,470 192,975
Commercial real estate mortgage 1,134,707 1,082,001 981,954 909,084 801,490
Residential real estate mortgage 1,203,790 1,243,718 1,168,828 997,748 969,512
Credit card 420,427 338,138 228,673 172,534 173,271
Lease financing 959,667 658,917 484,363 275,834 176,083
Other retail 1,506,818 1,400,362 1,310,012 1,122,083 1,073,502
Total loans, net of
unearned interest $7,587,178 $6,925,781 $6,249,557 $5,294,407 $4,993,084
Percent of total loans by type
Commercial 27.7% 28.2% 29.6% 30.9% 32.2%
Real estate construction and development 3.4 3.6 3.6 3.4 3.9
Commercial real estate mortgage 15.0 15.6 15.7 17.2 16.0
Residential real estate mortgage 15.9 18.0 18.7 18.8 19.4
Credit card 5.5 4.9 3.7 3.3 3.5
Lease financing 12.6 9.5 7.7 5.2 3.5
Other retail 19.9 20.2 21.0 21.2 21.5
Total loans, net of
unearned interest 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
- 18 -
<PAGE>
Table 9 -- Selected Loan Maturity Distribution --
As of December 31, 1996 (dollars in thousands)
Over One Over
One Year Through Five Five
or Less Years Years Total
Commercial $1,702,272 $359,825 $39,090 $2,101,187
Real estate construction
and development 114,076 111,749 34,757 260,582
Total $1,816,348 $471,574 $73,847 $2,361,769
Total of these selected loans due after one year with:
Predetermined interest rate $ 214,767
Floating interest rate 330,654
Asset Quality
As of December 31, 1996, the allowance for loan losses was $119 million or 1.56
percent of total loans, net of unearned interest. This compares to $107 million
or 1.54 percent of total loans, net of unearned interest, as of December 31,
1995. The provision for loan losses totaled $41 million in 1996, $25 million in
1995 and $24 million in 1994. Table 10 provides a summary of activity in the
allowance for loan losses account by type of loan.
As shown in Table 10, net charge-offs increased in 1996 to 0.40 percent of
average outstanding loans, compared to 1995 and 1994 which were at historically
low levels totaling 0.21 percent and 0.20 percent of average outstanding loans,
respectively.
The increase in net charge-off levels in 1996 was due to higher consumer
charge-offs and a higher mix of consumer loans compared to total loans. Net
charge-offs in the retail area increased $11 million in 1996 as net charge-offs
as a percentage of average loans for credit cards increased 136 basis points to
3.67 percent. The increase in credit card net charge-offs was consistent with
national trends in 1996, however, net charge-off levels on credit cards for the
Corporation have remained below national averages. Also contributing to the
increase in net charge-offs in 1996 was a 16 basis point increase in net
charge-offs as a percentage of average loans in the commercial area. This
increase was related to large commercial leasing charge-offs, primarily on one
commercial customer.
The low level of charge-offs, as compared to national averages, reflects the
Corporation's continued commitment to maintaining strict credit standards and
addressing problem credits at an early stage. Management does anticipate that
the higher level of net charge-offs experienced in 1996 will continue in the
near term, which is more consistent with levels experienced on an historical
basis.
Tables 12 and 13 provide information related to nonperforming assets and loans
90 days or more past-due.
- 19 -
<PAGE>
Although the Corporation has experienced increases in charge-off levels in
1996, nonperforming loans and nonperforming assets remained at historically low
levels. Nonaccrual loans increased 3.5 percent at December 31, 1996 to $41
million following a five percent increase in 1995. However, nonperforming loans
as a percentage of total loans decreased for the second consecutive year to
0.52 percent at December 31, 1996, compared to 0.53 percent at December 31,
1995 and 0.56 percent at December 31, 1994. Nonperforming assets as a
percentage of total loans and other real estate owned declined to 0.55 percent
at December 31, 1996, compared to 0.58 percent a year earlier. This was the
sixth straight year of decline in this ratio. The decrease in nonperforming
loans for 1994 was led by a $9 million decline in the asset-based lending area.
Due to the uncertainty of economic conditions, it is difficult to project
future levels of nonperforming loans.
Table 10 -- Summary of Loan Loss Experience --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Average loans--net of unearned interest $7,255,113 $6,669,806 $5,721,667 $5,146,341 $4,926,900
Allowance for loan losses:
Balance--beginning of year $ 106,909 $ 95,979 $ 83,156 $ 78,953 $ 73,805
Charge-offs:
Commercial (15,885) (11,280) (10,785) (20,752) (19,529)
Real estate (996) (2,157) (1,281) (2,516) (4,465)
Retail (26,772) (14,811) (12,504) (16,854) (23,890)
Total charge-offs (43,653) (28,248) (24,570) (40,122) (47,884)
Recoveries:
Commercial 6,215 5,773 4,255 3,372 3,083
Real estate 595 1,087 1,507 633 252
Retail 7,850 7,217 7,259 7,312 8,020
Total recoveries 14,660 14,077 13,021 11,317 11,355
Net charge-offs (28,993) (14,171) (11,549) (28,805) (36,529)
Provision charged to earnings 40,773 25,101 24,372 33,008 40,898
Net allowances of banks or offices
acquired/sold -- -- -- -- 779
Balance--end of year $ 118,689 $ 106,909 $ 95,979 $ 83,156 $ 78,953
Ratio of net charge-offs to average loans 0.40% 0.21% 0.20% 0.56% 0.74%
Ratio of allowance for loan
losses to end of year loans, net
of unearned interest 1.56 1.54 1.54 1.57 1.58
</TABLE>
Other real estate owned, which is carried at the lower of cost or fair value
less estimated selling costs, represents real estate of which the Corporation
has taken ownership in partial or total satisfaction of loans, in addition to
closed banking offices. Other real estate owned was $2 million at December 31,
1996, a decrease of 36.0 percent from $3 million at December 31, 1995. The
decline in 1996 was due to sales and write-downs of existing property, as well
as no significant additions to other real estate owned in 1996 or 1995.
- 20 -
<PAGE>
Loans past due 90 days or more increased to $12 million at December 31, 1996,
compared to $8 million at December 31, 1995. The increase in 1996 is primarily
in the credit card area, which is consistent with the increase in net
charge-offs previously discussed. There was also a slight increase in the real
estate area in 1996. In 1995, past due credits were at historically low levels.
Management is not aware of any material amounts of loans outstanding, not
disclosed in Tables 12 and 13, where there is significant uncertainty as to the
ability of the borrower to comply with present payment terms. In addition, as
of December 31, 1996, there were no significant other interest-earning assets
classified as nonperforming or past-due 90 days or more. The Corporation's
credit exposure to foreign countries is not significant.
Responsibility for the establishment of policy and direction of the loan
portfolio lies with the Credit Policy Management Group. Composed of members of
senior management, this group determines and oversees the execution of
strategies for the growth and development of the loan portfolio. To maintain
the level of credit risk at an appropriate level, the group sets underwriting
standards and internal lending limits and provides for proper diversification
by monitoring and placing constraints on concentrations of credit within the
portfolio on a consolidated basis. In monitoring the level of credit risk
within the loan portfolio, the Corporation utilizes a corporatewide loan
tracking program. As part of this program, risk ratings are individually
assigned to each commercial and commercial real estate loan within the
portfolio and reported to management on a monthly basis. Risk ratings are
independently reviewed for propriety by the Corporation's loan review
department. The system provides for the proper measurement of the level of risk
within the portfolio and facilitates appropriate management and control.
Effective January 1, 1995, the Corporation adopted the Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), as amended by Statement of
Financial Accounting Standards No. 118 (SFAS No. 118), related to accounting by
creditors for impairment of loans. SFAS No. 114 requires that impaired loans as
defined by the statement be measured based on (1) the present value of the
expected future cash flows discounted at the loan's effective interest rate, or
(2) as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. When the measure
of the impaired loan is less than the recorded investment in the loan, a
valuation allowance is recorded. The Corporation had previously measured the
allowance for loan losses on impaired loans using similar methods to those
prescribed by SFAS No. 114.
The specific valuation allowance recorded on impaired loans is included in the
total allowance for loan losses. In addition to the valuation for impaired
loans, the adequacy of the total allowance for loan losses is monitored on a
continual basis and is based on management's evaluation of several key factors:
the quality of the current loan portfolio, current economic conditions,
evaluation of significant problem loans, an analysis of periodic loan reviews,
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 periods in which they become known. It is
management's opinion that the allowance for loan losses at December 31, 1996
was adequate to absorb all anticipated losses in the loan portfolio as of that
date. The allowance for loan losses is based on estimates and ultimate losses
may vary from current estimates.
The recorded investment in impaired loans at December 31, 1996 was $31 million
with a related valuation allowance (as calculated under SFAS No. 114) of
$785,000.
- 21 -
<PAGE>
Table 11 provides an allocation of the total allowance for loan losses by
selected loan categories. This allocation of the allowance reflects an estimate
of possible credit losses based on the loss potential, assessment of risk
characteristics and historical loss experience associated with specific loan
categories. Actual losses may vary from current estimates. The allowance is
available to absorb losses from any segment of the portfolio.
FIVE YEAR BAR CHART OF ALLOWANCE AS A % OF NONPERFORMING LOANS
(coverage ratio)
1992 1993 1994 1995 1996
124 163 272 289 301
FIVE YEAR BAR CHART OF NET CHARGE-OFFS TO AVERAGE LOANS
(in percents)
1992 1993 1994 1995 1996
0.74% 0.56% 0.20% 0.21% 0.40%
Table 11 -- Allocation of Allowance for Loan Losses --
Percent of Percent of
As of December 31 loans to loans to
(dollars in thousands) 1996 total loans 1995 total loans
Loans:
Commercial and
industrial $ 10,108 27.7% $ 13,330 28.2%
Real estate
mortgage 4,669 30.9 5,056 33.6
Real estate
construction 428 3.4 553 3.6
Installment 5,263 19.9 4,624 20.2
Credit card 18,408 5.5 10,868 4.9
Lease financing 3,220 12.6 2,127 9.5
Unallocated 76,593 n/a 70,351 n/a
Total allowance $118,689 100.0% $106,909 100.0%
- 22 -
<PAGE>
Table 12 -- Nonperforming Assets --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $39,375 $36,875 $34,990 $50,687 $62,299
Loans which have been renegotiated 80 87 261 249 1,223
Total nonperforming loans 39,455 36,962 35,251 50,936 63,522
Other real estate owned 1,923 3,006 2,793 3,984 8,327
Total nonperforming assets $41,378 $39,968 $38,044 $54,920 $71,849
Percentage of nonperforming loans
to loans, net of unearned interest 0.52% 0.53% 0.56% 0.96% 1.27%
Percentage of nonperforming assets
to loans, net of unearned interest
and other real estate owned 0.55 0.58 0.61 1.04 1.44
Percentage of allowance for loan
losses to nonperforming loans 301 289 272 163 124
Loans past due 90 days or more $11,909 $ 7,750 $ 8,264 $15,200 $15,529
</TABLE>
Table 13 -- Composition of Nonperforming Loans --
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Nonperforming Loans Nonperforming Loans
90 Days 90 Days
or or
Non- Percentage More Non- Percentage More
accrual Restructured Total of Loans Past Due accrual Restructured Total of Loans Past Due
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans:
Corporate $23,379 $80 $23,459 1.28% $ 937 $23,371 $87 $23,458 1.20% $ 958
Commercial
leasing 4,998 -- 4,998 1.91 1 216 -- 216 0.09 --
Total
commercial
loans 28,377 80 28,457 1.20 938 23,587 87 23,674 1.08 958
Real estate loans:
Residential 4,132 -- 4,132 0.34 3,421 5,618 -- 5,618 0.45 2,589
Commercial
mortgage 2,412 -- 2,412 0.21 1,142 5,722 -- 5,722 0.53 949
Construction/
land
development -- -- -- -- 1,018 99 -- 99 0.04 433
Total real
estate loans 6,544 -- 6,544 0.25 5,581 11,439 -- 11,439 0.44 3,971
Retail loans:
Other retail 1,928 -- 1,928 0.12 849 978 -- 978 0.07 962
Credit cards 2,272 -- 2,272 0.54 4,392 743 -- 743 0.22 1,822
Retail leasing 254 -- 254 0.03 149 128 -- 128 0.03 37
Total retail
loans 4,454 -- 4,454 0.17 5,390 1,849 -- 1,849 0.09 2,821
Total loans $39,375 $80 $39,455 0.52% $11,909 $36,875 $87 $36,962 0.53% $7,750
</TABLE>
- 23 -
<PAGE>
Investment Securities
The Corporation's investment portfolio decreased $203 million to $1.50 billion
at December 31, 1996, from $1.70 billion a year earlier. This decrease was due
primarily to scheduled maturities and paydowns of mortgage-backed
securities. The decline in securities was used to fund continued loan growth
throughout 1996.
In the fourth quarter of 1996, the Corporation sold $143 million in
mortgaged-backed securities at a loss of over $2 million. The funds from these
sales, in addition to a portion of the funds received from the issuance of $100
million in subordinated debt, were used to purchase $273 million in high
quality collateralized mortgage obligations ("CMOs") and pass through
mortgage-backed securities. Through these transactions the Corporation was able
to remove low yielding securities from the investment portfolio and enhance its
interest rate sensitivity position by reinvesting in longer duration
securities. All securities sales were from the available-for-sale portfolio.
It is anticipated the investment portfolio will continue to decline in 1997 as
the funds received from maturities will be used to help fund expected loan
growth. However, if purchases of securities are made, the Corporation is
expected to invest in similar types of securities as have been held in the
portfolio. Credit risk has been minimized by restricting purchases of
mortgaged-backed securities to U.S. Agency backed or AAA rated securities. To
reduce interest rate risks associated with these securities, purchases are
restricted to securities with relatively short maturities and/or durations.
The investment portfolio is primarily made up of GNMA adjustable rate
mortgages, FNMA and FHLMC pass-through securities (primarily balloons and 15
year fixed rates) and CMOs. The CMOs consist of planned amortization classes
("PACs") and sequential pay bonds that are in the first or second classes.
Included in the investment portfolio is a pool of residential mortgage loans
issued from Key Bank, which the Corporation purchased as part of the
acquisition of 28 former Ameritrust branch offices in 1992. This pool of
mortgage loans had a book value of $114 million and a market value of $113
million at December 31, 1996. Table 14 provides information as to the
composition of the Corporation's investment securities portfolio as of December
31, 1996.
As of December 31, 1996, the Corporation's investment securities portfolio
included $1.33 billion in securities classified as available-for-sale and $168
million classified as held-to-maturity. As of December 31, 1996, the
Corporation reported a net unrealized gain of $11 million on investment
securities, with an offsetting increase to shareholders' equity of $7 million
(net of tax). In 1996, the unrealized gain/(loss) reported as a separate
component of equity changed from an unrealized net gain of $6 million to an
unrealized net gain of $7 million, increasing equity over $1 million. This
change was a result of the sale of lower yielding securities previously
discussed.
- 24 -
<PAGE>
Table 14 -- Investment Securities --
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Weighted Weighted
As of December 31, 1996 Carrying Market Average Average Carrying Market Average Average
(dollars in thousands) Value Value Maturity Yield Value Value Maturity Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Within one year $ 7,060 $ 7,060 0.5 yrs. 7.01% $ -- $ -- -- --%
One through five years 7,639 7,639 3.1 yrs. 6.78 -- -- -- --
Five through ten years 3,776 3,776 6.3 yrs. 6.81 -- -- -- --
Over ten years 1,960 1,960 15.4 yrs. 6.09 -- -- -- --
Total 20,435 20,435 4.0 yrs. 6.80 -- -- -- --
Mortgage-backed securities:
Within one year 227,646 227,646 0.5 yrs. 6.92 35,406 35,081 0.5 yrs. 7.30
One through five years 771,955 771,955 2.0 yrs. 6.91 78,348 77,628 2.0 yrs. 7.30
Five through ten years 189,069 189,069 7.0 yrs. 6.85 -- -- -- --
Over ten years 72,758 72,758 14.7 yrs. 7.03 -- -- -- --
Total 1,261,428 1,261,428 3.2 yrs. 6.91 113,754 112,709 1.5 yrs. 7.30
Obligations of states and
political subdivisions:
Within one year -- -- -- -- 19,401 19,899 0.5 yrs. 9.63
One through five years -- -- -- -- 14,172 14,558 1.6 yrs. 10.35
Five through ten years -- -- -- -- 7,208 7,393 7.5 yrs. 10.27
Over ten years -- -- -- -- 13,422 13,767 17.6 yrs. 9.79
Total -- -- -- -- 54,203 55,617 6.0 yrs. 9.94%
Other debt securities:
Within one year 252 252 0.5 yrs. 8.00 -- -- -- --
One through five years 1,187 1,187 2.0 yrs. 7.70 -- -- -- --
Five through ten years -- -- -- -- -- -- -- --
Over ten years -- -- -- -- -- -- -- --
Total 1,439 1,439 1.8 yrs. 7.75% -- -- -- --
Federal Reserve Bank stock
and other equity securities 49,010 49,010 -- --
Total investment securities $1,332,312 $1,332,312 $167,957 $168,326
</TABLE>
Note: Information related to mortgage-backed securities included above is
presented based upon weighted average maturities anticipating future
prepayments. Average yields are presented on a fully-taxable equivalent
basis. Yields on available-for-sale securities are computed based on
historical cost balances.
Deposits
Total deposits increased $182 million to $7.88 billion at December 31, 1996,
compared to $7.69 billion a year earlier.
The increase in 1996 was primarily the result of a $199 million increase in
noninterest-bearing deposits, which included increases of 18.8 percent in
nonpersonal deposits and 7.4 percent in personal deposits. In addition, core
interest-bearing savings, NOW and MMDA deposits were up slightly in 1996. With
the increase in core deposits in 1996, the Corporation reduced its level of
national market funding as shown in Table 15 by a $14 million decline in jumbo
and eurodollar deposits of $100,000 and over.
- 25 -
<PAGE>
The decline in NOW accounts shown in Table 15 was the result of a
restructuring of the NOW product which caused a change in its classification.
This product restructuring allowed the Corporation to establish sweeps from its
NOW accounts into the MMDA category. Combined NOW and MMDA deposits increased
$98 million in 1996, while time deposits less than $100,000 and savings
deposits both declined.
In the second half of 1995, rates offered on deposit products began to decline.
This declining rate environment prompted many customers to increase their
liquidity by increasing funds in immediately accessible deposit vehicles and
reducing the amount in longer term instruments such as certificates of
deposit. As short-term market rates and savings rates remained low in 1996,
customers continued to transfer their funds out of certificates of deposits and
savings accounts into tiered rate money market accounts. The Corporation also
noted a continued shift by customers out of traditional bank products to other
nonbank or nondeposit financial instruments or investments.
Table 15 provides a summary of total deposits by type at year-end for each of
the last five years. Table 16 provides maturity distribution for domestic time
deposits $100,000 and over.
Table 15 -- Deposits by Type --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $1,571,080 $1,371,888 $1,214,703 $1,200,609 $1,137,024
Interest-bearing deposits:
Savings 920,555 975,143 1,032,529 878,119 758,412
NOW 194,564 1,039,213 1,015,913 943,750 802,311
Money market deposit accounts 1,838,578 895,956 651,991 714,752 1,261,217
Time deposits $100,000 and over - domestic 397,322 409,515 378,480 351,095 425,128
Foreign deposits $100,000 and over 42,859 44,421 257,701 -- --
All other time deposits 2,911,303 2,957,862 2,812,498 1,927,241 2,018,664
Total deposits $7,876,261 $7,693,998 $7,363,815 $6,015,566 $6,402,756
Percent of total deposits by type
Noninterest-bearing deposits 20.0% 17.8% 16.5% 20.0% 17.8%
Interest-bearing deposits:
Savings 11.7 12.7 14.0 14.6 11.8
NOW 2.5 13.5 13.8 15.7 12.5
Money market deposit accounts 23.3 11.6 8.9 11.9 19.7
Time deposits $100,000 and over - domestic 5.0 5.3 5.1 5.8 6.7
Foreign deposits $100,000 and over 0.5 0.6 3.5 -- --
All other time deposits 37.0 38.5 38.2 32.0 31.5
Total deposits 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
- 26 -
<PAGE>
Table 16 -- Maturity of Domestic Time Deposits $100,000 and Over --
As of December 31, 1996 (dollars in thousands)
Three months or less $214,617
Over three months through six months 52,701
Over six months through twelve months 72,235
Over twelve months 57,769
Total $397,322
Liquidity
The Asset/Liability Policy Committee ("ALPC") establishes policies, as well as
analyzes and manages the Corporation's liquidity to ensure that adequate funds
are always available to meet normal operating requirements in addition to
unexpected customer demands for funds, such as high levels of deposit
withdrawals or loan demand. The most important factor in the preservation of
liquidity is the maintenance of public confidence as this facilitates the
retention and growth of a large, stable supply of core deposits and funds.
Ultimately, public confidence is generated through profitable operations and
a strong capital position. The Corporation's strong record in both of these
areas has enabled it to succeed in developing a large and reliable base of core
funding from within its market areas.
The ALPC's liquidity policies limit the amount the Corporation's subsidiary
bank can borrow, subject to the Corporation's ability to borrow funds in the
capital markets in an efficient and cost effective manner. In addition, the
Corporation's strategic liquidity and contingent planning are subject to the
amount of asset liquidity present in the balance sheet. The ALPC periodically
reviews the Bank's and the Corporation's ability to meet funding deficiencies
due to adverse business events. These funding needs are then matched up with
specific asset-based sources to ensure sufficient funds are available. Also,
strategic liquidity policy requires the Corporation to diversify its national
market funding sources to avoid concentration in any one market. As of December
31, 1996, the Corporation was 99 percent core funded from customers within its
market area.
The Corporation's subsidiary bank is a member of the Federal Home Loan Bank of
Cincinnati and maintains a Grand Cayman office for issuing eurodollar
certificates of deposit. At December 31, 1996, there was $43 million in
eurodollar deposits outstanding. Star Bank, N.A. also has established
relationships with dealers to issue national market retail certificates of
deposits. At December 31, 1996, there were no deposits outstanding in this
program. In 1996, Star Bank, N.A. updated an offering circular in order to
issue senior or subordinated bank notes of up to $500 million, to be available
as an alternative funding source. The terms on these notes can vary from 7 days
to 30 years. In the fourth quarter of 1996, the Bank issued $100 million of
subordinated notes under this offering circular. These notes are due in 2006.
In addition to these funding alternatives, the Bank has maintained a presence
in the national fed funds, repurchase agreements and certificate of deposit
markets.
The following debt ratings assist the Bank and the Corporation in their
abilities to gather funds from the capital markets.
- 27 -
<PAGE>
Debt Ratings
As of December 31, 1996
Standard & Poor's Moody's Fitch
Star Bank, N.A.
Short-term CDs A-1 P-1 not rated
Senior debt A- A1 A+
Subordinated debt A- A3 A+
Star Banc Corporation
Commercial paper A-2 P-2 F-1
The parent company obtains cash to meet its obligations from dividends
collected from its subsidiaries. Federal banking laws regulate the amount of
dividends that may be declared by banking subsidiaries. During 1996, the
Corporation's subsidiary bank could have provided an additional $72 million in
dividends to the parent company, without additional regulatory approval and
still exceeded minimum regulatory capital ratios.
In 1995, the Corporation prepared a private placement memorandum in order to
issue commercial paper notes up to an aggregate amount of $150 million, with
maturities up to 270 days. The proceeds of the notes from the commercial paper
program are used to provide funding to Star Banc Finance, Inc. and for general
corporate purposes. At December 31, 1996, there was $66 million in commercial
paper outstanding.
In January 1997, the Corporation prepared a universal shelf registration
statement for the issuance of up to $500 million in unsecured senior or
subordinated debt securities, warrants to purchase debt securities, shares of
$5 par value common stock, preferred stock, or depository shares. This provides
the parent company with an additional source of funding for future investments
in subsidiaries, acquisitions, repayment of maturing obligations and other
general corporate purposes. The parent company can also obtain funding on a
short-term basis through the issuance of short-term notes.
The Corporation's consolidated long-term debt increased $86 million to $247
million at December 31, 1996. This increase was the result of the subordinated
debt issuance at the Bank, partially offset by the prepayment of the parent
company's senior notes in the third quarter.
Capital Resources
The Corporation's total shareholders' equity increased $35 million or 4.3
percent to $855 million at December 31, 1996, compared to $820 million at
December 31, 1995. The increase is due to the retention of net income after
dividends on preferred and common shares, offset by a $60 million increase in
treasury shares as a result of the Corporation's buyback program.
In December, 1996, the Corporation declared a three-for-one stock split
payable to shareholders of record December 31, 1996. Restated for the stock
split, the Corporation increased its annual dividend rate per common share 17.6
percent from $0.53 in 1995 to $0.63 in 1996. The dividend payout ratio for 1996
declined slightly to 34.7 percent, following payout ratios of 35.0 percent in
1995 and 35.9 percent in 1994.
- 28 -
<PAGE>
In January of 1996, the board of directors of the Corporation approved the
purchase of six million shares over the next three years under its common stock
buyback program. In December of 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 primarily for reissue in
connection with the employee stock option plans. As of December 31, 1996, the
Corporation had repurchased 3,045,618 shares through the buyback program.
Banking industry regulators define minimum capital requirements for banks and
bank holding companies. The Corporation's tier 1 and total risk-based capital
ratios as of December 31, 1996 amounted to 7.64 percent and 11.88 percent,
respectively, well above the minimum requirements of 4.00 percent for tier 1
and 8.00 percent for total risk-based capital. This compares to tier 1 and
total risk-based capital ratios of 7.97 percent and 11.23 percent at December
31, 1995. Regulatory authorities have also established a minimum "leverage"
ratio of 3.00 percent, which is defined as tier 1 equity to average quarterly
assets. At December 31, 1996, the Corporation's leverage ratio was 6.53
percent, compared to 6.23 percent a year earlier. The increase in the total
risk-based capital ratio in 1996 was the result of the $100 million issuance of
subordinated debt, which increased total capital 18.5 percent, while gross
risk-adjusted assets were up 12.0 percent at December 31, 1996.
The Corporation's subsidiary bank maintains risk-based capital and leverage
ratios within the "well capitalized" category as defined by the FDIC. The "well
capitalized" category requires tier 1 and total risk-based capital ratios of at
least 6.00 percent and 10.00 percent, respectively, and a minimum leverage
ratio of 5.00 percent.
Table 17 provides a summary of the components of tier 1 and total risk-based
capital, the amounts of risk-weighted assets and capital ratios as defined by
the regulatory agencies as of December 31, 1996 and 1995.
Table 17 -- Regulatory Capital Ratios --
As of December 31 (dollars in thousands) 1996 1995
Tier 1 capital:
Common shareholders' equity $ 855,072 $ 819,896
Qualifying preferred stock -- 281
Less: Unrealized gains/(losses)
on securities 7,126 5,957
Goodwill and other adjustments 215,630 225,545
Total tier 1 capital 632,316 588,675
Tier 2 capital components:
Qualifying long-term debt 247,358 148,314
Allowance for loan losses 103,701 92,556
Total risk-based capital $ 983,375 $ 829,545
Risk-Weighted Assets:
Risk-weighted assets on-balance-sheet $7,710,575 $6,974,316
Risk-weighted assets off-balance-sheet 800,848 655,077
Less: Goodwill and other adjustments 230,389 239,243
Net risk-weighted assets $8,281,034 $7,390,150
Fourth quarter average assets,
net of adjustments $9,678,184 $9,447,575
Risk-based capital ratios:
Tier 1 7.64% 7.97%
Total 11.88 11.23
Tier 1 leverage ratio 6.53 6.23
- 29 -
<PAGE>
FIVE YEAR LINE CHART OF COMMON STOCK PRICE & BOOK VALUE
(dollars per share)
1992 1993 1994 1995 1996
High $13.17 $13.13 $14.92 $20.75 $31.38
Low 8.08 11.00 11.17 12.08 18.71
Book Value 6.70 7.44 8.01 9.16 9.86
- 30 -
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As of December 31 (dollars in thousands) 1996 1995
Assets:
Cash and due from banks $ 508,831 $ 463,693
Money market investments 50,170 22,500
Investment securities:
Available-for-sale 1,332,312 1,517,868
Held-to-maturity (market value of
$168,326 in 1996 and $186,064 in 1995) 167,957 184,687
Total securities 1,500,269 1,702,555
Loans:
Commercial loans 2,406,540 2,234,847
Real estate loans 2,599,079 2,576,186
Retail loans 2,726,561 2,213,036
Total loans 7,732,180 7,024,069
Less: Unearned interest 145,002 98,288
7,587,178 6,925,781
Allowance for loan losses 118,689 106,909
Net loans 7,468,489 6,818,872
Premises and equipment 136,045 134,386
Acceptances--customers' liability 19,257 20,965
Other assets 410,754 410,361
Total assets $10,093,815 $9,573,332
Liabilities:
Deposits:
Noninterest-bearing deposits $ 1,571,080 $1,371,888
Interest-bearing deposits 6,305,181 6,322,110
Total deposits 7,876,261 7,693,998
Short-term borrowings 921,317 735,016
Long-term debt 247,359 161,190
Acceptances outstanding 19,257 20,965
Other liabilities 174,549 141,986
Total liabilities 9,238,743 8,753,155
Shareholders' Equity:
Preferred stock:
Shares authorized - 1,000,000
Shares issued - none in 1996
3,387 in 1995 -- 281
Common stock:
Shares authorized - 100,000,000
Shares issued - 90,481,374 in 1996
30,160,458 in 1995 452,407 150,802
Surplus 76,045 76,937
Retained earnings 400,838 599,005
Treasury stock, at cost (3,722,931 shares
in 1996 and 326,870 shares in 1995) (81,344) (12,805)
Net unrealized gain on securities
available-for-sale 7,126 5,957
Total shareholders' equity 855,072 820,177
Total liabilities and
shareholders' equity $10,093,815 $9,573,332
The accompanying notes are an integral part of these statements.
- 31 -
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 (amounts in thousands except per share data)
1996 1995 1994
Interest Income:
Interest and fees on loans $635,619 $586,416 $465,361
Interest on investment securities:
Taxable 95,080 121,724 100,986
Non-taxable 3,126 1,215 1,491
Interest on money market investments 1,700 1,049 1,886
Total interest income 735,525 710,404 569,724
Interest Expense:
Interest on deposits 262,675 265,972 175,220
Interest on short-term borrowings 42,999 55,227 39,081
Interest on long-term debt 11,652 10,997 9,317
Total interest expense 317,326 332,196 223,618
Net interest income 418,199 378,208 346,106
Provision for loan losses 40,773 25,101 24,372
Net interest income after
provision for loan losses 77,426 353,107 321,734
Noninterest Income:
Service charges on deposits 55,983 43,870 35,543
Trust income 46,917 41,512 36,539
Credit card income 19,183 15,118 12,475
ATM income 10,231 7,652 5,104
Mortgage banking income 7,556 2,362 4,301
Investment securities gains/(losses)-net (2,451) 1,910 10
All other income 33,103 25,700 23,043
Total noninterest income 170,522 138,124 117,015
Noninterest Expense:
Salaries 121,366 112,923 105,279
Pension and other employee benefits 19,905 20,273 19,692
Equipment expense 17,329 16,284 15,028
Occupancy expense-net 22,019 22,059 18,852
All other expense 122,592 114,675 101,460
303,211 286,214 260,311
SAIF special assessment 5,000 -- --
Total noninterest expense 308,211 286,214 260,311
Income before income tax 239,737 205,017 178,438
Income tax 81,378 68,414 61,847
Net income $158,359 $136,603 $116,591
Per Share:
Primary earnings $ 1.79 $ 1.52 $ 1.30
Fully diluted earnings 1.79 1.51 1.29
Dividends declared on common stock 0.63 0.53 0.47
Dividends declared on preferred stock 3.00 6.00 6.00
Weighted average shares of common
stock outstanding 88,564 90,086 89,618
Weighted average fully diluted
common stock equivalents 88,584 90,319 90,689
Per share amounts have been restated to reflect a 3-for-1 stock split in
1996.
The accompanying notes are an integral part of these statements.
- 32 -
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Common Unrealized
Preferred Stock Stock Retained Treasury Gain/(Loss)
(dollars in thousands) $100 Stated Value $5 Par Surplus Earnings Stock on Securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $14,622 $ 148,767 $ 80,038 $ 435,724 $ (3,352) $ -- $ 675,799
Net income -- -- -- 116,591 -- -- 116,591
Cash dividends declared on
common stock -- -- -- (41,726) -- -- (41,726)
Cash dividends declared on
Series B Preferred Stock -- -- -- (321) -- -- (321)
Conversion of Series B Preferred
Stock into common stock (12,156) 1,672 (2,039) -- 12,522 -- (1)
Issuance of common stock
and treasury shares -- 90 (917) -- 6,600 -- 5,773
Purchase of treasury stock -- -- -- -- (25,680) -- (25,680)
Shares reserved to meet deferred
compensation obligations -- -- 955 -- 465 -- 1,420
Adoption of SFAS No. 115 -- -- -- -- -- 4,386 4,386
Change in net unrealized gain/
(loss) on available-for-sale
securities -- -- -- -- -- (18,023) (18,023)
Balance, December 31, 1994 2,466 150,529 78,037 510,268 (9,445) (13,637) 718,218
Net income -- -- -- 136,603 -- -- 136,603
Cash dividends declared on
common stock -- -- -- (47,790) -- -- (47,790)
Cash dividends declared on
Series B Preferred Stock -- -- -- (76) -- -- (76)
Conversion of Series B Preferred
Stock into common stock (2,185) -- (2,863) -- 5,047 -- (1)
Issuance of common stock
and treasury shares -- 273 583 -- 3,743 -- 4,599
Purchase of treasury stock -- -- -- -- (12,081) -- (12,081)
Shares reserved to meet deferred
compensation obligations -- -- 1,180 -- (69) -- 1,111
Change in net unrealized gain/
(loss) on available-for-sale
securities -- -- -- -- -- 19,594 19,594
Balance, December 31, 1995 281 150,802 76,937 599,005 (12,805) 5,957 820,177
Net income -- -- -- 158,359 -- -- 158,359
Cash dividends declared on
common stock -- -- -- (54,916) -- -- (54,916)
Cash dividends declared on
Series B Preferred Stock -- -- -- (5) -- -- (5)
3-for-1 stock split -- 301,605 (301,605) -- -- -- --
Transfer -- -- 301,605 (301,605) -- -- --
Conversion of Series B Preferred
Stock into common stock (281) -- (643) -- 924 -- --
Issuance of common stock
and treasury shares -- -- (2,517) -- 11,397 -- 8,880
Purchase of treasury stock -- -- -- -- (80,581) -- (80,581)
Shares reserved to meet deferred
compensation obligations -- -- 1,903 -- (279) -- 1,624
Amortization of stock awards -- -- 365 -- -- -- 365
Change in net unrealized gain/
(loss) on available-for-sale
securities -- -- -- -- -- 1,169 1,169
Balance, December 31, 1996 $ -- $452,407 $76,045 $400,838 $(81,344) $7,126 $855,072
</TABLE>
The accompanying notes are an integral part of these statements.
- 33 -
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (dollars in thousands)
1996 1995 1994
Cash Flows from Operating Activities:
Net income $ 158,359 $ 136,603 $ 116,591
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 38,359 33,688 30,559
Provision for loan losses 40,773 25,101 24,372
Provision for deferred taxes 27,359 19,674 7,298
Gains on sale of premises and equipment-net (166) (311) (235)
Gains/(loss) on sale of securities-net 2,451 (1,910) (10)
(Gain)/loss on sale of mortgage loans (2,745) 1,546 (594)
Mortgage loans originated for sale on
the secondary market (285,284) (235,026) (95,082)
Proceeds from sale of mortgage loans on
the secondary market 311,012 191,760 134,966
Net change in other assets (9,441) (96,360) (19,435)
Net change in other liabilities (2,352) 39,780 7,416
Total adjustments 119,966 (22,058) 89,255
Net cash provided by operating activities 278,325 114,545 205,846
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity
securities 60,497 223,349 273,522
Proceeds from maturities of available-for-
sale securities 327,685 123,150 370,940
Proceeds from sales of available-for-sale
securities 143,222 520,772 991
Purchase of held-to-maturity securities (44,024) (43,895) (1,007,526)
Purchase of available-for-sale securities (285,173) (170,488) (398,244)
Net change in loans (724,428) (780,130) (1,029,181)
Proceeds from sales of loans 31,170 134,595 22,172
Proceeds from sales of premises and equipment 856 2,091 1,261
Purchase of premises and equipment (16,933) (19,977) (30,462)
Net change due to acquisitions of branch
offices 32,513 568,488 972,568
Net cash provided by/(used in)
investing activities (474,615) 557,955 (823,959)
Cash Flows from Financing Activities:
Net change in deposits 120,174 (314,496) 270,006
Net change in short-term borrowings 186,301 (299,684) 217,994
Principal payments on long-term debt (12,780) (5,470) (33,450)
Proceeds from issuance of long-term debt 98,754 -- 148,050
Proceeds from issuance of common stock 8,880 4,598 5,773
Purchase of treasury stock (80,581) (12,081) (25,680)
Shares reserved to meet deferred
compensation obligations 1,624 1,111 1,420
Dividends paid (53,274) (46,397) (40,422)
Net cash provided by/(used in)
financing activities 269,098 (672,419) 543,691
Net change in cash and cash equivalents 72,808 81 (74,422)
Cash and cash equivalents at beginning
of year 486,193 486,112 560,534
Cash and cash equivalents at end of year $ 559,001 $ 486,193 $ 486,112
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands)
1996 1995 1994
Cash Paid During the Year for:
Interest $ 323,211 $ 321,300 $ 206,616
Income taxes 53,815 45,394 55,096
Noncash transfer of loans to other real
estate owned 1,457 1,327 1,325
The accompanying notes are an integral part of these statements.
- 34 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant
Accounting Policies
The accounting and reporting policies of Star Banc Corporation and subsidiaries
("the Corporation") are based on generally accepted accounting principles and
conform to general practices within the banking industry. The following is a
description of the more significant accounting policies followed by the
Corporation.
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results may
differ from those estimates.
Certain amounts within the consolidated financial statements as of and for the
years ended December 31, 1995 and 1994 have been restated to conform to the
1996 presentation.
Nature of Operations
Star Banc Corporation is a multi-state bank holding company headquartered in
Cincinnati, Ohio. Through its banking subsidiary the Corporation operates over
260 banking offices in Ohio, Kentucky and Indiana and provides a full range of
consumer, commercial and trust financial products, including deposit, credit
and investment services.
Investment Securities
When securities are purchased they are classified in the held-to-maturity
portfolio, the available-for-sale portfolio, or as trading securities.
Held-to-maturity securities are debt securities that the Corporation has the
positive intent and ability to hold to maturity. Held-to-maturity securities
are reported at historical cost adjusted for amortization of premiums and
accretion of discounts. Available-for-sale securities are debt and equity
securities which will be held for an indefinite period of time and may be sold
from time to time for asset/liability purposes, in order to manage interest
rate risk or for liquidity needs. Available-for-sale securities are reported at
fair value. Unrealized gains or losses for these securities are excluded from
earnings and reported, net of tax, in a separate component of equity. Debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in current earnings.
Currently, the Corporation has not classified any securities as trading. The
cost of securities sold is determined on a specific identification basis.
The investment security classifications described above are as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" which the Corporation
adopted in 1994. Additional disclosures required by SFAS No. 115 are shown in
Note 3.
Loans
Loans are stated at the principal amount outstanding, net of unearned interest
and unamortized origination fees and costs. Interest income on loans is
recognized using the interest method or methods that approximate the interest
method.
- 35 -
<PAGE>
Loans held-for-sale are carried in the aggregate at lower of cost or fair value
and included in total loans in the consolidated balance sheets.
Loans are placed on nonaccrual status when, in the opinion of management, there
is a reasonable doubt as to future collectibility of interest or principal.
Loans are generally placed on nonaccrual status when they are past due 90 days
as to either principal or interest. However, loans that are well secured and in
the process of collection may not be placed on nonaccrual status, at the
judgment of senior management.
Allowance for Loan Losses
The allowance for loan losses, which is reported as a deduction from loans, is
available for loan charge-offs. This allowance is increased by provisions
charged to earnings and recoveries of loans previously charged off and is
reduced by loan charge-offs.
In 1995, the Corporation adopted SFAS No. 114, as amended by SFAS No. 118,
related to accounting by creditors for impairment of loans. SFAS No. 114
requires that impaired loans as defined by the statement be measured based on
(1) the present value of the expected future cash flows discounted at the
loan's effective interest rate, or (2) as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, a valuation allowance is recorded. The
Corporation had previously measured the allowance for loan losses on impaired
loans using similar methods to those prescribed by SFAS No. 114.
The specific valuation allowance recorded on impaired loans is included in the
total allowance for loan losses. In addition to the methods prescribed in SFAS
No. 114 for impaired loans, the amount of the provision for loan losses
necessary to maintain the adequacy of the total allowance is based on
management's evaluation of several key factors: the current loan portfolio,
current economic conditions, evaluation of significant problem loans, changes
in the mix and levels of the various types of loans, past net charge-off
experience and other pertinent information.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. These estimates are reviewed continually and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known. Charge-offs are made against the allowance for loan
losses when management concludes that the loan amounts are likely to be
uncollectible.
Premises and Equipment
Premises and equipment are reported at cost, less accumulated depreciation and
amortization. Expenditures for major additions and improvements are
capitalized, and maintenance and repair costs are charged to operating expense.
Depreciation and amortization of premises and equipment are computed on a
straight-line basis over the estimated useful lives of the individual assets.
Other Real Estate Owned
Other real estate owned represents real estate of which the Corporation has
taken ownership in partial or total satisfaction of loans, in addition to
closed bank offices.
- 36 -
<PAGE>
Other real estate owned is carried at the lower of cost or fair value, less
estimated costs to sell, and is included in other assets in the consolidated
balance sheets. Losses at the time property is classified as other real estate
owned are charged to the allowance for loan losses. Subsequent gains and
losses, as well as operating income or expense related to other real estate
owned, are recorded in non-interest expense.
Intangible Assets
The excess of the Corporation's cost of acquisitions over the fair value of net
assets acquired is being amortized on a straight-line basis over periods of 25
to 40 years. Core deposit intangibles, which represent the net present value of
the future economic benefits related to deposits purchased, are being amortized
on a straight-line basis over periods ranging from 8 to 17 years.
Other identified intangible assets of the Corporation are being amortized on a
straight-line basis over periods from 5 to 17 years.
The Corporation reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Asset values and the related amortization expense are based on
estimated lives and significant changes in these lives could significantly
affect future amortization expense.
Income Taxes
The Corporation files a consolidated federal income tax return. The
Corporation recognizes the amount of taxes payable (or refundable) for the
current year and deferred taxes, related to temporary differences in the tax
and financial reporting bases of assets and liabilities. Temporary differences
occur when tax laws differ from the recognition and measurement requirements of
financial accounting standards. Temporary differences relate to lease
financing, allowance for loan losses, depreciation of fixed assets, pension
liabilities and deferred loan fees, among others. Provisions for deferred taxes
are made at each legal entity of the Corporation in recognition of such
temporary differences. Disclosures required by SFAS No. 109 are shown in
Note 9.
Derivative Financial Instruments
The Corporation utilizes derivative financial instruments, primarily interest
rate swap agreements, for hedging purposes to reduce exposure to adverse
changes in interest rates and in foreign currency exchange rates. The income or
expense related to these transactions is recognized, on an accrual basis, over
the life of the hedged instrument as an adjustment to interest income or
expense. Additional disclosures related to derivatives are shown in Note 17.
Postemployment Benefits
SFAS No. 112 related to employers' accounting for postemployment benefits,
requires companies to accrue, during the period that an employee renders
service to the company, the expense of providing postemployment benefits.
Types of benefits include, but are not limited to, salary continuation,
severance benefits, job training and counseling, and continuation of health
care and life insurance coverage. Currently, the Corporation provides only
workers' compensation as a postemployment benefit.
The adoption of SFAS No. 112 in 1994 did not have a material impact on the
Corporation's financial condition or results of operations.
- 37 -
<PAGE>
Mortgage Servicing Rights
In 1996, the Corporation adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122
requires the Corporation to capitalize mortgage servicing rights on originated
mortgage loans when the loans are originated to be sold or securitized and
servicing is retained. When a mortgage loan is purchased or originated to be
sold or securitized with servicing retained, the total cost of the loan is
allocated to the mortgage servicing right and the loan based on their relative
fair values. Under SFAS No. 122, capitalized servicing rights are assessed for
impairment based on the fair value of those rights. In addition, capitalized
mortgage servicing rights must be stratified based on one or more predominant
risk characteristics of the underlying loans and impairment is recognized
through a valuation allowance for each impaired stratum.
The capitalization requirements of SFAS No. 122 were applied prospectively
beginning January 1, 1996 to all transactions in which mortgage loans are sold
or securitized with servicing rights retained. 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
servicing rights were purchased. The effect of the adoption of SFAS No. 122
was not material to the Corporation.
Mortgage servicing rights are amortized as noninterest expense over the period
of their estimated lives in proportion with estimated net servicing income.
See Note 7 for additional information and required disclosures under SFAS
No. 122.
Transfers and Servicing of Financial Assets
In 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial-components approach that focuses
on control. SFAS No. 125 applies to transactions occurring after December 31,
1996.
The adoption of SFAS No. 125 is not expected to have a material impact on the
Corporation's financial condition or results of operations.
Impairment of Long-Lived Assets
In 1996, the Corporation adopted SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
addresses accounting for impairment of long-lived assets, including certain
identifiable intangibles, and goodwill related to those assets. SFAS No. 121
requires that assets to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
The adoption of SFAS No. 121 did not have a material impact on the
Corporation's financial condition or results of operations.
- 38 -
<PAGE>
Stock-Based Compensation
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require a "fair value" based
method of accounting for stock-based compensation plans. With the adoption of
SFAS No. 123 the Corporation elected to continue to follow the principles of
APB Opinion No. 25 for expense recognition purposes. The disclosures required
by SFAS No. 123 are shown in Note 13.
Statement of Cash Flows
For purposes of reporting cash flows on the consolidated statements of cash
flows, cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold and securities purchased under agreements to resell.
Earnings Per Share
Primary earnings per share is computed by dividing net income, reduced by
dividends on preferred stock, by the weighted average number of common share
equivalents outstanding for each period presented. Fully diluted earnings per
share is computed by dividing net income by common share equivalents adjusted
for the assumed conversion of the preferred stock into common stock. The
dilutive effects of unexercised stock options are not material and therefore
not included in earnings per share.
Note 2 - Reserve Balance Requirements
Banking regulations require the Corporation's banking subsidiary to maintain
cash reserves which are unavailable for investment. The amounts of such
reserves, which are included in cash and due from banks in the consolidated
balance sheets, were $133 million and $204 million at December 31, 1996 and
1995, respectively.
Note 3 - Investment Securities
The table below summarizes unrealized gains and losses for held-to-maturity and
available-for-sale securities at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
Amortized Unrealized Fair Amortized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
Mortgage-backed securities $ 113,754 $ -- $1,045 $ 112,709 $ 144,701 $ -- $1,118 $ 143,583
Obligations of state and
political subdivisions 54,203 1,920 506 55,617 39,986 2,500 5 42,481
Other debt securities -- -- -- -- -- -- -- --
Total held-to-maturity
securities $ 167,957 $ 1,920 $1,551 $ 168,326 $ 184,687 $ 2,500 $1,123 $ 186,064
Available-for-Sale
U.S. Treasuries and agencies $ 20,282 $ 160 $ 7 $ 20,435 $ 18,933 $ 419 $ 4 $ 19,348
Mortgage-backed securities 1,250,598 15,828 4,998 1,261,428 1,449,217 14,896 6,021 1,458,092
Other debt securities 1,434 6 1 1,439 1,435 9 1 1,443
Federal Reserve/FHLB stock
and other equity securities 49,010 -- -- 49,010 38,985 -- -- 38,985
Total available-for-sale
securities $1,321,324 $15,994 $5,006 $1,332,312 $1,508,570 $15,324 $6,026 $1,517,868
</TABLE>
- 39 -
<PAGE>
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at December 31, 1996.
Amortized Fair
(dollars in thousands) Cost Value
Held-to-Maturity
One year or less $ 54,807 $ 54,980
After one year through five years 92,520 92,186
After five years through ten years 7,208 7,393
After ten years 13,422 13,767
Total $ 167,957 $ 168,326
Available-for-Sale
One year or less $ 232,951 $ 234,958
After one year through five years 774,092 780,781
After five years through ten years 191,194 192,845
After ten years 74,077 74,718
Total $1,272,314 $1,283,302
Note: Maturity information related to mortgage-backed securities included
above is presented based upon weighted average maturities anticipating future
prepayments.
As of December 31, 1996, the Corporation reported a net unrealized gain of $11
million for available-for-sale securities. For 1996, the unrealized gain/(loss)
reported as a separate component of equity (net of tax) changed from an
unrealized gain of $6 million to an unrealized gain of $7 million, increasing
equity $1 million.
The following table provides information as to the amount of gross gains and
(losses) realized through the sales of investment securities (from
available-for-sale securities).
(dollars in thousands) 1996 1995 1994
Debt securities:
Gross gains $ 3 $ 3,275 $10
Gross (losses) (2,450) (1,365) --
Equity securities net gains (4) -- --
Net securities gains/(losses) $(2,451) $ 1,910 $10
Securities with a carrying value of $1.28 billion at December 31, 1996 and
$1.41 billion at December 31, 1995, were pledged to secure deposits and for
other purposes. All securities pledged to secure deposits and repurchase
agreements are controlled solely by Star Bank, N.A.
Note 4 - Loans
The following table lists information related to nonperforming loans as of
December 31.
(dollars in thousands) 1996 1995
Loans on nonaccrual status $39,375 $36,875
Restructured loans 80 87
Total nonperforming loans $39,455 $36,962
Interest that would have been recognized
on nonperforming loans in accordance
with their original terms $ 3,934 $ 3,888
Actual interest recorded for nonaccrual
and restructured loans 2,055 982
- 40 -
<PAGE>
Most of the Corporation's business activity is with customers located in the
immediate market areas of its subsidiary bank in Ohio, Kentucky and Indiana.
As of December 31, 1996, loans to customers engaged in similar activities and
having similar economic characteristics, as defined by standard industrial
classifications, did not exceed 10 percent of total loans.
At December 31, 1996, residential real estate loans held for sale, included in
total loans, amounted to $22 million, compared to $48 million at December 31,
1995.
The Corporation evaluates the credit risk of each customer on an individual
basis and obtains collateral when it is deemed appropriate. Collateral varies
by individual loan customer, but may include accounts receivable, inventory,
real estate, equipment, deposits, personal and government guaranties, and
general security agreements. Access to collateral is dependent on the type of
collateral obtained. On an ongoing basis, the Corporation monitors its
collateral and the collateral value related to the loan balance outstanding.
The aggregate amount of loans in excess of $60,000 outstanding to directors
and executive officers (including their related interests) of the parent
company and its wholly-owned subsidiary, Star Bank, N.A., amounted to
$54,766,000 and $31,623,000 at December 31, 1996 and 1995, respectively. During
1996, new loans and repayments related to outstanding loans amounted to
$2,486,000 and $1,805,000, respectively. Changes in the composition of the
board of directors and executive management had no effect on such loans in
1996. Management believes these loans were made on substantially the same
terms, including interest rate and collateral, as those prevailing at the same
time for comparable transactions with other persons.
Note 5 - Allowance for Loan Losses and Impaired Loans
A summary of the activity in the allowance for loan losses is shown in the
following table.
(dollars in thousands) 1996 1995 1994
Balance--beginning of year $106,909 $ 95,979 $ 83,156
Loans charged off (43,653) (28,248) (24,570)
Recoveries on loans
previously charged off 14,660 14,077 13,021
Net charge-offs (28,993) (14,171) (11,549)
Provision charged
to earnings 40,773 25,101 24,372
Balance--end of year $118,689 $106,909 $ 95,979
As described in Note 1, the Corporation adopted SFAS No. 114 and SFAS No. 118
in 1995. The valuation allowance recorded on impaired loans in accordance with
SFAS No. 114, is included in the total allowance for loan losses shown above.
The adoption of SFAS No. 114 and 118 did not have a material impact on the
financial condition or results of operations of the Corporation.
The average recorded investment in impaired loans was $32 million for 1996 and
$28 million for 1995. As a general policy, the Corporation applies both
principal and interest payments received on impaired loans as a reduction of
principal. The Corporation did not recognize any interest on impaired loans in
1996. For 1995, the Corporation recognized $152,000 in cash basis interest on
impaired loans.
- 41 -
<PAGE>
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance (as calculated under SFAS No. 114) at
December 31, 1996 and 1995.
(dollars in thousands) 1996 1995
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired Loans:
Valuation allowance required $ 2,215 $785 $15,688 $3,922
No valuation allowance required 29,018 -- 14,171 --
Total impaired loans $31,233 $785 $29,859 $3,922
Note 6 - Premises and Equipment
Premises and equipment as of December 31 are summarized in the following
table.
(dollars in thousands) 1996 1995
Land $ 15,754 $ 14,588
Bank buildings 89,567 92,735
Furniture, fixtures & equipment 78,674 71,756
Leasehold improvements 20,999 17,448
Construction in progress 1,799 2,639
Total premises and equipment 206,793 199,166
Less: Accumulated depreciation
and amortization 70,748 64,780
Net premises and equipment $136,045 $134,386
Depreciation and amortization expense related to premises and equipment
amounted to $15,106,000 in 1996, $13,894,000 in 1995 and $10,369,000 in 1994.
Total rental expense was $16,052,000 in 1996, $15,506,000 in 1995 and
$15,793,000 in 1994.
Future minimum rental payments related to non-cancelable operating leases
having initial terms in excess of one year are $12,986,000 in 1997, $11,684,000
in 1998, $9,749,000 in 1999, $9,174,000 in 2000, $7,473,000 in 2001 and
$39,150,000 in later years.
Note 7 - 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." 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.
The value of pre-SFAS No. 122 purchased mortgage servicing rights (PMSRs) was
established using the amount of consideration paid, which is based on current
market conditions at the time the loan was purchased. Beginning in 1996, the
value of servicing rights is established based on either the amount of
consideration paid for loans purchased or pricing determined using a valuation
model which calculates the present value of estimated future cash flows based
on the market rate at the time of the loan for originated loans. Mortgage
servicing rights are amortized as noninterest expense over the period of their
estimated lives in proportion with estimated net servicing income.
- 42 -
<PAGE>
In estimating fair value for the purposes of impairment evaluation and
measurement, mortgage servicing rights capitalized in 1996 are stratified based
on fixed and variable rate products by 200 basis point rate bands, while
pre-SFAS No. 122 PMSRs are measured separately. Quarterly impairment testing is
performed using a discounted cash flow methodology assuming current national
prepayment speeds and a current discount rate. At December 31, 1996 an 8.0
percent discount rate was assumed. Impairment will be recognized through a
valuation allowance for each impaired stratum.
The following is a summary of mortgage servicing rights at December 31, 1996.
Mortgage Servicing Rights:
(dollars in thousands) 1996
Balance at beginning of year $ 16,819
Amount capitalized 3,468
Amortization (1,557)
Balance at end of year 8,730
Fair Value at December 31, 1996 $ 11,983
There was no valuation allowance established related to mortgage servicing
rights at December 31, 1996.
Note 8 - Short-Term Borrowings
The following table is a summary of short-term borrowings for the last three
years.
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
At year end:
Federal funds purchased $254,877 5.6% $ 211,854 5.8% $ 421,228 5.9%
Securities sold under
agreements to repurchase 599,207 4.3 471,987 5.1 496,066 5.4
Commercial paper 66,078 5.5 36,810 5.7 -- --
Other short-term borrowings 1,155 4.4 14,365 4.5 117,406 5.0
Total 921,317 4.8 735,016 5.3 1,034,700 5.2
Average for the year:
Federal funds purchased 281,102 5.3 440,335 5.9 471,538 4.4
Securities sold under
agreements to repurchase 512,193 4.3 479,285 4.9 459,730 3.5
Commercial paper 91,797 5.5 11,861 5.9 -- --
Other short-term borrowings 12,933 6.0 83,071 5.7 64,633 4.0
Total $898,025 4.8% $1,014,552 5.4% $ 995,901 3.9%
Maximum month-end balances:
Federal funds purchased $375,109 $1,544,269 $ 724,486
Securities sold under
agreements to repurchase 599,207 549,437 502,777
Commercial paper 130,097 36,810 --
Other short-term borrowings 75,046 295,007 456,032
</TABLE>
- 43 -
<PAGE>
Note 9 - Income Taxes
At December 31, 1996, in accordance with SFAS No. 109, included in the
Corporation's consolidated balance sheet was a net deferred tax liability of
$54,591,000, compared to $26,579,000 at December 31, 1995. This change was
primarily due to increases in leasing operations. The Corporation has not
recorded a valuation reserve related to deferred tax assets.
The components of the net deferred tax asset/(liability) at December 31, 1996
and 1995 were as follows:
(dollars in thousands) 1996 1995
Allowance for loan losses $ 41,689 $ 37,567
Deferred loan fees/costs 1,133 1,749
Deferred compensation 3,391 2,522
Intangible asset amortization 458 845
Other 3,044 3,011
Total deferred tax asset 49,715 45,694
Leased assets (84,868) (55,343)
Pension liabilities (5,559) (4,945)
Depreciation of fixed assets (5,953) (5,379)
Unrealized gain on securities (3,862) (3,208)
FHLB stock dividend (1,735) (1,038)
Intangible assets/purchase
accounting adjustments (277) (580)
Other (2,052) (1,780)
Total deferred tax liability (104,306) (72,273)
Net deferred tax asset/(liability) $ (54,591) $(26,579)
Income tax expense for the last three years consisted of the following:
(dollars in thousands) 1996 1995 1994
Current payable:
Federal $52,668 $47,704 $53,740
State 1,351 1,036 809
Total current
income tax 54,019 48,740 54,549
Deferred federal income tax
resulting from:
Allowance for loan losses (4,122) (4,416) (4,585)
Leasing 29,525 23,137 12,019
Intangible assets 32 (1,299) (1,402)
Other-net 1,924 2,252 1,266
Total deferred
federal income tax 27,359 19,674 7,298
Income tax $81,378 $68,414 $61,847
A reconciliation of the statutory tax rate to the effective tax rate is as
follows:
1996 1995 1994
Statutory tax rate 35.0 % 35.0 % 35.0 %
Adjustments to statutory
tax rate:
Tax-exempt interest income (1.0) (1.1) (1.1)
Other-net (0.1) (0.5) 0.8
Effective tax rate 33.9 % 33.4 % 34.7 %
- 44 -
<PAGE>
Note 10 - Time Deposits and Long-Term Debt
Included in the Corporation's deposits at December 31, 1996 were $440 million
in time deposits over $100,000. Maturities of total time deposits at December
31, 1996 were $2.75 billion less than 1 year, $574 million 1-5 years and $29
million over 5 years.
The following is a summary of the Corporation's long-term debt as of
December 31.
(dollars in thousands) 1996 1995
Parent company:
9.25% Senior notes--semiannual
payments of interest, principal
paid off in 1996 $ -- $ 12,780
Star Bank, N.A.:
6 3/8% Subordinated notes--semiannual
payments of interest, principal
due 2004 148,606 148,410
6 5/8% Subordinated notes--semiannual
payments of interest, principal
due 2006 98,753 --
Total long-term debt $247,359 $161,190
The parent company has a line of credit of $150 million, of which the total
amount was available as of December 31, 1996. The scheduled payments of all of
the Corporation's long-term debt are over 5 years.
Note 11 - Pension
The Corporation has a non-contributory defined benefit pension plan covering
substantially all employees. The benefits are based on years of service and
employees' compensation while employed. The Corporation's funding policy is to
make an annual contribution to the plan which at least equals the minimum
required contribution.
- 45 -
<PAGE>
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated balance sheets at December 31, 1996 and
1995.
(dollars in thousands) 1996 1995
Projected benefit obligation:
Vested benefits $54,539 $46,041
Nonvested benefits 1,276 1,887
Accumulated benefit obligation 55,815 47,928
Effect of projected future
compensation levels 6,639 9,397
Projected benefit obligation 62,454 57,325
Plan assets 85,538 77,801
Plan assets in excess of
projected benefit obligation 23,084 20,476
Unrecognized net loss due to past
experience different from
assumptions made 2,706 4,364
Unrecognized prior service cost (270) (291)
Unrecognized net asset being
recognized over 16 years (6,034) (7,283)
Prepaid pension cost in
consolidated balance sheets $19,486 $17,266
Net pension cost, which amounted to a credit for 1994 through 1996, included
the following components:
(dollars in thousands) 1996 1995 1994
Service cost - benefits
earned during the
period $ 2,465 $ 2,108 $ 2,555
Interest cost of
projected benefit
obligation 4,174 3,806 3,773
Actual total return
on plan assets (10,846) (11,245) (324)
Net amortization
and deferral 1,987 3,273 (7,452)
Net periodic
pension (credit) $ (2,220) $ (2,058) $(1,448)
Plan assets primarily consist of listed stocks, corporate bonds, United States
Treasury and Agency securities, and mutual funds. Included in plan assets at
December 31, 1996 were 289,800 shares of the Corporation's stock with a value
of $9 million. December 31, 1995 plan assets included 397,800 shares with a
value of $8 million.
In determining the projected benefit obligation, the following weighted
average rates were used.
1996 1995 1994
Discount rate 7.75% 7.50% 8.25%
Future salary increases 4.50 4.00 4.00
Long-term return on assets 10.10 9.58 9.58
- 46 -
<PAGE>
Note 12 - Other Postretirement Benefits
The Corporation provides health care benefits to current retirees, and their
spouses, who had retired prior to January 1, 1993. Employees who retired after
January 1, 1993 may obtain health care benefits under the Corporation's health
care plan; however, the total amount of premiums is paid by the retiree.
The liability for postretirement benefits is unfunded. The following table sets
forth the amount of the accumulated benefit obligation recognized in the
Corporation's consolidated balance sheet at December 31, 1996 and 1995.
(dollars in thousands) 1996 1995
Accumulated postretirement
benefit obligation:
Retirees $ 2,995 $ 2,420
Fully eligible active participants -- --
Total 2,995 2,420
Unrecognized net gain/(loss) 1,903 2,796
Unrecognized transition
obligation being amortized over 14 years (3,909) (4,300)
Accrued postretirement obligation
in consolidated balance sheets $ 989 $ 916
The components of the net periodic cost of postretirement benefits for 1994
through 1996 were as follows:
(dollars in thousands) 1996 1995 1994
Interest cost of projected
benefit obligation $ 150 $ 194 $372
Amortization of unrecognized
transition obligation 391 391 391
Net amortization
and deferral (172) (185) --
Net periodic
postretirement
benefit cost $ 369 $ 400 $763
The weighted average discount rates used in determining the amount of the
accumulated benefit obligation were 6.75 percent as of December 31, 1996 and
6.5 percent as of December 31, 1995. The measurement of the accumulated
benefit obligation assumed a health care cost trend rate of 11.00 percent for
1996 and 1995, which gradually decreases to an ultimate rate of 5.80 percent by
2012 and thereafter. The health care cost trend assumption has a significant
effect on the amounts reported. To illustrate, a one percent increase in each
future year would increase the accumulated postretirement benefit obligation at
December 31, 1996 by $246,000 and increase the aggregate of the service and
interest cost components of the net periodic benefit cost for the year by
$17,000.
- 47 -
<PAGE>
Note 13 - Stock Options and Compensation Plans
In 1992, the shareholders of the Corporation approved the adoption of the Star
Banc Corporation 1991 Stock Incentive Plan ("the Plan") replacing the 1986
plan. The Plan provides for the grant, to selected key managerial personnel, of
options to purchase shares of common stock generally at the stock's fair market
value at the date of grant. In addition, the Plan provides for the grant, to
selected key managerial personnel, of stock awards and of shares of common
stock which are subject to restriction on transfer and to a right of repurchase
by the Corporation. Not more than 7,500,000 authorized and unissued shares of
common stock, in the aggregate, are available for issue under the Plan. The
Plan will terminate on January 7, 2001.
In 1996, the Corporation adopted the 1996 StarShare Stock Option Plan for all
employees. The 1996 StarShare Plan provided a one-time grant to all eligible
employees of options to purchase shares of common stock at the stock's fair
market value at the grant date. This one-time grant to purchase shares of
common stock of the Corporation was made to all active employees (not currently
eligible under the 1991 Incentive Plan) as a performance award.
The 1996 StarShare Plan was in addition to the original 1993 StarShare Plan
which was granted, as a performance award, to all eligible employees following
the Corporation's restructuring program. The StarShare Plans are one-time
grants and therefore no additional shares are available under these plans. The
StarShare Plans have no expressed termination date; however, these plans may be
terminated or modified by the board of directors at any time.
All grants of stock options since 1993 under the Stock Incentive and StarShare
Plans vest over a four year period.
- 48 -
<PAGE>
The following is a summary of options and awards outstanding and exercised
under the 1991 and 1986 Stock Incentive Plans, the Directors Plan and the
StarShare Option Plans.
<TABLE>
<CAPTION>
1996 1995
Stock Stock Weighted-Average Stock Stock Weighted-Average
Awards Options Exercise Price Awards Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Stock Incentive and Directors Plans:
Number of shares outstanding
at beginning of year 90,000 5,414,919 $13.24 -- 4,369,068 $11.22
Granted -- 1,290,900 29.44 90,000 1,350,300 19.14
Exercised -- (430,212) 9.77 -- (294,924) 10.44
Cancelled -- (27,564) 15.38 -- (9,525) 11.79
Number of shares outstanding
at end of year 90,000 6,248,043 16.81 90,000 5,414,919 13.24
Exercisable at end of year 3,071,650 $12.27 2,348,664 $10.73
Weighted average fair value
of options granted -- $6.25 $20.29 $3.54
Available for future grant under
the Stock Incentive Plans 214,656 1,386,492
StarShare Stock Option Plans:
Options outstanding at
beginning of year 187,563 $11.75 257,487 $11.75
Granted 1,420,875 30.33 -- --
Exercised (94,371) 11.75 (53,340) 11.75
Cancelled (22,806) 18.36 (16,584) 11.75
Options outstanding at
end of year 1,491,261 29.35 187,563 11.75
Exercisable at end of year 78,486 $11.75 187,563 $11.75
Weighted average fair value
of options granted $6.46 --
Available for future grant under
the StarShare Stock Option Plans -- --
</TABLE>
Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
The fair value and pro forma income information calculated for options granted
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for 1995 and 1996,
respectively: expected volatility of 16.01 percent and 16.03 percent, risk-free
interest rates of 5.79 percent and 6.00 percent, dividend yields of 2.70
percent and 2.02 percent, and for both years, expected lives of five years.
- 49 -
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1996, under the 1991 and 1986 Stock Incentive Plans, the Directors
Plan and the StarShare Option Plans.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
<S> <C> <C> <C> <C> <C>
Stock Incentive and Directors Plans:
$ 5.58 - 8.54 357,381 3.61 Years $ 7.03 357,381 $ 7.03
11.25 - 11.92 2,441,370 7.22 Years 11.40 1,679,991 11.41
12.08 - 17.75 1,071,075 6.99 Years 13.69 766,575 13.78
18.67 - 22.92 1,211,067 8.98 Years 20.38 267,703 20.29
24.83 - 30.33 1,167,150 9.94 Years 30.30 -- --
5.58 - 30.33 6,248,043 7.82 Years 16.81 3,071,650 12.27
StarShare Stock Option Plans:
11.67 - 12.00 78,486 6.09 Years 11.75 78,486 11.75
30.33 1,412,775 9.94 Years 30.33 -- --
$11.67 - 30.33 1,491,261 9.74 Years $29.35 78,486 $11.75
</TABLE>
Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for all of its stock-based compensation plans. Accordingly, no
compensation expense has been recognized for stock option grants.
SFAS No. 123 encourages a "fair value" based method of accounting for
stock-based compensation plans. Had the Corporation recognized compensation
expense based on the fair value of options at their grant date, as prescribed
by SFAS No. 123, the Corporation's net income for 1995 and 1996 would have been
$136,477,000 and $157,333,000, respectively. Pro forma primary and fully
diluted earnings per share would have been $1.51 in 1995 and $1.78 in 1996.
These pro forma disclosures are not likely to be representative of the effect
on reported net income and earnings per share for future years since current
options vest over a four year period and additional options are generally
granted each year.
Recipients of stock awards are entitled to a compensation equivalent of the
dividends that would have been payable on the awards reserved, over the number
of years the award is deemed to be fully earned. Compensation expense and the
related increase in equity is recognized by the Corporation over the service
period until the award is fully earned, based on the market value of the award.
Compensation expense recognized in 1996 for stock awards was $365,000.
Directors and selected senior officers of the Corporation and its banking
subsidiary may participate in the Corporation's Deferred Compensation Plan
through which they may postpone the receipt of compensation. Amounts deferred
under the plan may be valued on the basis of an interest index or be used to
purchase shares of the Corporation's common stock. Although the plan is
unfunded for tax purposes, a portion of the shares of treasury stock held at
December 31, 1996 and 1995 were acquired to meet obligations arising from this
plan and are considered common stock equivalents for the purpose of computing
earnings per share.
- 50 -
<PAGE>
The Corporation has entered into severance agreements with certain officers of
the Corporation. In general, the agreements provide for the payment of a lump
sum benefit to the officer, plus the continuation of certain medical and
insurance benefits and immediate exercisability of stock options, in the event
that the officer's employment is terminated involuntarily by the Corporation,
or voluntarily by the officer for good reason, following a change in control of
the Corporation during the officer's protected period. The benefits payable
under the agreements can be up to three times the officer's base salary and
incentive bonus. The aggregate amount payable if all officers were entitled to
and exercised their rights to receive payment under these agreements would be
approximately $41 million.
Note 14 - Shareholders' Equity
Each share of common stock outstanding (and each share issued by the
Corporation prior to the occurrence of certain events) carries with it one
Preferred Stock Purchase Right to purchase, at a price of $100, one-hundredth
of a share of Series A Preferred Stock. The Preferred Stock Purchase Rights are
exercisable only if a person or group acquires or obtains the right to acquire
ownership of 20 percent or more of the Corporation's common stock, commences a
tender or exchange offer for 30 percent or more of the common stock, or a
holder of 10 percent or more of common stock is declared an Adverse Person by
the Corporation's board of directors. The Corporation is entitled to redeem the
Preferred Stock Purchase Rights at a price of one cent per Preferred Stock
Purchase Right at any time before the twentieth day following the date a 20
percent position has been acquired. In connection with the shareholder rights
plan, 500,000 shares of the Corporation's 1,000,000 authorized shares of
Preferred Stock have been designated as Series A Preferred Stock; no shares of
Series A Preferred Stock have been issued.
In January of 1996, the board of directors of the Corporation approved the
purchase of six million shares over the next three years under its common stock
buyback program. In December of 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 primarily for reissue in
connection with the employee stock option plans. As of December 31, 1996, the
Corporation had repurchased 3,045,618 shares through the buyback program.
Note 15 - Regulatory Capital
The Corporation and its banking subsidiary are subject to various capital
requirements as defined by banking industry regulators for banks and bank
holding companies. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by the
regulators that, if undertaken, could have a material effect on the financial
statements of the Corporation. As of the most recent notification from its
regulators, the Corporation and Star Bank, N.A. were categorized as well
capitalized under the regulatory framework for prompt corrective action.
- 51 -
<PAGE>
The following provides a summary of the Corporation and its subsidiary bank's
tier 1 and total risk-based capital amounts and ratios, as compared to minimum
capital requirements for 1996 and 1995.
<TABLE>
<CAPTION>
For Minimum
Capital Adequacy To Be Well
(dollars in thousands) Actual Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $983,375 11.88% $662,483 8.00% $828,104 10.00%
Star Bank, N.A. 881,495 10.82 651,623 8.00 814,529 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 632,316 7.64 331,242 4.00 496,863 6.00
Star Bank, N.A. 532,141 6.53 325,812 4.00 488,717 6.00
Tier 1 Capital (to Average Assets):
Consolidated 632,316 6.53 387,128 4.00 483,910 5.00
Star Bank, N.A. 532,141 5.58 381,217 4.00 476,522 5.00
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $829,545 11.23% $591,212 8.00% $739,015 10.00%
Star Bank, N.A. 802,224 10.89 589,070 8.00 736,338 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 588,675 7.97 295,606 4.00 443,409 6.00
Star Bank, N.A. 561,601 7.63 294,535 4.00 441,803 6.00
Tier 1 Capital (to Average Assets):
Consolidated 588,675 6.23 377,903 4.00 472,379 5.00
Star Bank, N.A. 561,601 5.98 375,500 4.00 469,374 5.00
</TABLE>
Note 16 - Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business in managing its interest rate risk and
meeting the financing needs of its customers. These financial instruments
include commitments to extend credit, standby letters of credit, interest rate
swap agreements, interest rate caps, forward contracts to purchase or sell
foreign currencies and forward commitments to sell residential mortgage loans.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized on the Corporation's consolidated
balance sheet. The contract or notional amounts of these instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
- 52 -
<PAGE>
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and commercial letters of credit is represented by
the contract amount of these instruments. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to or typically expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. The need for collateral is assessed on a case-by-case basis, based
upon management's credit evaluation of the other party.
The Corporation currently utilizes commitments to purchase or sell foreign
currencies and commitments to sell residential real estate loans to hedge
positions taken in transactions with customers. In addition, the Corporation
utilizes interest rate swap agreements as hedge instruments to reduce exposure
to adverse changes in interest rates. The notional amounts of these instruments
do not represent exposure to credit loss. Risks associated with these types of
financial instruments arise from the movement of interest rates or foreign
exchange rates and failure of the other party to the transaction to meet its
obligation. The Corporation controls the risk of such instruments through
approvals, limits, and monitoring procedures. Note 17 provides additional
disclosures on the Corporation's derivative financial instruments. The
following table shows the contract or notional amount of the Corporation's
off-balance-sheet financial instruments as of December 31.
Contract or
Notional Amount
(dollars in millions) 1996 1995
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $3,290 $ 2,079
Standby letters of credit 272 249
Commercial and other letters of credit 15 31
Financial instruments whose notional or
contract amounts exceed the amount of
credit risk:
Forward commitments $ 39 $ 90
Interest rate swap agreements 367 471
Foreign currency spot and forward contracts 53 44
- 53 -
<PAGE>
Note 17 - Derivative Financial Instruments
The Corporation currently holds derivative financial instruments primarily for
purposes other than trading while some foreign exchange spot contracts are held
for trading purposes. The average amounts of foreign exchange contracts held
for trading purposes in 1996 were immaterial. The Corporation's primary
objective is the hedging or management of interest rate and foreign exchange
risks arising out of non-trading assets. Interest rate swap agreements are the
primary type of derivative used by the Corporation. The two parties to an
interest rate swap agreement agree to exchange, at particular intervals,
payment streams calculated on a specified notional amount, with one stream
based on a floating interest rate and the other stream based on a fixed
interest rate. The Corporation has entered into interest rate swap agreements
as part of its overall management of interest rate risk. The current swaps were
entered into in order to reduce the overall interest rate sensitivity of the
Corporation. The majority of the Corporation's interest rate swap agreements
are the standard fixed/floating type of swap agreement. In addition, one of the
Corporation's interest rate swaps is an indexed amortizing swap, which also has
a fixed and a floating stream of interest payments. All of the interest rate
swaps are treated as hedges, and accordingly, are accounted for on the same
basis as the underlying asset or liability being hedged. The income or expense
related to derivative financial instruments is recognized on an accrual basis,
over the estimated life of the hedged instrument, as an adjustment to interest
income or expense.
The Corporation enters into foreign exchange forward contracts to accommodate
the business needs of its customers and for proprietary trading purposes.
Foreign exchange-based forward contracts provide for the delayed delivery or
purchase of foreign currency. The majority of foreign exchange contracts relate
to major foreign currencies such as Canadian dollars, British pounds, Deutsche
marks and Japanese yen. The foreign exchange risk associated with these
contracts is mitigated by entering into offsetting foreign exchange contracts.
Adjustments to the fair value of foreign exchange forward contracts are
included in other income on the income statement. As of December 31, 1996,
there were no foreign exchange forward contracts, held for trading purposes,
outstanding.
The Corporation uses forward sale commitments to manage the risk associated
with adverse changes in interest rates on mortgages held for sale. The sale
agreements commit the Corporation to deliver mortgage loans in future periods
at specified coupon rates. These commitments have terms of up to 120 days.
At December 31, 1996, all derivative financial instruments qualify as hedges;
however, if a derivative financial instrument that was previously accounted for
as a hedge fails to meet the hedge accounting criteria, the instrument will be
marked-to-market from that point forward, with any resulting gain or loss
recognized in the future period. For derivative instruments which are
terminated prior to maturity, the unrealized gain or loss would be deferred and
amortized as an adjustment to interest income or expense over the life of the
underlying asset or liability which was hedged. In 1995, the Corporation
terminated one of its interest rate swap contracts in order to reduce its
liability rate sensitive position at that time. This termination resulted in a
$547,000 loss which was deferred and is being amortized over the life of the
underlying balance sheet item.
- 54 -
<PAGE>
Monthly, the Corporation's Asset/Liability Policy Committee and Credit
Administration review the credit risk of the Corporation's interest rate swap
agreements. Credit Administration reviews the creditworthiness of each
counterparty annually and updates individual derivative financial instrument
credit lines for each counterparty. To date, none of the interest rate swap
agreements include bi-lateral collateralization requirements, except in the
case of credit downgrades by Moody's or Standard & Poor's to a rating below
investment grade.
All of the Corporation's derivative financial instruments, fixed rate and
floating rate payments are settled on a net basis as permitted under master
netting agreements. This reduces the overall potential exposure of the
counterparty.
The following table provides information related to derivative financial
instruments as of December 31, 1996.
<TABLE>
<CAPTION>
Maturities of Derivative Products as of December 31,
2001
(dollars in thousands) 1997 1998 1999 2000 and after Total
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Receive fixed rate swaps
Notional value $ - $ - $ - $240,000 $100,000 $340,000
Weighted average receive rate 5.41% 6.32% 5.68%
Weighted average pay rate 5.59% 5.50% 5.56%
Receive fixed amortizing swaps
Notional value 27,133 - - - - 27,133
Weighted average receive rate 4.47% 4.47%
Weighted average pay rate 5.50% 5.50%
Total Interest Rate Swaps
Notional value $ 27,133 - - $240,000 $100,000 $367,133
Weighted average receive rate 4.47% 5.41% 6.32% 5.59%
Weighted average pay rate 5.50% 5.59% 5.50% 5.56%
Forward Commitments $ 39,070 - - - - $ 39,070
Foreign Currency Spot and
Forward Contracts 45,155 1,438 1,432 2,454 2,272 52,751
Total notional/contract amount $111,358 $1,438 $1,432 $242,454 $102,272 $458,954
</TABLE>
Note 18 - Litigation
Various legal claims have arisen during the normal course of business which, in
the opinion of management, will not result in material liability to the
Corporation.
Note 19 - Dividend Restriction
Bank regulatory agencies limit the amount of dividends a subsidiary bank can
declare to the parent company in any calendar year without obtaining prior
approval. The limitation of Star Bank, N.A. for 1996 was approximately $274
million. During 1996, the Bank declared $202 million in cash dividends to the
parent company. There were no dividends requiring regulatory agency approval in
1996. The carryover amount of dividends available to the parent company from
the Bank at January 1, 1997 was $80 million.
- 55 -
<PAGE>
Note 20 - Acquisitions
On July 15, 1995, Star Bank, N.A., purchased 24 Columbus area branch offices of
the Ohio division of Household Bank, Federal Savings Bank. This transaction was
accounted for as a purchase, and accordingly, all assets acquired and
liabilities assumed were recorded at fair value. In purchasing these branches,
the Bank received $564 million in cash and $645 million in deposits for a total
premium of $71 million (including fair value adjustments). The premium was
allocated to certain identified intangibles, such as core deposit, as well as
other unidentified intangibles. Accordingly, the premium is being amortized
over the estimated useful lives of these intangibles ranging from 13 to 25
years.
Note 21 - Intangible Assets
The following is a summary of intangible assets as of December 31 which are
included in other assets in the consolidated balance sheets.
(dollars in thousands) 1996 1995
Intangibles from acquisitions:
Excess of cost over fair value
of assets acquired $ 65,909 $ 70,204
Core deposit benefits 89,809 92,404
Other identified intangibles 59,682 62,282
Mortgage servicing rights 8,730 6,819
Purchased credit card relationships 2,300 39
Total intangible assets $226,430 $231,748
Note 22 - Other Noninterest Expense
The following are included in all other expense for the years ended
December 31.
(dollars in thousands) 1996 1995 1994
Amortization of intangibles $17,282 $14,037 $ 7,698
Outside processing services 11,537 10,655 9,530
State taxes 10,999 8,597 9,682
Marketing 8,418 10,257 8,391
FDIC insurance 2,172 9,783 13,176
Note 23 - Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about both on- and off-balance-sheet
financial instruments for which it is practicable to estimate that value. For
many of the Corporation's financial instruments, however, an available trading
market does not exist; therefore, significant estimations and present value
calculations were used to determine fair values as described below. Changes in
estimates and assumptions could have a significant impact on these fair values.
Cash and Cash Equivalents
For cash and due from banks, federal funds sold, securities purchased under
agreement to resell and interest-bearing deposits in banks, the carrying value
is a reasonable estimate of fair value.
- 56 -
<PAGE>
Investment Securities
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments or estimated current replacement
cost of the instrument.
Loans
For variable rate loans which reprice frequently or are based on market
changes, with no significant changes in credit risk, fair values are based on
carrying values. The fair values for all other types of loans (including
nonperforming loans) are estimated by discounting the future cash flows using
current rates being offered for similar loans to borrowers of similar credit
quality.
Deposit Liabilities
The fair values of noninterest-bearing deposits, savings, NOW and money market
deposit accounts are, by definition, equal to the amount payable on demand at
the reporting date. The carrying values of variable rate, fixed-term time
deposits and certificates of deposit approximate their fair values. For
fixed-rate certificates of deposit, fair values are estimated using a
discounted cash flow analysis based on rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings
The carrying amounts of federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings approximate their fair
values.
Long-Term Debt
Fair values of the Corporation's long-term debt are estimated by using
discounted cash flow analyses, based on current market rates for debt with
similar terms and remaining maturities.
Off-Balance-Sheet Instruments
The fair values of interest rate caps and floors, forward commitments to
purchase or sell foreign currency and to sell real estate loans are based upon
quoted market prices for similar instruments. The fair value of commitments to
extend credit and standby and commercial letters of credit is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties'
creditworthiness. The fair value of interest rate swap agreements is the
estimated amount that the Corporation would receive or pay to terminate the
swap agreement at the reporting date, taking into account current interest
rates and the creditworthiness of the counterparties.
- 57 -
<PAGE>
The following table summarizes the estimated fair values of the Corporation's
financial instruments at December 31.
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
Carrying Amount Fair Value Carrying Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 559,001 $ 559,001 $ 486,193 $ 486,193
Investment securities 1,500,269 1,500,638 1,702,555 1,703,932
Net loans 7,468,489 7,549,304 6,818,872 6,915,352
Financial liabilities:
Deposits (7,876,261) (7,875,464) (7,693,998) (7,729,533)
Short-term borrowings (921,317) (921,317) (735,016) (735,016)
Long-term debt (247,359) (244,964) (161,191) (159,313)
Off-balance-sheet instruments:(1)
Commitments to extend credit (642) (642) (249) (249)
Standby letters of credit (835) (835) (719) (719)
Foreign currency contracts - 163 - (10)
Interest rate swap agreements:
Loans (172) (7,745) (721) (4,487)
Debt 42 (2,741) 547 -
Forward commitments - 205 - (1,371)
</TABLE>
(1)The amounts shown under Carrying Amount represent accruals or unamortized
fees remaining from those unrecognized financial instruments. Unamortized fee
amounts related to commitments and standby letters of credit are included in
other liabilities. Interest rate swap accruals are presented net of amounts
offset in accordance with FASB interpretation No. 39, Offsetting of Amounts
Related to Certain Contracts, and included in other assets or other
liabilities, as appropriate.
Due to the wide range of permitted valuation techniques and numerous estimates
and assumptions which must be made for financial instruments which lack
available secondary markets, management is concerned that reasonable
comparability of estimated fair value disclosures between financial
institutions may not be likely.
- 58 -
<PAGE>
Note 24 - Parent Company Financial Information
Balance Sheets
As of December 31 (dollars in thousands) 1996 1995
Assets:
Investment in subsidiaries:
Banking subsidiary $754,801 $793,850
Nonbank subsidiaries 17,768 17,509
Total investment
in subsidiaries 772,569 811,359
Cash and cash equivalents 38,242 8,248
Other investments 10,774 3,188
Receivables from subsidiaries 124,145 50,201
Premises and equipment - 9,574
Other assets 3,445 5,185
Total assets $949,175 $887,755
Liabilities and Shareholders' Equity:
Short-term borrowings $ 66,078 $ 36,813
Long-term debt - 12,780
Other liabilities 28,025 17,985
Shareholders' equity 855,072 820,177
Total liabilities and
shareholders' equity $949,175 $887,755
Statements of Income
For the years ended December 31 (dollars in thousands)
1996 1995 1994
Revenue:
Dividends from subsidiaries
Banking subsidiary $201,700 $ 31,550 $146,174
Nonbank subsidiaries 1,600 - -
Total dividends
from subsidiaries 203,300 31,550 146,174
Fees and assessments from subsidiaries 170 - -
Other income 6,070 3,486 3,104
Total revenue 209,540 35,036 149,278
Expense:
Interest on short-term borrowings 5,002 703 -
Interest on long-term debt 1,382 1,541 2,423
Other operating expense 6,293 3,247 1,771
Total expense 12,677 5,491 4,194
Income before income tax benefit 196,863 29,545 145,084
Income tax expense/(benefit) (1,738) (836) 173
Equity in undistributed income of subsidiaries (40,242) 106,222 (28,320)
Net income $158,359 $136,603 $116,591
- 59 -
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
For the years ended December 31 (dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 158,359 $ 136,603 $ 116,591
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiaries 40,242 (106,222) 28,320
Depreciation and amortization 706 829 387
Net change in receivables from subsidiaries 2,274 14,850 (5,588)
Net change in other assets 1,456 (4,165) 153
Net change in other liabilities 2,560 2,912 (1,187)
Net cash provided by operating activities 205,597 44,807 138,676
Cash Flows from Investing Activities:
Capital contributions to subsidiaries (1,900) (25,000) (15,000)
Net change in advances to subsidiaries (91,275) (26,858) (17,178)
Cash received from sale of interest in partnership to subsidiary 27,063 - -
Other investing activity (2,625) (1,749) (647)
Net cash used in investing activities (68,737) (53,607) (32,825)
Cash Flows from Financing Activities:
Net change in short-term borrowings 29,265 36,813 -
Principal payments on long-term debt (12,780) (5,470) (15,542)
Dividends paid (53,274) (46,397) (40,422)
Proceeds from issuance of common stock 8,880 4,598 5,773
Purchase of treasury stock (80,581) (12,081) (25,680)
Shares reserved to meet deferred compensation obligations 1,624 1,111 1,420
Net cash used in financing activities (106,866) (21,426) (74,451)
Net change in cash and cash equivalents 29,994 (30,226) 31,400
Cash and cash equivalents at beginning of year 8,248 38,474 7,074
Cash and cash equivalents at end of year $ 38,242 $ 8,248 $ 38,474
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands) 1996 1995 1994
Cash Paid (Received) During the Year for:
Interest expense $ 6,708 $ 2,450 $ 3,143
Income taxes, net of tax payments received from subsidiaries (7,020) (4,139) (2,220)
</TABLE>
- 60 -
<PAGE>
Note 25 - Summary of Quarterly Financial Information (unaudited)
The following is a summary of quarterly results of operations for 1996 and
1995.
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) Quarter Ended
1996 Dec. 31 Sept. 30 June 30 Mar. 31
<S> <C> <C> <C> <C>
Net interest income $110,561 $107,722 $101,543 $ 98,373
Provision for loan losses 11,150 12,100 8,700 8,823
Net interest income after provision for loan losses 99,411 95,622 92,843 89,550
Noninterest income 43,874 44,453 42,404 39,791
Noninterest expense 79,237 81,822 75,062 72,090
Income taxes 21,804 20,036 20,415 19,123
Net income 42,244 38,217 39,770 38,128
Per share: (a)
Primary earnings $ 0.48 $ 0.43 $ 0.45 $ 0.43
Fully diluted earnings 0.48 0.43 0.45 0.43
Cash dividends declared on common stock 0.16 0.16 0.16 0.16
Book value of common shares at quarter-end 9.86 9.62 9.33 9.21
Market price high 31.38 28.80 23.38 22.21
low 27.96 21.92 21.08 18.71
Weighted average shares of common stock
outstanding 87,899 88,116 88,844 89,409
Weighted average fully diluted common
stock equivalents 87,899 88,116 88,879 89,445
Ratios:
Return on average assets 1.70% 1.57% 1.66% 1.60%
Return on average equity 19.65 18.16 19.24 18.74
Net interest margin 4.93 4.91 4.69 4.58
Noninterest expense as a percent of net revenue 51.02 53.49 51.85 51.86
Noninterest income as a percent of net revenue 28.25 29.06 29.29 28.63
1995
Net interest income $ 97,977 $ 96,883 $ 92,600 $ 90,748
Provision for loan losses 5,660 7,288 6,924 5,229
Net interest income after provision for loan losses 92,317 89,595 85,676 85,519
Noninterest income 39,361 32,057 33,512 33,194
Noninterest expense 77,766 70,374 68,519 69,555
Income taxes 18,042 17,081 16,899 16,392
Net income 35,870 34,197 33,770 32,766
Per share: (a)
Primary earnings $ 0.40 $ 0.38 $ 0.37 $ 0.36
Fully diluted earnings 0.40 0.38 0.37 0.36
Cash dividends declared on common stock 0.13 0.13 0.13 0.13
Book value of common shares at quarter-end 9.16 8.78 8.58 8.33
Market price high 20.75 18.13 15.33 14.21
low 17.79 15,25 13.71 12.08
Weighted average shares of common stock
outstanding 90,067 90,156 90,153 89,965
Weighted average fully diluted common
stock equivalents 90,122 90,334 90,469 90,352
Ratios:
Return on average assets 1.47% 1.43% 1.47% 1.42%
Return on average equity 17.65 17.21 17.61 17.81
Net interest margin 4.53 4.53 4.44 4.27
Noninterest expense as a percent of net revenue 56.28 54.22 53.96 55.75
Noninterest income as a percent of net revenue 28.49 24.70 26.39 26.61
(a) Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
</TABLE>
- 61 -
<PAGE>
Members of the Managing Committee
Jerry A. Grundhofer
Chairman since 1994
President and Chief Executive Officer since 1993
Director since 1993
Chairman, Star Bank, N.A. since 1993
President and Chief Executive Officer, Star Bank, N.A. since 1995
Daniel B. Benhase
Member of the Managing Committee since 1994
Executive Vice President since 1994
Joseph A. Campanella
Member of the Managing Committee since 1991
Executive Vice President since 1991
Richard K. Davis
Member of the Managing Committee since 1993
Executive Vice President since 1993
Timothy J. Fogarty
Member of the Managing Committee since 1993
Executive Vice President since 1995
S. Kay Geiger
Member of the Managing Committee since 1995
Executive Vice President since 1995
Jerome C. Kohlhepp
Member of the Managing Committee since 1994
Executive Vice President since 1994
Thomas J. Lakin
Member of the Managing Committee since 1993
Executive Vice President since 1994
General Counsel since 1994
Regional Chairman/Central Ohio since 1996
David M. Moffett
Member of the Managing Committee since 1993
Executive Vice President and Chief Financial Officer since 1993
Daniel R. Noe
Member of the Managing Committee since 1994
Executive Vice President since 1994
Andrew E. Randall
Member of the Managing Committee since 1995
Executive Vice President since 1995
Regional Chairman/Northern Ohio since 1995
Wayne J. Shircliff
Member of the Managing Committee since 1994
Executive Vice President since 1994
Stephen E. Smith
Member of the Managing Committee since 1993
Executive Vice President since 1995
- 62 -
<PAGE>
Corporate Directors
James R. Bridgeland, Jr. 1,5
Partner, Taft, Stettinius & Hollister
Laurance L. Browning, Jr. 2,5
Formerly Vice Chairman, Emerson Electric Co.
Victoria B. Buyniski 3,4
President and Chief Executive Officer, United Medical Resources, Inc.
Samuel M. Cassidy 1
Formerly President and Chief Executive Officer, Star Bank, N.A. and
Executive Vice President, Star Banc Corporation
V. Anderson Coombe 3
Chairman, The Wm. Powell Co.
John C. Dannemiller 4,5
Chairman, President and Chief Executive Officer,
Applied Industrial Technologies
Jerry A. Grundhofer 1
Chairman, President and Chief Executive Officer,
Star Banc Corporation and Star Bank, N.A.
J.P. Hayden, Jr. 1,3,5
Chairman and Chief Executive Officer, The Midland Company
Roger L. Howe 1,2,3
Chairman, U.S. Precision Lens, Inc.
Thomas J. Klinedinst, Jr. 3,4
Chairman, President, Chief Executive Officer and Chief Operating Officer,
Thos. E. Wood, Inc.
Charles S. Mechem, Jr. 2
Chairman, Cincinnati Bell, Inc.
Commissioner Emeritus, Ladies Professional Golf Association and
Formerly Chairman, U.S. Shoe Corporation
Daniel J. Meyer 2
Chairman and Chief Executive Officer, Cincinnati Milacron, Inc.
David B. O'Maley 2
Chairman, President and Chief Executive Officer,
Ohio National Life Insurance Company
O'dell M. Owens, M.D., M.P.H. 4
Director of Reproductive Endocrinology and Infertility,
The Christ Hospital
- 63 -
<PAGE>
Thomas E. Petry 1,2,3
Chairman and Chief Executive Officer, Eagle-Picher Industries, Inc.
William C. Portman 1,4,5
Chairman, Portman Equipment Company
Oliver W. Waddell 1
Formerly Chairman, Star Banc Corporation and
Vice Chairman, Star Bank, N.A.
1=Executive Committee
2=Compensation Committee
3=Audit Committee
4=Community Outreach and Fair Lending Committee
5=Governance Committee
- 64 -
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS OF STAR BANC CORPORATION
Responsibility for the financial information presented in the Annual Report
rests with Star Banc Corporation's management. The Corporation believes that
the consolidated financial statements reflect fairly the substance of
transactions and present fairly the Corporation's financial position and
results of operations in conformity with generally accepted accounting
principles appropriate in the circumstances applying certain estimates and
judgments as required.
In meeting its responsibilities for the reliability of the financial
statements, the Corporation depends on its system of internal accounting
controls. The system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with the
appropriate corporate authorization and recorded properly to permit the
preparation of financial statements in accordance with generally accepted
accounting principles. Although accounting control procedures are designed to
achieve these objectives, it must be recognized that errors or irregularities
may nevertheless occur. Also, estimates and judgments are required to assess
and balance the relative cost and expected benefits of the controls. The
Corporation believes that its accounting controls provide reasonable assurance
that errors or irregularities that could be material to the financial
statements are prevented or would be detected within a timely period by
employees in the normal course of performing their assigned functions. An
important element of the system is a continuing and extensive internal audit
program.
The board of directors of the Corporation has an Audit Committee composed of
seven directors who are not officers or employees of the Corporation. The
committee meets periodically and privately with management, the internal
auditors and the independent public accountants to consider audit results and
to discuss internal accounting control, auditing and financial reporting
matters.
Arthur Andersen LLP, independent public accountants, have been engaged to
render an independent professional opinion on the Corporation's financial
statements. Their audit is conducted in accordance with generally accepted
auditing standards and forms the basis for their report as to the fair
presentation, in the financial statements, of the Corporation's financial
position, operating results and cash flows.
- 65 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Star Banc Corporation:
We have audited the accompanying consolidated balance sheets of STAR BANC
CORPORATION (an Ohio corporation) and subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Star Banc Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the
Corporation changed its method of accounting for investment securities
effective January 1, 1994.
/S/ Arthur Andersen LLP
Cincinnati, Ohio
January 13, 1997
- 66 -
<PAGE>
CORPORATE INFORMATION
Annual Meeting
There is a new location for the Annual Meeting this year. The Annual Meeting of
Shareholders of Star Banc Corporation will be held at 11:00 a.m. (EDT),
Tuesday, April 8, 1997, at the new Aronoff Center for the Arts, Sixth and
Walnut Streets, Downtown Cincinnati, in the Jarson-Kaplan Theater.
Financial Information
Additional financial or general information, including copies of this annual
report, Form 10-K filed with the Securities and Exchange Commission, and
interim reports published quarterly during the year may be obtained by
contacting:
David M. Moffett, Executive Vice President and Chief Financial Officer, at the
executive office address listed below or by calling (513) 632-4008; or
Steven W. Dale, Vice President and Director, Public Relations (513) 632-4524
Media requests should be made to:
Steven W. Dale, Vice President and Director,
Public Relations (513) 632-4524
Stock Listing
Star Banc Corporation common stock is listed under the symbol STB on the New
York Stock Exchange.
Transfer Agent
Inquiries relating to shareholder records, stock transfers, changes of
ownership, changes of address and dividend payment should be sent to the
transfer agent at the following address:
Star Bank, N.A.
Securities Transfer Department
425 Walnut Street
Mail Location #5155
Cincinnati, OH 45202
Dividend Reinvestment
Star Banc Corporation offers its shareholders an automatic dividend
reinvestment program. The program enables shareholders to reinvest their
dividends in shares at the prevailing market price. For more information, write
to Star Banc Corporation, Dividend Reinvestment Department, 425 Walnut Street,
Mail Location #5155, Cincinnati, OH 45202 or call (513) 632-5578.
Independent Public Accountants
The independent public accountants of Star Banc Corporation are Arthur Andersen
LLP, Cincinnati, OH.
Executive Offices
Star Bank Center
425 Walnut Street
Cincinnati, OH 45202
- 67 -
<PAGE>
Federated Securities Corp., Distributor of The Star Funds
Star Bank is Investment Adviser to The Star Funds.
Products and services available through branch-based investment centers at Star
include the Star Family of Mutual Funds; are not bank deposits and therefore
are not obligations of or guaranteed by Star Bank; are not FDIC insured;
involve investment risk, including the possible loss of principal. The
investment centers offer a program of life insurance, annuities and securities
products, available at Star Bank branches. Insurance and annuities are offered
through InveStar Insurance Agency, Inc., an independent insurance agency
licensed in the states of Ohio, Indiana and Kentucky. Securities products and
services are offered through MDS Securities, Inc., a registered broker-dealer
and member NASD/SIPC. Star Bank is not a registered broker-dealer. When
making investment transactions through branch-based investment centers, you
are dealing with representatives of MDS Securities, Inc. None of these
companies is affiliated with Star Bank.
- 68 -
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report incorporated by reference in this
Form 8-K, into the Company's previously filed Registration
Statement Files No. 2-94845, No. 33-9494, No. 33-10085, No. 33-
24672, No. 33-46018 and No. 33-61308.
/s/ ARTHUR ANDERSEN LLP
_____________________________
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 12, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 508,831
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 50,070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,332,312
<INVESTMENTS-CARRYING> 167,957
<INVESTMENTS-MARKET> 1,500,638
<LOANS> 7,587,178
<ALLOWANCE> 118,689
<TOTAL-ASSETS> 10,093,815
<DEPOSITS> 7,876,261
<SHORT-TERM> 921,317
<LIABILITIES-OTHER> 193,806
<LONG-TERM> 247,359
0
0
<COMMON> 452,407
<OTHER-SE> 402,665
<TOTAL-LIABILITIES-AND-EQUITY> 10,093,815
<INTEREST-LOAN> 635,619
<INTEREST-INVEST> 98,206
<INTEREST-OTHER> 1,700
<INTEREST-TOTAL> 735,525
<INTEREST-DEPOSIT> 262,675
<INTEREST-EXPENSE> 317,326
<INTEREST-INCOME-NET> 418,199
<LOAN-LOSSES> 40,773
<SECURITIES-GAINS> (2,451)
<EXPENSE-OTHER> 308,211
<INCOME-PRETAX> 239,737
<INCOME-PRE-EXTRAORDINARY> 239,737
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,359
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 8.38
<LOANS-NON> 39,375
<LOANS-PAST> 11,909
<LOANS-TROUBLED> 80
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 106,909
<CHARGE-OFFS> 43,653
<RECOVERIES> 14,660
<ALLOWANCE-CLOSE> 118,689
<ALLOWANCE-DOMESTIC> 118,689
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 76,593
</TABLE>
