Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7601
STAR BANC CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0838189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
425 Walnut Street, Cincinnati, Ohio 45202
(Address of principal executive offices)
Registrant's telephone number, including area code (513) 632-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5 Par Value
Preferred Stock Purchase Rights
Series B Preferred Stock, $100 Stated Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates was
approximately $3,635,000,000 based upon the closing price of these
shares on March 20, 1997.
As of March 1, 1997, there were 85,956,487 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of Star Banc Corporation's Proxy Statement for the Annual Meeting of
Shareholders on April 8, 1997 are incorporated by reference into Part III.
Portions of Star Banc Corporation's Annual Report to Shareholders for the
year ended December 31, 1996 are incorporated by reference into Parts I,
II, III and IV.
<PAGE>
FORM 10-K/A SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized as
of the twenty-ninth day of May 1997.
Star Banc Corporation
/s/ Jerry A. Grundhofer
------------------------
Jerry A. Grundhofer
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated as of the twenty-ninth day of May 1997.
/s/ David M. Moffett /s/ James D. Hogan
- ---------------------- ------------------
David M. Moffett James D. Hogan
Executive Vice President and Senior Vice President
Chief Financial Officer and Controller
James R. Bridgeland, Jr., Director* Thomas J. Klinedinst, Jr., Director*
Laurance L. Browning, Jr., Director* Charles S. Mechem, Jr., Director*
Victoria B. Buyniski, Director* Daniel J. Meyer, Director*
Samuel M. Cassidy, Director* David B. O'Maley, Director*
V. Anderson Coombe, Director* O'dell M. Owens, M.D., M.P.H., Director*
John C. Dannemiller, Director* Thomas E. Petry, Director*
J.P. Hayden, Jr., Director* William C. Portman, Director*
Roger L. Howe, Director* Oliver W. Waddell, Director*
/s/ Jerry A. Grundhofer
--------------------------
Jerry A. Grundhofer
Attorney-in-fact
*Pursuant to Power of Attorney
1996 ANNUAL REPORT
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES
THE FIVE STAR SERVICE GUARANTEE
Corporate profile
Star Banc Corporation (NYSE:STB) is a multi-state bank holding company,
incorporated in Ohio. At December 31, 1996, total assets were $10.1 billion,
and market capitalization was $2.7 billion. Headquartered in Cincinnati, Ohio,
Star Banc Corporation is the parent of Star Bank, N.A., which, on December 31,
1996, operated 263 banking offices in Ohio, Kentucky and Indiana.
Ranked by asset size, Star Banc is the 61st largest banking organization in the
country.
Star Bank actively meets the needs of individuals, business, industry,
government entities and other financial institutions in all its market areas
through a full range of consumer, commercial and trust financial products,
including deposit, credit and investment services.
The Corporation's predecessor, Star Bank, N.A., (formerly named The First
National Bank of Cincinnati) was founded in 1863 under National Bank Charter
Number 24. Over the years, the bank grew in its own markets and by acquiring
banks in other markets and merging them into its operations.
In 1973, the bank holding company now known as Star Banc Corporation was
formed. All of its subsidiary banks were renamed Star Bank in 1988. In 1993,
the Corporation merged 10 independent Star Banks into three banks, one per
state in Ohio, Kentucky and Indiana. In 1996, those three banks were merged
into a single entity, Star Bank, N.A.
Metropolitan Banking
Star Bank maximizes its ability to serve our Metropolitan Banking markets
through the management of major independent lines of business--Consumer
Banking, Commercial Banking and Trust Financial Services.
Community Banking
All of Star Bank's Consumer, Commercial and Trust products and services are
offered and marketed through Star Bank offices in smaller urban and non-urban
markets with local autonomy in resource allocation, community affairs, business
development and pricing.
Ohio -- Akron, Canton, Cincinnati, Circleville, Cleveland, Columbus, Dayton,
Eaton, Gallipolis, Hamilton, Hillsboro, Ironton, Portsmouth, Sidney and Troy.
Kentucky -- Boone, Campbell, Carroll, Kenton, Marion and Pendleton Counties in
Northern and Central Kentucky.
Indiana -- Southeastern and Eastern Indiana, including Dearborn, Fayette,
Randolph and Wayne Counties.
Subsidiaries
Star Bank, N.A.
Star Banc Finance, Inc.
A wholly-owned consumer finance company, headquartered in Cincinnati and
licensed in Ohio, Indiana and Kentucky.
Miami Valley Insurance Company
An Arizona insurance agency which provides credit life and other similar
insurance products to customers of Star Banc Corporation.
NYSE:STB
<PAGE>
BUILDING BUSINESS THROUGH GUARANTEED SERVICE AND CUSTOMER CONVENIENCE.
The Five Star Service Guarantee
Giving our customers what they want, when they want it and on their terms.
That's Star Bank's business strategy, and it is executed in part by delivering
customer service that outclasses competitors and exceeds customer expectation.
Star Bank introduced its Five Star Service Guarantee in 1996 at the Annual
Meeting of Shareholders. Star made promises to its shareholders, customers and
to the marketplace, and Star put its money where its promises were. Star has
also made a commitment to set the standard for banking convenience, to be where
our customers want us, with the products and services they want and be
available to do business when our customers want to bank.
Bank Without Boundaries
Open to see the latest in banking convenience and guaranteed customer service
inside.
In This Report
2 Financial Highlights
4 Letter to Shareholders
6 Corporate Priorities & Initiatives
8 Commercial Banking
10 Trust & Investment Services
12 Consumer Banking
Financial Section
15 Consolidated Six Year Selected Financial Data
16 Management's Discussion and Analysis
Line of Business Results......................17
Results of Operations.........................19
Balance Sheet.................................25
34 Consolidated Financial Statements
38 Notes to Consolidated Financial Statements
56 Responsibility for Financial Statements
of Star Banc Corporation
56 Report of Independent Public Accountants
57 Executive Officers of the Corporation
57 Corporate Directors
58 Banking Subsidiary Directors and
Regional Advisory Boards
Inside Back Cover
Corporate Information
<PAGE>
SOME BANKS PROMISE GREAT SERVICE. STAR BANK GUARANTEES IT!
Commitment to quality customer service is one of the key factors in Star's
financial performance. The Five Star Service Guarantee, unique in the industry,
was introduced in 1996, and is making a difference in attracting new customers
and instilling confidence in current customers in all lines of business. Star
Bank's Five Star Service Guarantee is backed by the reputation and operating
structure of the organization...and with cash. If Star fails to deliver on one
of our guarantees, the customer's account is credited with $5.00. That payment
symbolizes Star's determination to satisfy our customers and give them the best
possible service every day, a sure route to shareholder value.
"Checking and savings statements are accurate."
"ATMs available 24 hours a day, 7 days a week."
"Same day response on questions made before 3 p.m."
"Wait no more than 5 minutes in any Teller line."
"Telephone Customer Service Representatives available 24 hours every day."
<PAGE>
CONVENIENCE THAT MAKES A DIFFERENCE. REMOTE BANKING, VISA CHECK CARD, MOBILE
BANKING, BANK AT WORK, AND MORE.
Video Banking. Full-service, face-to-face electronic banking.
Star's first Video Banking Center opened in November 1996 in Columbus, Ohio.
An extended-hour "mini branch," it features a full-service, touch-screen video
kiosk which allows customers to talk "face-to-face" with a Star representative
via a two-way video screen. Individuals can open accounts, apply for loans,
locate Star branches, get product information, even car prices! The cutting
edge facility includes a Super ATM, a state-of-the-art night deposit and
customer service phones, linked to our 24-Hour Customer Service. Video Banking
Centers are cost effective extensions of Star's strategy to be where our
customers want, when they want us.
24-Hour Remote Banking only at Star. 'Round the clock, 'round the world
convenience.
The first in the nation with this totally integrated platform of banking
convenience delivery options, Star Bank continues to enhance its comprehensive
24-Hour Remote Banking program which complements Star's ever-growing network of
branch offices. Star's commitment to set the standard for customer convenience
has resulted in the revolutionary line-up of customer options seen here: from
Super ATMs which deliver account statements, postage stamps, and even foreign
currency, to Voice Banking and bill payment by phone; from ScreenPhone banking
and instant electronic catalog purchasing to full-service PC Banking at the
click of a mouse; from Video Banking to interactive Internet Banking, Star Bank
defines the future of customer convenience now.
Branch Banking
Super ATM
Voice Banking
ScreenPhone
PC Banking
Video Banking
Internet Banking
Visa Check Card. One convenient card for ATM access and purchase power.
In 1996, Star launched the national rollout of the Visa Check Card, the card
that transforms everyday purchasing activity and ATM access. Another component
in Star Bank's inventory of customer convenience benefits, the Visa Check Card
debits purchases from the cardholder's account, eliminating the need for check
writing at more than 12 million locations worldwide where Visa is accepted. It
provides the ease of a credit card without incurring charges, and the signed
receipt and descriptive statement facilitate easy record keeping. The Visa
Check Card is also the cardholders' access to Star's 24-Hour Customer Service
system and a full-service ATM card for getting cash, making deposits, checking
balances, transferring funds and more.
<PAGE>
Corporate On-Site Banking. On-the-job banking convenience at major employers.
In May 1996, Star Bank was selected to provide on-site banking and cashier
services for The Procter & Gamble Company's Cincinnati Technical Centers and
General Offices. As part of this agreement, Star Bank opened five full-service
banking locations and four satellite offices at five Procter & Gamble
facilities. With Star on-site, employers provide a valuable benefit to their
employee base, and employees enjoy the convenience of in-house banking, plus
assistance with international currency, and the full-range of credit and
investment services available at Star.
Mobile Banking. Now Star goes where the action is.
Star Bank takes to the road with banking convenience putting dual ATMs on the
scene wherever people gather in our markets. Engineered with satellite
communications and full security, Star's mobile ATM van operates at locations
which may be underserved, plus community affairs, sporting events, and other
high-traffic locations. The van is fully-scheduled in the tri-state area to
provide the widest access. Star's Mobile Banking van is providing banking
services for thousands of sports fans during the NCAA women's basketball
championship in Cincinnati. It will make on-site appearances at volunteer
events, kids' basketball clinics, pre-game activities and at the arena on game
days.
<PAGE>
Loan By Phone. Easy application, fast approval.
After great success in several marketing promotions, Star's popular option of
applying for consumer loans by telephone was expanded in 1996 to a full
24-hour, seven-day Loan By Phone service. Customers can call anytime to apply
for installment loans, home improvement loans and home equity lines of credit.
With underwriters linked directly to the call center, loans can be approved the
same day, often in as little as two hours. Since inception, the percent of
consumer loans applied for by phone has nearly quadrupled, a clear sign that
our customers value Star's commitment to convenience.
In-Store Banking. 7 days a week, plus evening hours.
Full-service branch offices within supermarkets is a growing segment of Star
Bank's multiple distribution channels. At year end 1996, Star operated 26
In-Store offices in our banking markets, with plans to double that number in
1997. In addition, we operate Super ATMs in Wal-Mart, Sam's Club and United
Dairy Farmers stores. In-Store offices are a convenience boon for busy
shoppers, as well as a cost effective option to gain market share in selected
areas. With lower costs and higher sales per square foot, a multi-functional
staff, joint marketing efforts with our retail partners and the opportunity to
consolidate traditional offices into In-Store offices, In-Store Banking is a
successful extension of our convenience strategy.
A Star Bank checking account is the key to banking convenience.
<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.
- 2 -
<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>
- 3 -
<PAGE>
Fellow Shareholders:
We are pleased to report that, by any measure, 1996 was an outstanding year for
your corporation. It was also the fourth consecutive year of earnings per
share growth exceeding 17 percent.
Financial Results
Earnings per share, net income, return on average equity, return on average
assets, noninterest income, the efficiency ratio and other key financial
performance indicators all were at record levels. Loan growth was up, the net
interest margin continued to expand, asset quality remained excellent, and
every core line of business recorded its best year ever. These results do not
mean that we are satisfied or complacent; on the contrary, they are simply a
strong foundation on which we keep building.
Fully diluted earnings per share were $1.79, an increase of 18.5 percent over
1995. Net income reached the record level of $158,359,000, a 15.9 percent
increase over 1995. Excluding the special one-time assessment to the Savings
Association Insurance Fund (SAIF) included in third quarter 1996 results, fully
diluted earnings per share would have been $1.82 or 20.5 percent over 1995, and
net income would have been $161,609,000, an 18.3 percent increase over 1995.
Shareholder Returns
We are pleased that Star Banc's performance and growth in 1996 resulted in
another year of record earnings and earnings per share. Our commitment to
manage this company for the benefit of our shareholders is well-known, and it
is gratifying that our shareholders' total return on their investment in Star
Banc is among the best in the industry.
Fully diluted earnings per share increased 17.8 percent compared to 1995, the
fifth consecutive year of earnings per share increases. We also increased the
dividend by 17.6 percent in 1996, the 24th consecutive year of dividend
increases. This increase follows a 12.8 percent increase in 1995 and a 20.5
percent increase in 1994. For the year 1996, total shareholder returns were
58.3 percent; over the last two years, the average annual return was 63.6
percent, and over the last three years, 42.4 percent.
Investing in the Corporation
A key requisite for producing the kind of financial results Star Banc posted in
1996 is continuous and astute investment in our business. The investments we
have made in the corporation and earnings initiatives over the past several
years are proving their value.
Investments are giving us the tools to carry out our commitment to be a sales
and service organization delivering value-added financial products and services
at competitive prices, when our customers want them and on their terms.
New technology and automation have cut costs and improved service, sales and
delivery, as well as enhanced our product development capability. Technology
has also helped us integrate acquisitions onto our systems efficiently and
swiftly. Our investments in expanding our franchise through acquisitions are
contributing to earnings and extending our presence in key markets. The modest
investment we made in our 24-Hour Remote Banking initiative thrust Star
immediately into a national front-runner position in providing unprecedented
alternatives for customer access.
- 4 -
<PAGE>
New Initiatives
We launched a number of new ventures in 1996 designed to be positive influences
on earnings per share. We continue to expand our delivery channels and are
continuously assessing new ones. New styles of offices, new configurations for
existing ones and innovative locations increase our ability to market Star Bank
services to diverse customer segments. Outstanding new products and services
are attracting new customers and strengthening our relationships with existing
ones. Joint ventures are putting us into profitable businesses quickly, and
ahead of our competition. You can read further details about these initiatives
in the sections of this report about our corporate priorities and our lines of
business.
Five Star Service Guarantee
In April 1996, Star Banc introduced its Five Star Service Guarantee. In The
Five Star Service Guarantee, Star promised that we always would deliver on five
specific service standards, and if we failed to do so, we would credit the
customer's account with $5.00. Though $5.00 is not a lot of money, it is a
tangible symbol that we mean what we say when we guarantee superior service.
To date, Star has received an outpouring of positive response to The Five Star
Service Guarantee from our customers, the press and the investment community.
It seems everyone recognizes that outstanding service is a fundamental
attribute of success. The number of times Star has made service redemption
payments on the guarantee is infinitesimal compared to our total number of
transactions. We are pleased about that, but at the same time, we do want to
be sure that any customer who deserves the compensation receives it and
recognizes Star's commitment to quality.
Growth Strategy
Star Banc's earnings growth strategies are not complex, and they govern our
management decisions: Grow our core businesses through new products, customer
service and convenience; make strategic, non-dilutive acquisitions when they
meet our criteria for cost and earnings potential; persevere in our rigorous
expense management; further raise sales and service capabilities to a level
that attracts and keeps new customers, fully satisfies existing customers and
outshines our competitors; collaborate in joint ventures with outside experts
when it creates a faster, more economical, superior result; and allocate our
resources for the benefit of the corporation and you, our shareholders.
The key to the success of these strategies, of course, is in the execution.
The growth recorded by all of our lines of business in 1996 indicates that both
our growth strategy and our execution are working, and that we are headed in
the right direction in terms of sales and marketing, the development of new
products and services and our ability to fulfill the needs of existing clients.
We continue moving our mix of business toward increased earning assets, with
retail banking as a focal point. Our expanded, upgraded ATM network is
generating higher revenues, as are investment sales at our branches. The
introduction of the Visa Check Card and SmartMoney, a new savings vehicle, are
new income producers.
The establishment of our consumer finance subsidiary was another revenue
generation move by Star, and the results from the first year and a half of this
business have exceeded our expectations. The great expansion of our Small
Business Banking group, International Trade Services, Corporate Cash
Management, Trust Custody, Personal Trust and other areas in all lines of
business are generating increased noninterest income for the corporation. We
are growing our businesses through many approaches and on many fronts.
Looking Ahead
The financial services industry is changing at such a fast pace that it is no
longer enough to adapt quickly to change. Instead, Star Banc is committed to
anticipating emerging needs, transforming ourselves as often and as swiftly as
necessary and to settle for nothing less than leading the industry into the
next century. It's a challenge Star Banc is up to.
As always, we remain focused on increasing the value of your investment in Star
Banc Corporation; it is the reason we come to work each day.
Sincerely,
/s/ Jerry A. Grundhofer
Jerry A. Grundhofer
Chairman, President and Chief Executive Officer
- 5 -
<PAGE>
CORPORATE PRIORITIES & INITIATIVES
Earnings Growth Strategies
- - Growth of existing business lines
- - Balance sheet management
- - Capital management
- - Improve operating leverage
- - Accretive Acquisitions
Growing Our Lines of Business
Internal growth
Star Bank is comprised of 23 business lines within our Consumer Banking,
Commercial Banking and Trust & Investment divisions. It is the continuous net
income growth of these business lines which presents the best opportunity to
meet our earnings per share and return on equity goals. Star is uncompromising
about business line review. Monthly senior management reviews examine past
results and future potential for performance improvement of every line.
THREE YEAR BAR CHART
LOAN PORTFOLIO MIX (IN PERCENTS)
12/94 12/95 12/96
COMMERCIAL COMPONENT 52.05 50.90 49.54
CONSUMER COMPONENT 47.94 49.10 50.46
Investment in Our Businesses
To fully support our core businesses, substantial investments have been made to
facilitate revenue growth and return on equity capacity. Through 1997,
cumulative capital expenditures will total $119 million since 1993, excluding
acquisitions. Investment in information systems, including hardware and
software, supports new processing capabilities and automation for better
customer service, lower cost delivery and state-of-the-art products and
services. Investment in our Retail Banking business includes the upgrading of
our ATM network which generates additional fee income, plus our landmark
24-Hour Remote Banking initiative of multiple distribution and banking
channels. In Commercial Banking, we invested in upgrades to improve loan
processing and services. Additionally, another $190 million has been invested
in franchise expansion and branch acquisitions to increase market share.
Strategic alliances
Star Bank has been able to dramatically expand its new ventures and initiatives
through strategic alliances and partnerships with outside organizations. These
alliances present outstanding opportunities to gain unique proficiency, achieve
an immediate technological edge, enter new businesses and gain economies of
scale. Our Remote Banking program, our recent railcar leasing joint venture,
our Procter & Gamble on-site branches and our current alliance with the
HongkongBank are prototypes of the benefits of partnership.
Pay for performance
Inherent in growing our lines of business and increasing profitability is the
existence of a strong sales culture and incentive-based compensation. Every
employee participates in one or more of Star's Pay for Performance compensation
plans, which tie personal earnings to individual performance and to the
financial results of the company, and thus linking employees' interests with
those of our shareholders. In four years, Star's Pay for Performance program
has evolved into a growing and intrinsic part of total compensation. In 1996,
13.3 percent of compensation expense was incentive-based, with about $17
million paid in incentives.
Comprehensive sales and service training programs in all lines of business
support the increasing skills of our employees to identify and meet customer
needs.
- 6 -
<PAGE>
FOUR YEAR LINE CHART
TOTAL SHAREHOLDER RETURNS (IN PERCENTS)
5 YEARS 3 YEARS 2 YEARS 1 YEAR
STAR BANC 33.9 42.4 63.6 58.3
Acquisitions
Star Banc's acquisition policy is uncommonly disciplined and explicit.
Acquisition explorations are focused on gaining market share, primarily in
existing metropolitan markets. Management expects that any acquisition will
enhance market share, will bolster Star's core funding base and will be a
positive influence on earnings per share. In addition, expected return on
investment must exceed the cost of capital. Major acquisitions recently in
Columbus and Cleveland have met these criteria, and in 1996 two smaller, but
vital acquisitions did as well.
In November 1996, Star announced the acquisition of seven AmeriFirst Bank
branches located in several communities in and around Greater Cincinnati and
Dayton, Ohio, with approximately $100 million in deposits. The acquisition
closed in February 1997. Earlier, in July 1996, Star completed the acquisition
of four National City Bank branch locations in the Connersville, Indiana, area
consisting of approximately $60 million of deposits and nearly $25 million of
primarily retail and small business loans. The acquisition vaulted Star from
sixth place to first place in that market.
Expense Management
With an efficiency ratio that is among the best in the industry, Star keeps an
unwavering focus on expense management. With processing, operations, product
development, information systems and other corporate functions already
centralized to reduce infrastructure and overhead costs, Star has streamlined
its branch network through select consolidations, invested in cost saving
technology, outsourced selected functions and become proficient at developing
strong retail partners for economical in-store locations. Additionally, in June
1996, Star merged its three independent banking subsidiaries into a single
entity, realizing the correspondent cost savings. Several employee incentive
plans reward extraordinary cost control ideas. Concurrent with Star's emphasis
on cost control is the equal significance placed on revenue generation, and you
will read more about our aggressive sales efforts in the line of business
sections of this report.
Capital Management
The corporation's clear shareholder predisposition is reflected in the
corporation's management of capital. Star's strong internal capital generation
rate has allowed Star Banc to initiate an aggressive stock repurchase program.
In December 1996, Star increased shares authorized for repurchase to nine
million shares over the next three years. The reacquired shares will be held
as Treasury shares for reissue through the corporation's employee benefit
plans. Star increased the dividend by 17.6 percent in March 1996, the 24th
consecutive year of dividend increases.
FOUR YEAR BAR CHART
DIVIDEND GROWTH
1993 1994 1995 1996
0.39 0.47 0.53 0.63
11.4% 20.5% 12.8% 17.6%
Operating Strategy
- - Centralized product management and operations
- - Centralized staff and risk management functions
- - Decentralized business development, marketing and pricing
- - Common data processing system
- - Multi-channel consumer product delivery
- - Pay for performance compensation
- - Strong sales culture
- - Maintain low risk profile
PIE CHART OF REVENUE BY BUSINESS LINES (IN PERCENTS)
A. 12.2% Trust
B. 26.7% Commercial
C. 61.1% Consumer
- 7 -
<PAGE>
COMMERCIAL BANKING
Star Bank originated as a Commercial banking organization 134 years ago, and
has occupied a leadership position in that line of business since 1863, through
enormous changes in banking and fluctuating economies and in all the markets
Star serves.
Technological advances support the essential characteristics of sound
commercial banking which endure at Star Bank: knowledgeable and experienced
lenders, industry and market expertise, tenacious calling efforts and prudent
underwriting standards.
International Trade Services and Cash Management round out a comprehensive
array of commercial services for middle market and large corporate clients. In
addition, Star entered a new business endeavor in 1996, an extension of our
Equipment Finance operations.
Although Star Banc Corporation is headquartered in Cincinnati, regional
commercial banking officers and on-site staff deliver the same breadth and
quality of service in every Star market. Our tremendous growth in thriving
Northern Ohio, incorporating Cleveland, Akron and Canton, reflects the caliber
of Star's Commercial bankers and the service they deliver. Our Commercial
operations in the Northern Ohio and Central Ohio markets have recently been
placed under the management of Regional Chairmen who are members of the
Managing Committee, comparable to the Commercial Banking organizational
structure employed in Greater Cincinnati.
International Trade Services
Continued technological enhancements in this business, plus the skill and
experience of our International bankers, position Star as a leader in this
specialized field. Just as important is the extent of our international
network, which was expanded this year by our trade service arrangement with the
HongkongBank in Hong Kong, one of the world's largest banks. This alliance
broadens the variety of trade services we offer corporate clients with business
dealings in the Asia-Pacific region. Our initiation of an automated Canadian
cash management system is another benefit to clients dealing with Ohio's
largest trading partner. Serving importers and exporters across all industry
and service sectors in Ohio, Kentucky and Indiana, Star maximizes the potential
of the global-minded tri-state market.
Income from this line of business increased 21 percent in 1996. Regional
offices cover the international trade services needs of clients in all Star
markets, and this is an inherent component of our Commercial Banking business.
Commercial Banking Lines of Business
- - Commercial Real Estate
- - Middle Market Banking
- - National Accounts
- - Cash Management
- - Equipment-Lease Finance
- - Structured Capital
(Asset Based Lending)
- - International Trade Services
- - Financial Institutions
- - Municipal Finance
- 8 -
<PAGE>
Corporate Cash Management
Customized cash management programs fit the specific needs of our corporate and
small business clients, working in tandem with the client's business operation
to manage, control and invest available funds, while reducing administrative
expense and increasing management information. Star Bank offers a full line of
cash management services including: balance reporting, ACH, account
reconciliation, controlled disbursement, EDI, wires and lockbox.
Star Bank clients benefit by outsourcing payable and receivable functions to
Star Bank, and we are able to assist clients by electronically paying vendors
through EDI or by printing, mailing and reconciling paper checks. We also can
facilitate all other types of EDI transactions. Clients who bill large volumes
of consumers outsource their statement function to Star Bank, facilitating
automated posting of their receivables. Our unique customization of consumer
lockboxes accommodates client needs.
In 1996, Star Bank launched two new services, StarViewCM -- a state-of-the-art,
WindowsTM based funds and account management workstation, and TaxComm -- a
touch phone tax payment service that enables businesses to deposit all types of
state and federal taxes. At year end 1996, Cash Management revenues showed a
24.4 percent increase over 1995.
Equipment-Lease Financing
Star Bank is in the growing business of financing income producing personal
property, including transportation vehicles, industrial and manufacturing
equipment, office and computer equipment, aircraft and railroad equipment for
established companies doing business in the tri-state market and adjacent
regions. Our experience and success in this business led to a new business
enterprise in 1996. Star Bank entered a joint venture, DJJ Leasing, to lease
railcars with the David J. Joseph Company to capitalize on the aging railcar
fleet and consequent national railcar shortage. To date, more than 500 cars
are purchased and under lease, primarily coal cars and mill cars to haul scrap
metal, to public and private railroad operators. This extension of a business
we know well, with a respected company who is also a long time customer, is
another example of our strategy to form productive alliances.
Structured Capital
Star now has offices which serve all of our tri-state market area, plus
adjacent markets in Pennsylvania, Michigan, Tennessee and West Virginia. With
a focus on manufacturers, distributors, select retail and service-related
companies, Structured Capital provides asset-based lending services to finance
leveraged buyouts, recapitalizations, turnarounds, growth financing and secured
bridge loans. Loan sizes generally range from $3-$25 million, plus larger
syndicated and agented transactions to borrowers with annual sales ranging from
$15 million up. Intensifed sales and marketing through calling efforts to
intermediaries and prospects support the expertise of a veteran staff,
thoroughly experienced in this specialized lending business. Year-to-year
asset growth was 27.3 percent.
Commercial Real Estate
Star's Commercial Real Estate portfolio is primarily in-market, with the
portfolio evenly split between income producing and investor-owned properties.
This line of business represents about 25 percent of Star's Commercial Banking
revenues, with total assets of $1.1 billion in 1996, a year-to-year asset
growth of 9.5 percent.
Middle Market Lending
Star focuses on middle market commercial lending to companies with sales up to
$250 million. This business is essentially in-market and relationship based,
and our customers value Star's extensive market knowledge and experience in
this core business. The loan portfolio is well-diversified among industries.
We have implemented aggressive business development strategies in all our
markets, emphasizing our competitive advantages of experience, personal
service, responsiveness and creativity, while maintaining sound underwriting
standards. Middle market lending is not only one of the corporation's
strengths, it also provides us with the opportunity to cross sell numerous
other services, particularly International, Cash Management and Trust.
- 9 -
<PAGE>
TRUST & INVESTMENT SERVICES
Revenues from Trust and Investment services amounted to $47 million in 1996, an
increase of $6 million or 13 percent over the prior year. Star operates Trust
offices in 10 markets, including the major metropolitan areas of Akron,
Cincinnati, Cleveland, Columbus and Dayton, Ohio; plus other offices in Butler
County, Ohio; Southeastern Ohio and Troy, Ohio; and established operations in
Indiana and Kentucky. At year end, Trust assets under investment management or
administration totaled $30 billion, a 40 percent increase over the year before.
New products and services, intensified calling efforts, a growing client base
and a strong investment market combined to produce a record breaking year for
this line of business.
Trust Custody
Star's Custody service continued its substantial growth rate in 1996, providing
securities settlement, custody and cash management for mutual funds, financial
institutions, insurance companies, registered investment advisers and
individuals. Particularly significant was the increase in the Mutual Funds
Custody area. At year end, Star provided this service to 64 mutual fund
families representing 160 mutual funds, an increase of 54 percent, versus 1995.
Trust assets under custody recorded a two-year compound average growth rate of
74.3 percent, and fee income from this division soared more than 40 percent
over 1995.
Corporate Trust
Recognized as one of the leading bond servicing providers in the Midwest,
Star's Corporate Trust offers bond registrar, paying agent, bond trustee,
escrow accounts, stock transfer and structured finance. Professional expertise
and in-depth experience are critical in an area as specialized as Corporate
Trust services, and Star has excelled in this line of business since 1929.
Investment and Mutual Funds
The Star Funds, a family of nine proprietary mutual funds for which Star Bank
is the investment adviser, ended the year with $1.9 billion invested.
Year-to-year asset growth was over 50 percent. In December 1996, The Star
Funds' Relative Value mutual fund was recognized by The Wall Street Journal and
Morningstar. In addition, both The Star Fund's Relative Value Fund and Growth
Equity Fund were recognized by Lipper Analytical Services, Inc. A tax-free bond
fund is the newest member of the Star Funds family.
The Star Funds achieved a marketing coup during 1996 when they announced
StarPoints, an unprecedented offer to potential investors in The Star Funds.
StarPoints rewards new investors in Star Funds with frequent flier points, one
for each dollar invested. At 50,000 points, the investor earns one round-trip
domestic ticket on any U.S. airline.
Joining the Investar Advantage Annuity, a fixed annuity with proprietary
investment service, introduced in 1995, a new variable annuity in conjunction
with Ohio National Financial Services was introduced in 1996. Labeled Investar
Vision, the annuity offers 14 investment options, three of which are managed by
Star Bank.
During 1996, Star Bank affiliated with an innovative program called
"V.O.I.C.E."TM (Vision for Ongoing Investment in Charity and Education) which
allows individuals and institutions establishing a new agency account and
investing in The Star Funds to designate an eligible institution to receive a
contribution from Star Bank, based on a percentage of the amount in the
account. The V.O.I.C.E. program is provided at no cost to the investor.
- 10 -
<PAGE>
Employee Benefits
Star's Employee Benefits Group offers a full range of retirement plan products
designed to meet the needs of any size employer. Our product line includes:
defined benefit and money purchase pension plans, profit sharing plans and
non-qualified deferred compensation arrangements, as well as traditional and
daily valued 401(k) plans. From the Omni-Star 401(k), designed specifically for
the smaller employer, to the AllStar 401(k) for the larger employer, we have a
401(k) plan to meet any objective. Introduced in 1995, the AllStar 401(k) has
become one of Star's most attractive products, offering daily valuation with 24
hour access to account information and an array of diversified investment
options. This concept has been expanded to include a product for nonprofit
organizations with the introduction of the AllStar 403(b) retirement program.
Private Banking Group
A growing network of client referrals and heightened calling programs resulted
in an outstanding year for the Private Banking Group. Our Private Bankers are
customization experts who work with each client individually to orchestrate a
wealth management program to suit specific circumstances and financial goals.
We build solid client relationships by becoming the client's confidential envoy
to the bank's full scope of credit, investment and asset management services,
across all lines of business. We are pleased that many of our new relationships
are the results of referrals by appreciative clients, a reflection of the level
of performance and personal service offered by Private Banking. There are now
Private Banking locations in Cincinnati, Cleveland, Akron, Columbus, Dayton and
Northern Kentucky, fulfilling complex financial requirements of physicians,
attorneys, CPAs, business leaders, entrepreneurs, corporate executives and
other high income, high net worth individuals. In 1996, total loans increased
19.1 percent and total deposits increased 21.5 percent.
Personal Trust
Star Bank provides a wide variety of personal financial and asset management
services. The three branches of Personal Trust are Traditional Personal Trust,
Retail Trust and Family Asset Management. Among them, they contribute more
than half of Trust & Investment revenues. Revenues from Personal Trust
increased 11 percent in 1996, and average year-to-year asset growth was 30
percent.
Our LifeCycle investment account, introduced in 1994, continues to increase our
client base among a generally younger market segment. LifeCycle is a sound
introduction to the benefits of consistent planning and investment through the
stages of life and combines personal attention with proven investment
strategies.
Charitable Services
Star Bank has a long history of providing investment and administrative
services to charities, foundations and endowments. Star Bank's Charitable
Trust, Foundation and Endowment Services Group was specifically created to meet
the unique needs of these organizations. We understand the challenges facing
the not-for-profit community and respond by working closely with organizations
to create innovative programs to address specific administrative, investment
and planned giving needs.
Professional Sports Division
The year 1996 was another great year for the Pro Sports Division. This unique
group provides wealth management services to pro athletes all over the country.
The Pro Sports Division recognizes the athletes' uncommon financial
circumstances and requirements and extends services such as asset management,
Private Banking, bill payment and and post-career planning. Last year, two of
the first five NBA draft picks and six first or second round NFL draft picks
became clients of our Pro Sports Division, selecting Star to manage their
financial affairs. Star was particularly interested in Super Bowl XXXI, as we
had clients on both the Green Bay Packers and the New England Patriots.
- 11 -
<PAGE>
CONSUMER BANKING
The extensive branch network that comprises Consumer Banking's Metropolitan and
Community Banking businesses provides the main source of the corporation's
deposits, which is an integral part of Star's strategy to remain core funded.
These branches also are a key access point for the principals and employees of
the businesses served by our Commercial Banking business, as well as the
primary contact point for our Small Business Banking clients.
In both Community Banking and Metropolitan Banking markets, Star
makes a major investment in a high quality, productive work force. Hiring
standards are rigorous, and training is intense and ongoing. Incentive
compensation at the branch manager, platform and teller levels is weighted to
sales production and quality of service and is linked to individual and branch
performance.
The operating structure of Consumer Banking is divided into Branch and
Non-Branch delivery divisions. Through strategic acquisitions and the
placement of new start-up locations, Star continues to build its branch network
to increase market share, while simultaneously increasing alternate means of
access to the bank through multiple distribution channels.
Two key branch acquisitions were completed in the past calendar year in
Metropolitan and Community markets. Details about those acquisitions can be
found on page 7 of this report.
Multiple Distribution Channels
- - Traditional Branch Offices
- - Corporate On-Site Offices
- - Retirement Center Offices
- - In-Store Offices
- - Video Banking Centers
- - Remote Banking Options
- - Mobile Banking
Revenue Enhancement
Concurrent with Star's notable expense control culture are continuous sales and
marketing initiatives for revenue enhancement. Sales and service training and
sales management programs have been expanded to incorporate more courses and
extended to reach every Consumer Banking employee. Additionally, methods used
rarely by banks, but routinely by other large sales and service businesses,
such as sales rallies, calling and telemarketing "blitzes," intracompany
competitions and award events are raising the level of skill, enthusiasm and
achievement among employees.
Customer Profiling, an in-depth, one-on-one dialogue with customers and
prospects has increased Star's ability to match customer needs with the right
products and services. Other means of pinpoint marketing include direct mail
communications which we target at identified needs, based on our growing
understanding of our customers, achieved through profiling and relationship
data mining.
Every branch office and district develops a sales and marketing plan, based on
demographics, customer base, market penetration and local sales management.
These plans guide local activities, selected campaigns, point of sale displays
and branch goals for the year, a focused micro plan within the corporation's
more global marketing activities.
In 1996, a new loan production office was opened in Ashland, Kentucky, to
generate consumer, small business and commercial loans. The office exceeded
goals in its first year of operation.
New products and services play a central role in Star's sales and revenue
building strategies, as well as the continued drive to raise the bar for
customer convenience. Star's new SmartMoney Account, a higher rate savings
plan, was introduced in February 1997, and our new EquiLine With LockRate
product is our successful home equity line of credit product, with the added
benefit of multiple fixed rate loans within the line, at the customer's option.
Our Remote Banking initiative, introduced at the end of 1995, has been enhanced
and upgraded, with more enhancements planned for 1997.
- 12 -
<PAGE>
Strategic Alliances
Alliances with outside partners have accelerated Star's ability to reach the
market with cost effective locations, distribution systems and new products.
Key among these is our growing number of partnerships with quality retailers,
together with whom we have opened 26 In-Store offices at year-end 1996, and
with whom we expect to double that number by year-end 1997.
Our Remote Banking breakthrough was launched with unprecedented speed and cost
effectiveness only through the partnerships we forged with internationally
renowned technology and communications companies, each of whom provided
distinct expertise and capability to the creation of an industry first. These
same alliances will see us through Remote Banking II, as well. See the special
section at the front of this report for more Remote Banking detail.
Star's partnership with consumer products giant, Procter & Gamble, Cincinnati's
largest private sector employer, made possible our successful entry into
corporate On-Site Banking. Our penetration into that employee base and our
ability to add value to P&G's formidable line-up of employee support programs
have confirmed this as an advantageous distribution track.
Other partnerships have led to new products such as the Visa Check Card debit
card, the CollegeCard educational expense credit card, and Star's exclusive
arrangement with Xavier University in Cincinnati to provide their campus
"Musketeer All Card."
In addition to the deposit and savings products and services within our
Consumer Banking line of business, the following businesses offer further
opportunities.
Card Services
Card Services represent a significant line of business in Consumer Banking, and
the portfolio reached more than $420 million in 1996. The growing card
portfolio represents the powerful direct marketing programs and the creative
payment, rate and benefit options developed within the line. StarMiles, our
landmark frequent flier reward program is cited as one of the most advantageous
card promotions in the country, including mentions on the NBC Today Show and in
SmartMoney magazine. Mexico, Canada and Caribbean destinations were recently
added to the program. A new "frequent user" program, Dining Rewards, began in
February 1997. In addition, a series of balance transfer offers has increased
outstandings.
Card Services also provides merchant services and processing for a growing
number of customers. Star has been named as the settlement and issuing bank for
CollegeCard, a credit card to be used only for educational expenses. More than
30 colleges and universities are participating in the CollegeCard program,
marketed by Southwest Student Services, Inc. Merchant services revenue
increased 21 percent in 1996.
Star's Commercial Card has been well received by our business customers who are
able to distribute multiple cards to their employee base for business expenses.
Star provides the comprehensive tracking and reporting which make this such a
value-added service.
Investment Services
Star makes available a branch-based investment service which provides access to
a variety of mutual funds (including The Star Funds, managed by Star Bank) and
annuities (including proprietary offerings). Star makes investments in mutual
funds and annuities possible through an outside provider who fields a top
quality, dedicated marketing force. This team is able to offer alternatives and
answer questions for clients who prefer to make such financial decisions within
the familiar surroundings of their bank. In addition, annuities are sold also
by licensed agents who are dual employees of both Star Bank and Investar
Insurance Agency, Inc. Sales by these dual employees exceeded $5 million in
1996, and income from mutual fund and annuity sales increased 79 percent.
- 13 -
<PAGE>
Consumer Credit
The growth of our consumer credit portfolios is one of Star's strategies for
earnings growth, as we continue our move to change the mix of earning assets.
Consumer credit now represents more than 50 percent of the corporation's total
loan portfolio, the result of more aggressive marketing and competitive
pricing, plus our increasing command of sales skills. Consumer credit
incorporates all installment lending, student loans, indirect vehicle and
marine lending and leasing, home equity loans and lines of credit and
residential real estate, as well as Card Services, Small Business Banking and
Star Banc Finance, Inc.
Small Business Banking
Created just two years ago, Business Banking markets financial packages
targeted to companies with annual sales of up to $5 million. These companies,
with unique needs, have been underserved by traditional commercial banking in
the past, and Star has developed products expressly for them. Business Star
Reserve, a special line of credit is one example, and a cash management and
Remote Banking package specifically for small business is being introduced in
1997. Asset quality is maintained through centralized underwriting with credit
scoring. Business Banking loans increased more than 40 percent in 1996 over the
year before, and Star ranks in the top 50 banks in terms of small business
portfolio size. Increases are due in part to Star's regular Calling Blitz
program which has proved very successful: equipped with information from our
data bases, a phone squad of Star bankers spends a day calling prospects and
leads, setting up appointments for upcoming sales calls by our Business Banking
calling officers. The Calling Blitz phone squads get effusive positive
reinforcement through incentives, refreshments, scorecards and frequent drop-in
visits from senior management!
Star Banc Finance, Inc.
Consumer finance company
Star Banc Finance, Inc., Star's Consumer finance subsidiary, began operation in
mid-1995 to expand Star's credit services market penetration. This line of
business ended the year 1996 with $134 million in loan outstandings, an
increase of 241 percent over year-end 1995. This increase was due primarily to
a rapidly growing broker business, a successful direct mail program, growing
product lines and staff expertise. Our centralized underwriting standards are
appropriately conservative for this business, and lending is priced according
to risk. Star Banc Finance opened its first regional office in September 1996,
in Louisville, Kentucky, and we will expand our presence to other regional
markets in 1997. Growth plans include expanded direct marketing, closer ties
to existing Star Bank correspondent banks and increased auto dealer
relationships. New products introduced in 1996 include a successful program
which finances funeral expenses for customers who may not have access to estate
funds at the time of funeral preparations. Another new product is the
preapproved, unsecured Check Letter which allows the customer to simply endorse
the back of the check, which is also a contract.
- 14 -
<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.
- 15 -
<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.
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.
- 16 -
<PAGE>
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.
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.
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.
- 17 -
<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
- 18 -
<PAGE>
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
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.
- 19 -
<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.
- 20 -
<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.
- 21 -
<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.
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.
- 22 -
<PAGE>
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.
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.
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
- 23 -
<PAGE>
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.
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.
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%
- 24 -
<PAGE>
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.
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.
- 25 -
<PAGE>
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>
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.
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.
- 26 -
<PAGE>
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.
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.
- 27 -
<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%
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>
- 28 -
<PAGE>
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>
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.
- 29 -
<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.
- 30 -
<PAGE>
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.
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>
- 31 -
<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.
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.
- 32 -
<PAGE>
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.
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
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
- 33 -
<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.
- 34 -
<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 377,426 353,107 321,734
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.
- 35 -
<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.
- 36 -
<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.
- 37 -
<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.
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.
- 38 -
<PAGE>
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.
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.
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.
- 39 -
<PAGE>
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.
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>
- 40 -
<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
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.
- 41 -
<PAGE>
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.
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.
- 42 -
<PAGE>
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.
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 $ 6,819
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 $ 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 %
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.
- 44 -
<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
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.
- 45 -
<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.
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.
- 46 -
<PAGE>
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.
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.
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.
- 47 -
<PAGE>
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.
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>
- 48 -
<PAGE>
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.
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
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.
- 49 -
<PAGE>
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.
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>
- 50 -
<PAGE>
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.
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.
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.
- 51 -
<PAGE>
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.
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.
- 52 -
<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
- 53 -
<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>
- 54 -
<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>
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<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.
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
- 56 -
<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
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
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
- 57 -
<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
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.
<PAGE>
Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202 U.S.A.
S.W.I.F.T.: Starus33
Telex: 170346 STAR BANK CIN
http://www.starbank.com
POWER OF ATTORNEY
We, the undersigned Directors of Star Banc Corporation, hereby appoint
Jerry A. Grundhofer and Jenny P. Carlson or either of them with full power of
substitution, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf as Directors of the Corporation, which
said attorneys and agents may deem necessary or advisable to enable the
Corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations or requirements of the Securities and Exchange
Commission, in connection with the filing of the Corporation's annual report on
Form 10-K for the year 1996, including, without limitation, signing for us, or
any of us, in our names as Directors of the Corporation, such Form 10-K and any
and all amendments thereto, and we hereby ratify and confirm all that said
attorneys and agents shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, and
the rules and regulations thereunder, this Power of Attorney has been signed
below by the following persons as Directors of the Corporation as of the 10th
day of December, 1996.
/s/ James R. Bridgeland, Jr.
_____________________________________ Director
James R. Bridgeland, Jr.
/s/ Laurance L. Browning, Jr.
_____________________________________ Director
Laurance L. Browning, Jr.
/s/ Victoria B. Buyniski
_____________________________________ Director
Victoria B. Buyniski
/s/ Samuel M. Cassidy
_____________________________________ Director
Samuel M. Cassidy
/s/ V. Anderson Coombe
_____________________________________ Director
V. Anderson Coombe
/s/ John C. Dannemiller
_____________________________________ Director
John C. Dannemiller
/s/ J. P. Hayden, Jr.
_____________________________________ Director
J. P. Hayden, Jr.
/s/ Roger L. Howe
_____________________________________ Director
Roger L. Howe
/s/ Thomas J. Klinedinst, Jr.
_____________________________________ Director
Thomas J. Klinedinst, Jr.
/s/ Charles S. Mechem, Jr.
_____________________________________ Director
Charles S. Mechem, Jr.
/s/ Daniel J. Meyer
_____________________________________ Director
Daniel J. Meyer
/s/ David B. O'Maley
_____________________________________ Director
David B. O'Maley
/s/ O'dell M. Owens, M. D.
_____________________________________ Director
O'dell M. Owens, M. D.
/s/ Thomas E. Petry
_____________________________________ Director
Thomas E. Petry
/s/ William C. Portman
_____________________________________ Director
William C. Portman
/s/ Oliver W. Waddell
_____________________________________ Director
Oliver W. Waddell
