United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7601
STAR BANC CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0838189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
425 Walnut Street, Cincinnati, 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 $4,943,000,000 based upon the closing price of these
shares on March 20, 1998.
As of March 1, 1998, there were 95,250,353 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 14, 1998 are incorporated by reference into Part III.
Portions of Star Banc Corporation's Annual Report to Shareholders for the
year ended December 31, 1997 are incorporated by reference into Parts I,
II, III and IV.
Page 1 of 10
<PAGE>
STAR BANC CORPORATION
INDEX TO FORM 10-K
10-K
Part I Page(s)
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Item 1. BUSINESS
Description of Business...........................................5
Item 2. PROPERTIES.........................................................6
Item 3. LEGAL PROCEEDINGS..................................................6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(a)..............
Part II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................6
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................None
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Consolidated Balance Sheets as of December 31, 1997 and 1996......7
Part III
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Item 10. DIRECTORS OF THE REGISTRANT (a)...................................
EXECUTIVE OFFICERS OF THE REGISTRANT............................8
Item 11. EXECUTIVE COMPENSATION (a)........................................
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT (a)................................................
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a)................
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(a) Incorporated by reference from Star Banc Corporation's (the Corporation)
Proxy Statement for the Annual Meeting of Shareholders on April 14,
1998.
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<PAGE>
STAR BANC CORPORATION
INDEX TO FORM 10-K (continued)
Part IV
- - ----------------------------------------------------------------------------
Item 14. EXHIBITS, REPORTS ON FORM 8-K, AND FINANCIAL STATEMENT SCHEDULES(b)
EXHIBITS:
Exhibit 3.1 Amended Articles of Incorporation of Star Banc
Corporation (previously filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated herein by
reference)
Exhibit 3.2 Code of Regulations (previously filed as an exhibit to
the registrant's Annual Report on Form 10-K for the year
ended December 31, 1988, and incorporated herein by
reference)
Exhibit 4 Rights Agreement (previously filed as an exhibit to the
registrant's Current Report on Form 8-K, dated October
27, 1989, and incorporated herein by reference)
Exhibit 10.1 1986 Stock Incentive Plan (previously filed as an exhibit
to Registration Statement No. 33-9494 and incorporated
herein by reference)
Exhibit 10.2 Amended 1991 Stock Incentive Plan (previously filed as an
exhibit to 1993 Proxy Statement and incorporated herein
by reference)
Exhibit 10.3 1987 Deferred Compensation Plan (previously filed as
an exhibit to Registration Statement No.33-10085 and
incorporated herein by reference)
Exhibit 10.4 1996 Stock Incentive Plan (previously filed as an exhibit
to 1996 Proxy Statement and incorporated herein by
reference)
Exhibit 10.5 Severance and Employment Agreements
Exhibit 11 Computation of Earnings Per Share
Exhibit 13 Annual Report to Security Holders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Independent Public Accountants in regards to
the previously filed Registration Statements No. 2-94845,
No. 33-9494, No. 33-10085, No. 33-24672, No. 33-46018,
No. 33-61308, No. 333-20133 and No. 333-42041.
Exhibit 24 Power of Attorney
FORM 8-K. During the fourth quarter of 1997, the Corporation filed no
Current Reports on Form 8-K.
The Corporation will file with the Commission its long-term debt instruments
upon request.
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SIGNATURES................................................................10
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(b) Certain documents filed as a part of the Form 10-K Financial Statements
and Financial statement schedules have been omitted due to inapplicability or
because required information is shown in the consolidated financial statements
or notes thereto. Copies of exhibits may be obtained at a cost of 30 cents per
page upon written request to the chief financial officer of the Corporation.
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<PAGE>
STAR BANC CORPORATION
ANNUAL REPORT CROSS-REFERENCE INDEX
The page numbers used in this index represent pages in the Star Banc
Corporation 1997 Annual Report. Annual
Report
PART I Page(s)
- - ----------------------------------------------------------------------------
Item 1. Statistical Disclosure By Bank Holding Companies:
Financial Ratios................................................15
Average Balance Sheets and Average Rates........................20
Volume/Rate Variance Analysis...................................21
Investment Securities........................................31-32
Loans........................................................26-27
Risk Elements of Loan Portfolio..............................27-30
Summary of Loan Loss Experience.................................28
Deposits.....................................................32-33
Short-Term Borrowings...........................................45
PART II
- - ----------------------------------------------------------------------------
Item 6. Selected Financial Data...........................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................16-35
Item 8. Financial Statements and Supplementary Data:
Report of Independent Public Accountants..........................59
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.................................37
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.....................38
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................39
Notes to Consolidated Financial Statements.....................40-58
Selected Quarterly Financial Data for the periods ended
December 31, 1997 and 1996.......................................58
Part III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..............60
- - -------------------------------------------------------------------------
The following is an amendment to Note 12 - Trust Preferred Securities on page
47 of the Star Banc Corporation 1997 Annual Report.
Note 12 - Trust Preferred Securities
In 1997, the Corporation formed Star Capital I ("the Trust"), a wholly
owned Delaware business trust which issued $150 million of Corporation-
obligated mandatorily redeemable Floating Rate Securities ("Capital
Securities") and $4,640,000 aggregate liquidation amount of Corporation-
obligated redeemable Floating Rate Common Securities (the "Common Securities";
together with the Capital Securities, the "Trust Securities"). The Trust used
the proceeds from the issuance of the Trust Securities to purchase a like
amount of Floating Rate Junior Subordinated Debentures ("the Debentures") of
the parent company. The debentures are the sole assets of the Trust, and all
the Common Securities are held by the Corporation. The Corporation used the
proceeds from the sale of the Debentures for general corporate purposes, which
included repurchase of common equity of the Corporation, repayment of
indebtedness and the financing of possible acquisitions.
The Trust Securities accrue and pay distributions quarterly at an annual
rate equal to three month LIBOR plus 0.765% of the liquidation amount of $1,000
per Trust Security. The Corporation has fully and unconditionally guaranteed
the obligations of the Trust. The guarantee covers the payment of the
distributions and payments on liquidation of the Trust or the redemption of the
Trust Securities, but only to the extent of the funds held by the Trust. The
Corporation has the right to defer payment of interest on the Debentures at any
time or from time to time for a period not exceeding 20 consecutive quarters,
provided that no deferred period extends beyond the stated maturity of the
Debentures.
The Trust Securities are mandatorily redeemable upon the maturity of the
Debentures on July 15, 2027, or upon earlier redemption as provided by the
indenture. The parent company can redeem the Debentures in whole or in
part on or after June 15, 2007 or any time in whole or upon the occurrence of a
Special Event (as defined in the offering circular). For financial reporting
purposes the Corporation treats the Trust Securities as debt and the
distributions to the security holders are recorded as interest expense.
-4-
<PAGE>
DESCRIPTION OF BUSINESS
Star Banc Corporation ("the Corporation") was organized as a Delaware
corporation in 1973 under the name First National Cincinnati Corporation. In
1988, it was reincorporated under the laws of the State of Ohio and in 1989
changed its name to the current form. Executive offices are maintained in
Cincinnati, Ohio.
The Corporation is a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended, and is registered with the Board of Governors
of the Federal Reserve System. As such, it is subject to regulation and
examination by the Federal Reserve.
Through its banking subsidiary, the Corporation is engaged in commercial
banking and trust business, providing a full range of consumer, commercial and
trust financial products and investment services throughout Ohio, Kentucky and
Indiana. The Corporation competes for loans and/or deposits with numerous
other banks and financial institutions throughout its market area, as well as
with mutual funds, brokerage firms and other types of financial service
providers.
Types of loans offered through its banking subsidiary includes commercial
loans, commercial leasing, commercial and residential mortgages, real estate
construction and a variety of consumer loan products including installment
loans, credit cards and retail leasing. The Corporation's loan portfolio is
well diversified between wholesale and consumer loans, with none of the above
mentioned loan types exceeding 30 percent of the total portfolio. See note 4
to the Consolidated Financial Statements, on page 43 of the Corporation's
Annual Report, for additional loan information. The Corporation invests in
U.S. Treasury and a variety of mortgage-back securities in order to 1)
facilitate the management of interest rate risk, 2) provide liquidity, 3)
provide a degree of credit diversification and flexibility in the balance
sheet, and 4) provide collateral as necessary for public deposits. See the
Management's Discussion and Analysis section on pages 31 and 32 of the
Corporation's Annual Report for additional information on investment
securities.
In the past five years the Corporation has continued to expand through the
acquisition of branch offices or other smaller banking institutions throughout
its market area of Ohio, Kentucky and Indiana. Most recently the Corporation
purchased seven branch offices in southwestern Ohio from AmeriFirst Bank, N.A.
and five offices in Indiana from National City Bank. This followed the 1995
purchase of 24 Columbus, Ohio area branch offices from Household Bank, Federal
Savings Bank, and prior purchases of branch offices in the Cleveland and Akron,
Ohio areas. The Corporation continues to explore other acquisition
opportunities in its tri-state market area.
In 1996 the Corporation merged its Kentucky and Indiana banks into Star
Bank, N.A., resulting in the Corporation wholly owning one subsidiary bank with
over 260 offices in Ohio, Kentucky and Indiana. This followed a comprehensive
restructuring program in 1993 in which the Corporation merged its six
Ohio banks in Columbus, Eaton, Hillsboro, Ironton, Sidney and Troy with Star
Bank, N.A. In addition, the Corporation merged its two Indiana banks in
Lawrenceburg and Richmond to form Star Bank, N.A., Indiana. Star Bank, N.A. is
a national bank. The primary regulator of all national banks is the Office of
Comptroller of the Currency. As a federally insured institution and member of
the Federal Reserve System, Star Bank, N.A. is also subject to regulation by
the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve.
The Miami Valley Insurance Company, a wholly-owned subsidiary of the
Corporation, is incorporated under the laws of the State of Arizona and is
engaged solely in the business of issuing credit life and accident and health
insurance in connection with the lending activities of the Corporation's Ohio
and Indiana bank offices. In 1996, First National Cincinnati Corporation
purchased the 24.5 percent ownership of the Corporation's headquarters building
that was held directly by the Corporation. Also in 1996, First National
Cincinnati Corporation merged into Star Banc Center Company and become a
wholly-owned subsidiary of Star Bank, N.A. In 1995, the Corporation formed a
wholly-owned consumer finance company, known as Star Banc Finance, Inc. The
finance company offers consumers a broad mix of credit products and services,
such as indirect and direct auto loans, second mortgages and personal loans.
A tabulation of pertinent financial and operational data for Star Banc
Corporation's banking subsidiary as of December 31, 1997 is shown in the
following table.
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<PAGE>
BANKING SUBSIDIARY
<TABLE>
<CAPTION>
As of December 31, 1997 (dollars in thousands) Total Employees
Total Total Total Equity (Full-Time Banking
Assets Loans Deposits Capital Equivalent) Offices
- - ------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Star Bank, N.A. $10,671,936 $8,211,809 $8,206,427 $790,797 4,049 279
<TABLE/>
The Corporation and its subsidiaries had a total of 4,099 full-time equivalent
employees at December 31, 1997. The Corporation's banking subsidiary operated
a total of 279 full service offices at December 31, 1997.
PROPERTIES
Star Banc Corporation and Star Bank, N.A. maintain their offices in Star Bank
Center, a 26-story office tower in downtown Cincinnati, which is wholly-owned
by the Corporation. This office building contains approximately 562,000 square
feet of space of which the Corporation and Star Bank, N.A. occupy
approximately 255,000 square feet or 45 percent of the space in the building.
Of the 279 banking offices operated by the Coporation's banking subsidiary,
122 are owned and 157 are leased.
LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries presently is involved in
litigation which in the opinion of management will result in a material effect
upon the Corporation's consolidated financial position or results of
operations. See Note 20 to the Consolidated Financial Statements, on page 53
of the Corporation's Annual Report, for additional information.
MARKET AND DIVIDEND
The Corporation's common stock (symbol: "STB") is traded on the New York Stock
Exchange. The following table sets forth the high and low sales prices of the
common stock for each quarterly period during 1997 and 1996 as reported by the
National Association of Securities Dealers, Inc., as well as dividends per
share which have been declared on a quarterly basis. The following amounts
have been restated for a 3-for-1 stock split declared in December, 1996.
Cash Dividends
1997 1996 Declared Per Share
--------------- --------------- ---------------
High Low High Low 1997 1996
----- ----- ----- ----- ---- ----
Fourth Quarter $58.00 $46.13 $31.38 $27.96 $0.20 $0.16
Third Quarter 47.06 42.63 28.80 21.92 0.20 0.16
Second Quarter 44.75 38.88 23.38 21.08 0.20 0.16
First Quarter 45.25 29.70 22.21 18.71 0.20 0.16
At December 31, 1997, there were 9,262 holders of record of the Corporation's
common stock.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
As of December 31 (dollars in thousands) 1997 1996
- - ------------------------------------------------------------------------
Assets:
Cash and due from banks $ 577,479 $ 508,831
Money market investments 238,441 50,170
Investment securities:
Available-for-sale 1,007,619 1,332,312
Held-to-maturity (market value of
$154,996 in 1997 and $168,326 in 1996) 154,549 167,957
- - ------------------------------------------------------------------------
Total securities 1,162,168 1,500,269
Loans:
Commercial loans 2,719,626 2,406,540
Real estate loans 2,773,212 2,599,079
Retail loans 3,150,370 2,726,561
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Total loans 8,643,208 7,732,180
Less: Unearned interest 198,942 145,002
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8,444,266 7,587,178
Allowance for loan losses 132,055 118,689
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Net loans 8,312,211 7,468,489
Premises and equipment 141,439 136,045
Acceptances--customers' liability 16,764 19,257
Other assets 510,399 410,754
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Total assets $10,958,901 $10,093,815
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Liabilities:
Deposits:
Noninterest-bearing deposits $ 1,717,987 $ 1,571,080
Interest-bearing deposits 6,479,588 6,305,181
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Total deposits 8,197,575 7,876,261
Short-term borrowings 1,113,570 921,317
Long-term debt 353,742 247,359
Guaranteed preferred beneficial interests
in Corporation's Junior subordinated
debentures 148,581 --
Acceptances outstanding 16,764 19,257
Other liabilities 222,656 174,549
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Total liabilities 10,052,888 9,238,743
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Shareholders' Equity:
Preferred stock:
Shares authorized - 1,000,000
Shares issued - none -- --
Common stock:
Shares authorized - 200,000,000
Shares issued - 90,481,374 in 1997
and 1996 452,407 452,407
Surplus 84,015 76,045
Retained earnings 527,297 400,838
Treasury stock, at cost (5,192,374 shares
in 1997 and 3,722,931 shares in 1996) (167,048) (81,344)
Net unrealized gain on available-for
sale securities 9,342 7,126
- - ------------------------------------------------------------------------
Total shareholders' equity 906,013 855,072
- - ------------------------------------------------------------------------
Total liabilities and
shareholders' equity $10,958,901 $10,093,815
- - ------------------------------------------------------------------------
The notes referenced in the 1997 annual report are an integral part of
this statement.
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<PAGE>
EXECUTIVE OFFICERS
Jerry A. Grundhofer Chairman since 1994. 53
President and Chief Executive Officer since 1993.
Director since 1993.
Jerry A. Grundhofer joined Star Banc Corporation in May 1993 as President
and was named Chief Executive Officer in June 1993. He has served as
Chairman of the Board since January 1, 1994. He has served as President
and Chief Executive Officer of Star Bank, N.A. since January 1, 1995 and as
Chairman of Star Bank, N.A. since June 1993. He has served on the Board of
Directors of the Corporation and Star Bank, N.A. since June 1993. Prior to
joining Star, he had served as Vice Chairman of the Board for BankAmerica
Corporation since 1992. Prior to the merger between BankAmerica Corporation
and Security Pacific Corporation, he had served as President and Chief
Executive Officer of Security Pacific National Bank since 1990.
Daniel B. Benhase Member of the Managing Committee since 1994. 38
Executive Vice President since 1994.
Daniel B. Benhase has served as Executive Vice President and Head of the
Trust Financial Services Group and Private Banking since 1994. Previously
he had served as Senior Vice President since 1992 and Director of Corporate
Trust and Employee Benefits since 1987.
Joseph A. Campanella Member of the Managing Committee since 1991. 55
Executive Vice President since 1991.
Joseph A. Campanella served as President and Chief Executive Officer of Star
Bank, N.A., Cleveland from its founding in 1988 to June 1991, at which time
he was elected Executive Vice President of Star Banc Corporation.
Richard K. Davis Member of the Managing Committee since 1993. 39
Executive Vice President since 1993.
Richard K. Davis joined Star Banc Corporation in November 1993 as Executive
Vice President. Prior to joining Star, he had served as Executive Vice
President of BankAmerica Corporation since 1992. Prior to the merger between
BankAmerica Corporation and Security Pacific Corporation, he had served as
Executive Vice President at Security Pacific National Bank since 1990. He
has been President and a Director of The Miami Valley Insurance Company
since 1993.
Timothy J. Fogarty Member of the Managing Committee since 1993. 40
Executive Vice President since 1995.
Timothy J. Fogarty has served as Executive Vice President, Residential
Mortgage Banking since 1995. Previously he had served as Senior Vice President,
Residential Mortgage Banking since 1993 and Senior Vice President, Operations
since 1989.
S. Kay Geiger Member of the Managing Committee since 1995. 41
Executive Vice President since 1995.
S. Kay Geiger has served as Executive Vice President and Head of International
Banking since 1995. Previously she served as Senior Vice President and Manager
of the International Division since 1993. She joined Star in 1989 as Vice
President and Manager of International Banking.
Jerome C. Kohlhepp Member of the Managing Committee since 1994. 52
Executive Vice President since 1994.
Jerome C. Kohlhepp has served as Executive Vice President and Head of
Specialized Lending since 1994. Previously he had served as Senior Vice
President, Specialized Lending for the Corporation since 1992 and Head of
Specialized Lending since 1990. He joined Star Bank, N.A. in 1987 as Senior
Vice President, Asset-Based Lending.
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<PAGE>
Thomas J. Lakin Member of the Managing Committee since 1993. 55
Executive Vice President since 1994.
Thomas J. Lakin has served as Executive Vice President and Regional Chairman
in Central Ohio since 1996. Previously he had served as Executive Vice
President, General Counsel and Secretary since 1994, as Senior Vice President,
Operations and Administration since 1992, as Executive Vice President of Star
Bank, N.A. since 1989 and as Senior Vice President and Head of Trust Financial
Services since 1986.
David M. Moffett Member of the Managing Committee since 1993. 45
Executive Vice President and Chief Financial
Officer since 1993.
David M. Moffett joined Star Banc Corporation in September 1993 as Executive
Vice President and Chief Financial Officer. Prior to joining Star, he had
served as Senior Vice President and Assistant Treasurer of BankAmerica
Corporation since 1992. Prior to the merger between BankAmerica Corporation
and Security Pacific Corporation, he had served as Senior Vice President and
Director of Corporate Treasury at Security Pacific National Bank since 1990.
He has served as Treasurer and a Director of First National Cincinnati
Corporation and as Vice President, Treasurer and a Director of The Miami
Valley Insurance Company since 1993.
Daniel R. Noe Member of the Managing Committee since 1994. 46
Executive Vice President since 1994.
Daniel R. Noe has served as Executive Vice President and Head of Credit
Administration since 1994. Previously he had served as Senior Vice President,
Credit Administration since 1990 and Vice President, Loan Review since 1986.
Andrew E. Randall Member of the Managing Committee since 1995. 45
Executive Vice President since 1995.
Andrew E. Randall joined Star Banc Corporation in 1995 as Executive Vice
President and Regional Chairman in Northeast Ohio. Prior to joining Star,
he served as Senior Vice President and Regional Sales Director at Bank of
America.
Wayne J. Shircliff Member of the Managing Committee since 1994. 47
Executive Vice President since 1994.
Wayne J. Shircliff has served as Executive Vice President Commercial Lending
since 1994. Previously he had served as Senior Vice President, Commercial
Lending for the Corporation and Executive Vice President, Commercial Lending
for Star Bank, N.A. since 1990.
Stephen E. Smith Member of the Managing Committee since 1993. 50
Executive Vice President since 1995.
Stephen E. Smith has served as Executive Vice President, Corporate Human
Resources since 1995. Previously he had served as Senior Vice President,
Corporate Human Resources since 1993. He joined Star Banc Corporation in 1991.
Prior to joining Star, he had served as Senior Vice President, Human Resources
at Ameritrust Company since 1986.
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<PAGE>
FORM 10-K 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 March 30, 1998.
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 March 30, 1998.
/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*
John C. Dannemiller, Director* Thomas E. Petry, Director*
J.P. Hayden, Jr., Director* Oliver W. Waddell, Director*
Roger L. Howe, Director*
/s/ Jerry A. Grundhofer
--------------------------
Jerry A. Grundhofer
Attorney-in-fact
*Pursuant to Power of Attorney
-10-
</TABLE>
EXHIBIT 10.5
SEVERANCE, EMPLOYMENT AND RETENTION AGREEMENTS
Exhibit 10.5 includes the severance, employment and retention
Agreements for executive officers.
The employment contract of Jerry A. Grundhofer, Chairman, President and
Chief Executive Officer of Star Banc Corporation and Star Bank, N.A. was
previously filed as an exhibit to the registrant's Annual Report on Form
10K for the year ended December 31, 1996, and is incorporated herein by
reference.
THREE (3) YEAR SEVERANCE AGREEMENT:
Previously filed as an exhibit to the registrant's Annual Report on
Form 10K for the year ended December 31, 1996, and is incorporated
herein by reference.
Three year severance agreements cover the following executive officers:
David M. Moffett, Executive Vice President and Chief Financial Officer,
Star Banc Corporation and Star Bank, N.A.
Richard K. Davis, Executive Vice President, Star Banc Corporation and
Star Bank, N.A.
Joseph A. Campanella, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
## Andrew E. Randall, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
## The three year agreement for Andrew E. Randall was added in 1995 and
included the same provisions as the previously filed three year agreement
with the exception of the elimination of sections 2.4 and 2.5, which
provided for additional years of service and coverage for pension and
medical benefits.
<PAGE>
EXHIBIT 10.5(cont.)
TWO (2) YEAR EXECUTIVE SEVERANCE AGREEMENT:
- - -1 year protection period
- - -30 day walkaway rights
- - -Severance payment: two (2) times highest salary + highest bonus
- - -2 year continuation of medical coverage
- - -Pension coverage includes additional 2 years of service
- - -No 280G limitation
- - -Additional gross-up provision for any excise tax owed.
- - -Term of Agreement: Initial 3 year term and renewal on each anniversary
Two year severance agreements were amended and previously filed as an
exhibit to the the regristrant's Annual Report on Form 10K for the year
ended December 31, 1996 and is incorporated herein by reference.
The two year severance agreements cover the following executive officers:
Daniel B. Benhase, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Timothy J. Fogarty, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
S. Kay Geiger, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Jerome C. Kohlhepp, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Thomas J. Lakin, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Daniel R. Noe, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Wayne J. Shircliff, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
Stephen E. Smith, Executive Vice President, Star Banc Corporation
and Star Bank, N.A.
<PAGE>
EXHIBIT 10.5(cont.)
EXECUTIVE RETENTION AGREEMENT
The executive retention agreement was previously filed as an exhibit
To the regristrant's Annual Report on Form 10K for the year ended
December 31, 1994 and is incorporated herein by reference.
This agreement covers the following executive officers of the Corporation
for the amounts indicated:
David M. Moffett, $350,000
Executive Vice President and Chief Financial Officer
Richard K. Davis, $350,000
Executive Vice President
Daniel B. Benhase, $250,000
Executive Vice President
Jerome C. Kohlhepp, $250,000
Executive Vice President
Joseph A. Campanella $200,000
Executive Vice President
Wayne J. Shircliff, $200,000
Executive Vice President
Stephen E. Smith, $200,000
Executive Vice President
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
For the Periods Ended December 31
(Amounts in thousands except per share data)
Fourth Quarter For the Year Ended
1997 1996 1997 1996
- - --------------------------------------------------------------------------------
Net income........................ $51,723 $42,244 $194,754 $158,359
Dividends on preferred stock...... -- -- -- (5)
- - --------------------------------------------------------------------------------
Net income available to common
shareholders.................... $51,723 $42,244 $194,754 $158,354
- - --------------------------------------------------------------------------------
Weighted average shares:
Common shares..................... 85,928 87,860 86,160 88,544
Convertible preferred shares...... -- -- -- 20
Stock awards...................... 56 39 49 20
Stock options..................... 2,783 1,944 2,668 1,654
- - --------------------------------------------------------------------------------
Weighted average diluted common
shares........................... 88,767 89,843 88,877 90,238
- - --------------------------------------------------------------------------------
Basic earnings per share.......... $ 0.60 $ 0.48 $ 2.26 $ 1.79
(net income available to common
shareholders divided by weighted
average of common shares)
- - --------------------------------------------------------------------------------
Diluted earnings per share........ $ 0.58 $ 0.47 $ 2.19 $ 1.75
(net income divided by weighted
average diluted common shares)
- - --------------------------------------------------------------------------------
Earnings per share and weighted average share amounts have been restated for
adoption of SFAS No. 128.
1997 ANNUAL REPORT - EXHIBIT 13
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES
CORPORATE PROFILE
Star Banc Corporation is a regional multi-bank holding company
headquartered in Cincinnati, Ohio. Through its subsidiary full service
banks, the Corporation offers a comprehensive line-up of banking and
related financial services to individuals, businesses, financial
institutions, non-profit organizations and government entities in its
primary market areas of Ohio, Kentucky and Indiana.
At year-end 1997, total assets were $10.96 billion, and market
capitalization was $4.9 billion. Star Banc Corporation is the parent of
Star Bank, N.A., which on December 31, 1997, operated 279 banking offices.
Ranked by asset size, Star Banc is the 49th largest banking organization
in the country. The Corporation was founded in 1863 as The First National
Bank of Cincinnati under National Bank Charter Number 24 signed by
President Abraham Lincoln. 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 was formed. All of its subsidiary
banks were renamed Star Bank in 1988, and the Corporation was renamed
Star Banc Corporation in 1989. In 1993, the Corporation merged its 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, Troy,
and Youngstown.
Kentucky
Campbell and Kenton Counties in Northern Kentucky; Louisville; Central
Kentucky, including Barren, Boone, Boyle, Carroll, Estill, Fayette, Madison,
Marion, Pendleton, Shelby and Washington Counties, and Western Kentucky,
including Daviess, Hancock, Henderson and McLean Counties.
Indiana
Southeastern and Eastern Indiana, including Dearborn, Fayette, Floyd,
Randolph and Wayne Counties.
ON THE COVER
FIVE STAR SERVICE GUARANTEE
Some banks promise great service. Star Bank guarantees it. Star Bank
guarantees we will deliver on core service standards which are most
important to our customers, such as: quick response, questions answered
promptly, accurate and timely statements and other information, availability
of ATM machines and 24-Hour Customer Service lines, plus others. Every
line of business at Star Bank has its own customized Five Star Service
Guarantee for its customers. And, if Star ever fails to deliver on any
element of its guarantee, the customer's account is credited. All employees
wear a Star Bank "service guaranteed" lapel pin everyday to tell our
customers that quality service is paramount at Star Bank.
<PAGE>
EARNINGS GROWTH STRATEGIES
(PG. 6-11) Profitable growth of existing business lines
Star Bank is a sales and service organization delivering
value-added financial products and services at competitive
prices, when our customers want them and on their terms.
(PG. 12) Multiple delivery channels
As the "Bank Without Boundaries," Star Bank focuses on customer
choice and alternative delivery channels. Consumer, commercial,
small business and trust customers find equal convenience,
speed and accuracy.
(PG. 13) Market expansion
Star Banc Corporation continues to grow its franchise through an
expanding branch office network and through acquisitions which
meet Star's exacting standards.
(PG. 14) Expense control
Star Banc's tight reign on expenses is well known, but the
Corporation also makes major investments in technology,
distribution systems and product development.
Balance sheet management and capital management
Star Banc Corporation manages its strong Balance Sheet to
eliminate low yield assets, to maintain core deposit funding,
to improve margin and to free up capital for the benefit of our
shareholders and for other important Corporation activities.
Star Banc builds shareholder value through consistent dividend
growth and our stock repurchase plan.
Building shareholder value
In 1997, Star Banc Corporation was named to The Wall Street
Journal's "Shareholder Scoreboard" Honor Roll for outstanding
total return to investors.
NYSE: STB
Subsidiaries
Star Bank, N.A.
The largest subsidiary of the Corporation. The Bank operates full
service banking offices in Ohio, Indiana and Kentucky.
Star Banc Finance, Inc.
A wholly-owned consumer finance company, headquartered in Cincinnati and
licensed in Ohio, Indiana, Kentucky and 14 other states.
Miami Valley Insurance Company
An Arizona insurance company which provides credit life and other similar
insurance products to customers of Star Banc Corporation.
15 Consolidated Six Year Selected Financial Data
16 Management's Discussion and Analysis
Line of Business Results......................17
Results of Operations.........................19
Balance Sheet.................................26
36 Consolidated Financial Statements
40 Notes to Consolidated Financial Statements
59 Responsibility for Financial Statements
of Star Banc Corporation
59 Report of Independent Public Accountants
60 Executive Officers of the Corporation
60 Corporate Directors
61 Banking Subsidiary Directors and
Regional Advisory Boards
62 Corporate Information
<PAGE>
CONVENIENCE AND SERVICE - 1997 HIGHLIGHTS
At Star Bank, customer convenience and service set the standard for the
industry. Star Bank delivers on its commitment to define convenience and
service in our market areas. Among the rewards for banking with Star are our
multiple, round-the-clock distribution channels; products and services that are
easy to use and understand; our exclusive Five Star Service Guarantee; new
products that meet changing customer needs, and simply being first with the
very best in banking.
"BANK WITHOUT BOUNDARIES" DEFINES STAR'S 24-HOUR BANKING SYSTEM
Star Bank continues to enhance its exclusive, fully integrated 24-Hour
Banking System. At the forefront of alternative service delivery since the
System's launch three years ago, Star gathers momentum with continuous
innovations. With Star BillPay, customers use the sound of their voice, not
code numbers, to pay bills through Voice Banking or handle banking and bill
paying with just a point-and-click with PC Banking. Internet Banking is Star's
newest breakthrough and offers Star customers no-fee access to full-service
banking on the Internet to pay bills and access their Star Bank accounts.
Star's Super ATMs continue to lead the industry in most-wanted features and
state-of-the-art functionality. Technology and convenience combine in our Video
Banking Centers which include face-to-face video banking, Super ATMs, automated
loan applications, Voice Banking and more, in specialized high traffic
locations. Our branch network continues to grow, led by booming growth of
in-store locations in partnership with some of the region's premier
supermarkets and retailers.
STAR BANK EXPRESS, THE NEXT GENERATION IN BANKING CONVENIENCE
Full service electronic banking and comprehensive merchant service
center... that's Star Bank Express at one of the tri-state's most prestigious
and successful shopping malls. Complete with PC/Internet banking connections,
Super ATMs, Video and Voice Banking, Star Bank Express is the showcase for our
exclusive Star Bank Advisor, an interactive kiosk for full-service financial
planning information. From buying a home to evaluating retirement income needs
to computing a savings plan for college tuition, the Star Bank Advisor
provides a complete financial picture.
<PAGE>
FIVE STAR CIRCLE OF SERVICE EXCELLENCE
Just as we back our Five Star Service Guarantee to customers with cash,
Star Bank also rewards those employees who exemplify outstanding quality
customer service. Each quarter, Star inaugurates five employees into the
Circle of Service Excellence from among all those who have been nominated by
customers. Recognition includes personal congratulations from Star's corporate
directors and winners receive options on shares of Star Banc Corporation stock.
It's just another way Star Bank reinforces its commitment to service.
STAR'S LOCKRATE(sm) FEATURE PLUS VISA(R) ACCESS MAKE EQUILINE(sm) HOME EQUITY
LINES OF CREDIT MORE FLEXIBLE
With our exclusive LockRate feature, the customer can convert any portion
of the outstanding balance of their EquiLine to a fixed rate loan with just a
simple phone call. Customers can also access their EquiLine by their Visa
Gold Card.
<PAGE>
STAR BANK INTRODUCES THE BUSINESS CHECK CARD FROM VISA(R)
Star is first again in delivering on our commitment to offer specialized
products for businesses with up to $5 million in annual sales. Now, small
business customers can enjoy the convenience and control they need to execute
and manage business banking and purchasing needs. The Star Bank Visa Business
Check Card makes it possible for the small business owner to reduce the
number of check requests, reduce the inconvenience of petty cash
administration and increase their control over recordkeeping and expenses.
Star Bank is one of only a handful of banks in the country to offer this new
financial management tool, reflecting Star's leadership position in this
growing customer segment.
<PAGE>
STAR BANK CENTRAL OHIO HEADQUARTERS MOVES TO HEART OF OHIO'S FASTEST GROWING
MARKET
Signifying Star's commitment to Central Ohio and our growing presence in
that market, we relocated regional headquarters into the heart of downtown
Columbus, the state capital and an economic powerhouse. Central Ohio boasts one
of the lowest unemployment rates in the country, combined with population
growth, younger demographics and a strong, diverse business base.
STAR BANC CORPORATION EXPANDS IN THE COMMONWEALTH
In February 1998, Star Banc completed its acquisition of Great Financial
Corporation headquartered in Louisville, Kentucky. With most of Star's prior
Kentucky business concentrated in the northern part of the Commonwealth, the
acquisition expands Star markets into the Greater Louisville area, Central
Kentucky and Western Kentucky, offering customers in those areas a broader
range of consumer and commercial financial services, an expanded ATM network
and the introduction of trust and investment services.
STAR BANK TAKES INTERNET BANKING BEYOND HOME PAGE INFORMATION TO FULL ACCOUNT
ACCESS
Now customers of Star Bank can experience true Internet Banking with full,
no-fee access to actively manage their Star Bank accounts. Users can check
balances, transfer funds, even order stop payments in real time, right through
the Internet, without loading special software. Immediate, free, secure access
and Star Internet Banking BillPay [effective March 1998] position Star Bank
Internet Banking as an industry leader.
STAR BANK LOAN-A-THONS BRING INFORMATION AND APPLICATIONS TO THE COMMUNITY
Throughout its market areas, Star has introduced Loan-A-Thons, community-
based opportunities for individuals, families and small businesses, to meet
with Star Bank loan representatives during non-traditional hours at convenient
sites. During the day-long event, Star Bank representatives discuss loan
opportunities and options and take applications for auto, mortgage, home
improvement, small business and other types of loans. Applicants can expect
an answer on their loan requests within 24 hours.
IN-STORE BANKING CONVENIENCE GROWS IN ALL STAR MARKETS
Star Bank elevates the convenience of branch banking with 7-day-a-week
banking in major supermarkets and other retailers. Convenient locations,
extended hours and full financial services, combined with lower operating
costs, make In-Store banking a continuing strategy for Star Bank and a
continuing banking benefit for our customers.
<PAGE>
FIVE YEAR BAR CHARTS OF NET INCOME, EPS, DIVIDENDS, AVERAGE
BALANCES AND VARIOUS RATIOS:
1993 1994 1995 1996 1997
Net Income $100.3 $116.6 $136.6 $161.6* $194.8
(in millions of dollars)
Diluted Earnings Per Share $1.10 $1.28 $1.50 $1.79* $2.19
(in dollars)
Common Dividends Declared Per Share $0.39 $0.47 $0.53 $0.63 $0.80
(in dollars)
Average Shareholders' Equity to
Average Total Assets 8.50% 8.51% 8.24% 8.61% 8.31%
(in percents)
Return on Average Equity 15.65% 16.59% 17.57% 19.34%* 22.62%
(in percents)
Return on Average Assets 1.33% 1.41% 1.45% 1.67%* 1.88%
(in percents)
Net Interest Margin 4.67% 4.55% 4.44% 4.78% 4.94%
(in percents)
Efficiency Ratio 57.06% 55.84% 55.07% 51.22%* 48.03%
(in percents)
Market Capitalization $1.04 $1.08 $1.78 $2.66 $4.89
(in billions of dollars)
Average Shareholders' Equity $640.9 $702.6 $777.7 $835.6 $861.0
(in millions of dollars)
Average Total Assets $7.54 $8.25 $9.44 $9.71 $10.36
(in billions of dollars)
Dividend Payout Ratio 34.41% 35.89% 35.00% 34.69% 35.07%
(in percents)
* Excluding SAIF assessment; see Financial Highlights on facing page.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
(dollars in thousands except per share data) 1997 % change 1996 % change 1995
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For The Year:
Net income $ 194,754 23.0% $ 158,359 15.9% $ 136,603
Net interest income, fully taxable equivalent 465,299 10.4 421,499 10.5 381,564
Noninterest income 204,576 20.0 170,522 23.5 138,124
Net revenue 669,875 13.2 592,021 13.9 519,688
Noninterest expenses 321,763 4.4 308,211 7.7 286,214
- - --------------------------------------------------------------------------------------------------------------
Per Share: (a)
Basic earnings per common share $ 2.26 26.3% $ 1.79 17.8% $ 1.52
Diluted earnings per common share 2.19 25.1 1.75 16.7 1.50
Common dividends declared 0.80 27.0 0.63 17.6 0.53
Preferred dividends declared -- -- 3.00 (50.0) 6.00
Book value per common share 10.62 7.7 9.86 7.6 9.16
Market value per common share 57.38 87.3 30.63 54.4 19.83
- - --------------------------------------------------------------------------------------------------------------
Average Balances:
Total assets $10,357,273 6.7% $ 9,705,620 2.8% $ 9,439,626
Earning assets 9,414,818 6.8 8,817,559 2.7 8,588,587
Loans, net of unearned interest 8,012,368 10.4 7,255,113 8.8 6,669,806
Deposits 7,889,327 3.2 7,643,960 4.1 7,343,698
Total Shareholders' equity 861,029 3.0 835,566 7.4 777,674
- - --------------------------------------------------------------------------------------------------------------
At Year-End:
Common shares issued and
outstanding (a) 85,289,000 86,758,443 89,500,764
Number of common shareholders 9,262 8,112 7,955
Number of employees 4,099 3,988 3,850
- - --------------------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 1.88% 1.63% 1.45%
Return on average equity 22.62 18.95 17.57
Average total shareholder's equity
to average total assets 8.31 8.61 8.24
Regulatory capital ratios:
Tier 1 risk-based capital 8.77 7.64 7.97
Total risk-based capital 12.61 11.88 11.23
Leverage ratio--average assets 8.01 6.53 6.23
Net interest margin 4.94 4.78 4.44
Noninterest income as a percent
of net revenue 30.54 28.80 26.58
Efficiency ratio 48.03 52.06 55.07
Net profit margin 29.07 26.75 26.29
- - --------------------------------------------------------------------------------------------------------------
Excluding 1996 SAIF Special Assessment:
Net income $ 194,754 20.5% $ 161,609 18.3% $ 136,603
Noninterest expense 321,763 6.1 303,211 5.9 286,214
Basic earnings per common share 2.26 23.5 1.83 20.4 1.52
Diluted earnings per common share 2.19 22.3 1.79 19.3 1.50
Return on average assets 1.88% 1.67% 1.45%
Return on average equity 22.62 19.34 17.57
Efficiency ratio 48.03 51.22 55.07
(a) Share amounts have been restated to reflect a 3-for-1 stock split in 1996.
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (3)
<PAGE>
Fellow Shareholders:
The year 1997 was another outstanding year for your Corporation in terms of
earnings per share, financial results, geographic expansion and strategic
momentum.
Shareholder Return
Once again, Star Banc Corporation was able to deliver on our commitment to
you, our shareholders, that we will manage this Corporation to maximize your
investment in this company. Total shareholder return for the year was 90.6
percent, and 71.9 percent annualized over the last three years. We maintained
our dividend payout ratio in the 35 percent range. Our record of shareholder
return put us in some very good company when Star Banc Corporation was included
in The Wall Street Journal's Honor Roll for outstanding total return to
investors. To make the Honor Roll, Star Banc achieved an "A" rating for the
past one, three, five and ten years in the area of total shareholder return.
To receive an "A" rating, a company stock had to rank in the top 20 percent of
the 1,000 companies included in the "Shareholder Scoreboard." Only 38 companies
of the 1,000 included in the "Shareholder Scoreboard" were named to the Honor
Roll. At year-end 1997, over five and a half million shares had been reacquired
under Star's Stock Repurchase program. Star Banc continues to focus on
strategies that will increase earnings and ultimately shareholder return.
Financial Results
We are very pleased at the continued record earnings of the Corporation.
For 1997, diluted earnings per share reached $2.19, an increase of 25.1
percent over 1996 and our sixth straight year of record profits. It was also
our sixth consecutive year in which earnings per share growth exceeded 15
percent. Net income for the year also reached a record $194,754,000, or 23.0
percent higher than the year before. Star Banc's Return on Equity (ROE) reached
a record 22.62 percent. Star's ROE has consistently surpassed that of its peer
banks, and 1997 marked the third consecutive year we have achieved an ROE
exceeding 17 percent. Driven by improving profitability, Star Banc's Return on
Assets (ROA) reached 1.88 percent, another record and a level that puts us
among the very top performers in the industry.
Other significant improvements include the increase in our net interest
margin to 4.94 percent, due to better profitability and a more efficient
balance sheet. Star's efficiency ratio is the best it has ever been, a record
low 48.03 percent for 1997 and a reflection of the extreme importance
management places on expense control. Noninterest income increased 20 percent
in 1997, led by increases in Trust, Credit Card, Electronic Banking and other
business areas. Interest income increased ten percent as loan growth
continued. Star's credit quality remains excellent.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (4)
<PAGE>
Performance and Productivity
Star Banc continues to reach new levels of productivity among our
employees, and it is reflected in our financial results. We believe that our
Pay for Performance strategy is a significant factor in our productivity
levels. Under our incentive compensation program, employees are rewarded when
they and the Corporation exceed stated goals. Every Star employee participates
in one or more incentive programs based on performance. This aligns the goals
of the organization with those of each employee, and the results speak for
themselves. In 1997, we paid out approximately $17 million in incentive
compensation. As a comparison, in 1992, we paid just $4 million in incentives.
Additionally, in 1996, Star Banc awarded every employee options on shares of
Star Banc stock. We can't think of a better way to have our entire employee
base working every minute for the benefit of our shareholders!
Our Growth Strategies
Star Banc's growth strategies are not complex. And they are not the only
way to manage a banking company. But they are working for us. You will find
each strategy discussed elsewhere in this report. Basically, we will continue
to increase revenues through value-added products and services, delivered in
the most efficient and convenient ways possible to a wide range of personal,
business and institutional customers. We will watch expenses and cut waste
wherever it is. We will expand our franchise through acquisitions only when
the return exceeds the cost of capital and the transaction will have a positive
impact on earnings per share. We will manage our business and allocate capital
to keep the Corporation sound and profitable.
LINE CHART OF ANNUALIZED TOTAL RETURN COMPARATIVE 1994-1997
(in percents)
S&P 500 22.9%
S&P Major Regional Banks 32.2
Star Banc Corporation 53.1
The banking industry is changing at an ever-increasing pace. Consolidation
in the industry continues unabated. Success will belong only to those banking
companies which are focused on their strategies, which excel at execution,
which are nimble and which anticipate the needs of their customers. At Star
Banc we place a premium on being quick off the block. Our size, our flat
management structure, our technological capabilities and our Corporate culture
foster those abilities. They are responsible for our successes to date, and we
look forward to putting them to use in the 21st Century.
As always, we put the highest priority 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
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (5)
<PAGE>
PROFITABLE GROWTH OF EXISTING BUSINESS LINES
The profitable growth of our business lines is foremost among our earnings
growth strategies. The revenue increases recorded by all of our lines of
business in 1997 indicate that both the strategy and our disciplined approach
are working.
Star develops only products and services which meet our high standards
for quality and value. We hire expertise or employees we can train to market
these products and services knowledgeably and enthusiastically. We expect our
employees to match the right product with the right customer. Then we back up
this sales and service force with investments in the locations, systems and
delivery channels that will make banking with Star convenient and satisfying.
We promote our products to the customers and prospects most likely to derive
benefit from them.
At the same time, we carefully evaluate every product and service for its
continued ability to please our customers and also to add to the revenue growth
and profitability of the Corporation. Business line managers are accountable to
the CEO of Star Banc Corporation for the revenue, expenses, distribution and
profitability of their products and services; they are expected to run their
business as if they own it.
Products/Services Revenue by Business Lines Pie Charts
- - - Structured Capital Commercial Banking
- - - Treasury Management 23.1%
- - - Commercial Real Estate
- - - Equipment-Lease Finance
- - - Financial Institutions
- - - Global Services/
International Banking
- - - Middle Market Banking
- - - Municipal Finance
- - - National Accounts
- - - Personal Trust StarTrust
- - - Corporate Trust 13.4%
- - - Employee Benefits/
Retirement Plans
- - - Institutional Custody
- - - Capital Management
- - - Professional Sports
- - - Charitable Trusts
- - - Private Banking
- - - Metropolitan Banking Consumer Banking
- - - Consumer Finance 63.5%
- - - Card Services
- - - Electronic Banking
- - - Indirect Auto
- - - Insurance Products
- - - Community Banking
- - - Mortgage Banking
- - - Small Business Banking
- - - Branch-based
Investment Services
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (6)
<PAGE>
COMMERCIAL BANKING
Middle Market Lending
Star Bank has been a leading commercial banking provider since its
founding in 1863. We work to meet the financial needs of all businesses in
our market areas, with a focus on building long-term relationships with middle
market companies with annual sales of up to $250 million. Relationships
spanning decades are not uncommon, even in the face of intense banking
competition.
As it has throughout its history in commercial banking, Star maintains
its high credit standards and gains new business and repeat business based on
our unrivaled customer service, flexibility, value-added supplementary
services and superior knowledge of the industries, businesses and markets we
serve. Close contact with clients and prospects is a hallmark of Star's
commercial calling program.
The Middle Market Lending portfolio is well diversified across
industries, with no concentration in a single industry.
Treasury Management
The year 1997 was another growth year for Star Bank's Treasury Management
Division. With its full line of cash management services, competitive pricing
and superior technology-based delivery, Treasury Management reported a 16.0
percent increase in revenues, compared to 1996. Staffed by experienced,
industry-focused professionals who understand the needs of businesses large and
small, Star is able to develop effective solutions and deliver them
economically with advanced technology. Star Bank's state-of-the-art software,
StarView CM, is a Windows based solution that allows customers to control their
treasury management needs from one central workstation. In addition to
accessing the cash position in any Star Bank checking account, StarView CM
offers the flexibility of providing balance and detail information from other
banks all on one central software. Additional features of StarView CM increase
regularly as Star stays ahead of the competition and grows with our customer's
needs. Treasury Management clients outsource payable and receivable functions
to Star Bank. Star's Treasury Management also provides balance reporting, ACH,
account reconciliation, controlled disbursements, EDI services, wire transfers,
and wholesale lockbox, including our unique customization of receivable posting
services. In 1997, Star invested nearly $1 million in upgrading Remittance
Processing (retail lockbox) to image technology. Star Bank has achieved a
quality standard twice that of our competitors, faster throughput and the
delivery platform from which to deliver other image services.
Global Services - International Banking
Star Bank operates in one of the largest export/import regions in the
nation, and our Global Services - International Banking Division has grown to
meet the demand for related financial services. Our International Corporate
Banking service was expanded in 1997, as we focus on the local banking needs of
foreign owned companies and their employees located in our market area. Star
Bank is able to meet the increased requirements of our international clients
through its development of sophisticated electronic delivery systems, which
enable us to succeed in a specialty, formerly dominated by much larger banks.
Star Bank enters into selective partnerships which greatly expand our
capabilities to service our clients. Partnerships include our online Canadian
cash management services arrangement with the Bank of Montreal. We also have a
partnership with the HongkongBank which broadens our ability to assist
companies doing business in the Asia-Pacific Rim, as well as Asian companies
located in the tri-state area. Our correspondent relationships with banks in
Europe and around the world give Star Bank true global coverage for our
clients. Star Bank has been awarded both the President's "E Star" Award,
presented by the U.S. Department of Commerce, as well as the State of Ohio
Governor's "E Award" for excellence in export services.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (7)
<PAGE>
Structured Capital
Our Structured Capital Division provides secured, asset-based lending
primarily in the Midwest, Mid-Atlantic, South, Southeastern and Southwestern
regions of the country. Generally, the companies are manufacturers,
wholesalers, distributors, select retail or service-related businesses with
annual sales ranging from $15 million to $250 million. We lend funds for
leveraged buyouts, selective turnarounds, rapid growth financing, bridge loans
and recapitalizations. Structured Capital increased year-to-year asset growth
by 22 percent in 1997 over the previous year.
Equipment-Lease Financing
Star has expanded its presence in this line of business in the Cleveland
and Columbus markets in addition to its prominence in the Greater Cincinnati/
Northern Kentucky region. We finance income-producing equipment, with a focus
on transportation vehicles, industrial and manufacturing equipment, office and
computer equipment, aircraft and railroad equipment. Lease financing now makes
up nearly 90 percent of our portfolio, with secured loans comprising the
remainder. A significant benefit of borrowing or leasing with Star Bank is our
full line-up of financing structures.
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 is Star's largest secured lending business and represents
about 27 percent of Star's Commercial Banking revenues. At year-end 1997,
Commercial Real Estate assets totaled $1.56 billion, a 12 percent increase
over 1996.
STARTRUST
Since 1919, Star Bank's StarTrust Division has been recognized as a
leading provider of trust, investment and financial management services for
individuals, corporations, private companies, foundations, charities, public
entities and other organizations. StarTrust has clients in all 50 states and
several foreign countries. With approximately $50 billion in total assets and
$10 billion under management, it is clear that StarTrust meets the needs of
its diverse client base. StarTrust revenue increased 21 percent in 1997.
Personal Trust
StarTrust is a premier provider of Personal Trust and Financial Services
in our markets, with client relationships which span generations, administered
by trust officers who average 16 years of on the job experience. Our clients'
needs range from the sophisticated requirements of our high net worth
clientele, to personal financial services for individuals, to strategic
financial planning and portfolio management, to retirement planning and
estate/probate administration. Our trained Personal Trust specialists assist
not only long-time trust clients and families, but also beginning investors,
new parents and grandparents, closely held business owners and trust
beneficiaries.
Family Asset Management focuses on the specialized needs of high net worth
individuals and their families. Utilizing a sophisticated level of investment
management, trusts, tax planning and asset protection services, StarTrust
officers provide customer-tailored service to their clients.
The Personal Asset Management Division focuses on Star Bank's branch
clientele, specializing in strategic Financial Planning and Portfolio
Management, as well as providing IRA products and services.
Capital Management
The Capital Management Division manages the proprietary Star Funds, the
Star Select Funds and the fiduciary assets of StarTrust. Capital Management is
committed to provide individually defined investment performance, the rigorous
application of disciplines, the employment of innovative techniques and client
communication. StarTrust maximizes its expertise and capitalizes on the
enormous client interest in mutual fund investing through its management of the
investments of the Star Funds, the Star Select Funds, the Investar Vision
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (8)
<PAGE>
Annuity and the Investar Advantage Annuity. These investments are available to
the retail public through Star Bank branch offices. In November three new
mutual funds were introduced: the Star International Equity Fund, the Star
Market Capitalization Fund, and the Star Ohio Tax-Free Money Market Fund. In
June a new no-load family of mutual funds, managed by Star Bank, was
introduced with the REIT-Plus Fund. With the addition of these new funds, Star
Bank now manages proprietary mutual funds with more than $2.5 billion in total
assets and $10 billion through the entirety of StarTrust. In 1997, the Star
Relative Value Fund was recognized by Morningstar as one of its Five Star funds
for the past three years.
Retirement Plans Division
The ALLSTAR 401(k) daily valuation program, our premier retirement plan
product, experienced tremendous growth during 1997. The extensive number of
investment options offered, as well as the comprehensive employee
communications program and the 24-hour access to account information, have
enabled us to compete and obtain business on a national basis as well as in
our market areas. We offer trustee, investment, administrative and consultation
services for traditional pension and defined contribution plans, non-qualified
deferred compensation arrangements and 403(b) plans for employers large and
small.
Corporate Trust
StarTrust serves as trustee, security holder and recordkeeping agent for
municipal and corporate issuers of publicly issued or privately placed debt
and equity securities. The division also provides specialized services to the
mutual fund industry. Star's Trustee's Ranking for Municipal Debt in the United
States is 14th.
Private Banking
An increasing business of client referrals and heightened call programs
resulted in expanded staff and record growth for the Private Banking Group. The
StarTrust Private Banker becomes the client's confidential envoy to the bank's
full scope of credit, investment and asset management services. Through
proactive wealth management, Private Bankers work with clients to achieve their
financial goals. Private Bankers focus on the special needs of physicians and
surgeons, attorneys, CPAs, entrepreneurs and corporate executives.
Institutional Custody Services
The year 1997 was another exceptional year for the Institutional Custody
Services Division of StarTrust, which is recognized in the industry as a
premier provider of custody services in the United States. StarTrust provides
these services to mutual funds, municipalities, financial institutions,
insurance companies, registered investment advisors and charitable
organizations. At year-end 1997, total assets under custody increased 98
percent, and revenue increased 36 percent over 1996. In this highly specialized
field, StarTrust fields a team of experts who guarantee outstanding performance
in safekeeping of underlying securities, collection of securities income and
the settlement of securities transactions. We also provide supplementary
services, such as cash management, Turnkey IRA, 403(b), employee benefits and
global custody services.
Professional Sports
The year 1997 marked the second year of operation for the Professional
Sports Division of StarTrust, one of only three banks nationally to handle
professional athletes with a dedicated business unit. Professional Sports
provides highly specialized services to meet the uncommon requirements of
professional athletes. Relocation services, disability insurance counseling,
cash flow projection, transitional credit and the establishment of private
foundations are just some of the complex services these young athletes require.
StarTrust represents clients in every major professional sport and has been
recognized in the national press for its skilled approach to this business.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (9)
<PAGE>
CONSUMER BANKING
Star Bank's Commitment
Star Bank has made a commitment to define convenience and customer service
in our market areas. Star's 24-Hour Banking System is the industry leader in
alternative delivery. The diverse options in our 24-Hour Banking System give
each customer the choice of how to handle their Star banking. Whether they use
one option or many, that freedom of choice is another important part of
convenience.
Customers who use branches as their primary access to Star Bank have
choices, too. Star Bank's network of branches continues to grow throughout the
region with both traditional and non-traditional offices. Among our
non-traditional branches are In-Store offices found at many of the finest
supermarkets and other retailers in the tri-state. Star also operates offices
in retirement centers and at corporate sites, such as Procter & Gamble
facilities. Our mobile ATM van, the Star Cash Cruiser, travels to all our
markets for special events, and Star Bank Express Video Centers are self serve
offices round the clock. The graphic on this page demonstrates how
non-traditional branches are becoming a larger part of our distribution
system.
Our exclusive Five Star Service Guarantee ensures that every customer
receives the best in banking service or is compensated in cash for their
inconvenience. The Five Star Service Guarantee has become such an important and
integral part of Star Bank culture that our employees wear a lapel pin to
communicate our commitment to guaranteed service. You will see a replica of
that lapel pin on the cover of this report. It is worth its weight in gold!
Growth of Branch Operations
1995 1996 1997
--------------------------------------
Traditional 227 222 219
Corporate 1 10 10
Retirement 5 7 9
In-Store 15 28 41
--------------------------------------
Total 248 267 279
--------------------------------------
(Excludes 45 former Great Financial
offices acquired 2/7/98)
Convenience and customer service are two of the most important ways we put
customers first and how we differentiate ourselves from the competition.
Star Bank also is a leader in the development of new products and
financial services which meet the changing needs of our customers. Star Bank is
continuously designing new products, improving existing ones and adding
benefits to service packages to ensure that every customer receives added value
when they bank with Star Bank.
Enhanced in 1997, our EquiLine home equity line of credit now offers our
exclusive LockRate. Customers can lock in a fixed rate and term for up to three
loans within their line of credit. We also added immediate credit card access
to EquiLine with a Visa Gold Card, a real convenience when using EquiLine for
easy cash access or for major purchases anytime.
Knowing our customers
Star Bank knows that the better we know our customers, the better we can
serve them with the products and services and delivery systems which are most
appropriate for them and the way they want to handle their finances.
Star Bank has initiated several programs to help us understand our
customers. Customer Profiling is conducted at all of our branch offices to
determine a customer's financial situation and to assist the customer in
pinpointing those services which will be most beneficial. Customer Profiling is
an in-depth conversation which focuses not only on an immediate need, but also
on how customers can structure their accounts to meet future needs as well.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (10)
<PAGE>
Customer Profiling is now one of Star's most important tools in creating
long-term customer satisfaction.
Star Bank also is making more valuable use of the information about our
customers in our data base files. Through this information we are able to make
product and service offers to customers that most closely fit their needs and
to foresee the services and products they may need in the future. This process
is a major advantage for both the customer, who receives only those more
personalized offerings which are most likely to be useful, and for Star Bank
as a way to focus our communications and our resources.
Specialized service for smaller businesses
Star Bank understands that the success of smaller businesses is about hard
work, long hours, commitment and the quality of their banking partnership. Star
Bank is committed to small businesses, and Star offers a comprehensive line of
products and services that help businesses with annual sales up to $5 million.
Star's 24-Hour Customer Service, streamlined loan applications, Visa Business
Check Card and PC based access to account information augment Star's complete
range of services, including cash management and international trade services,
for this important and growing market segment. Star has established dedicated
Small Business Banking sales teams in all metropolitan markets to ensure
quality service and expertise throughout the region.
Star Banc Finance, Inc. expands markets and product lines
Star Banc Finance, Inc. is Star's subsidiary consumer finance company
established in 1995. The Alternative Lending program, designed for Star Bank
loan applicants who do not qualify for standard bank financing under Tier I
credit guidelines, is marketed through Star Bank branches. Star Bank Home
Equity Alternative featuring loan-to-values up to 100 percent and debt ratios
up to 45 percent, was introduced in 1995 and acquires its business through a
network of mortgage brokers. Star Banc Finance now operates in 17 states,
direct and through brokers, with products ranging from real estate, home
improvement, auto and installment loans to our special Memorial Loan funeral
financing program. At year-end 1997, Star Banc Finance loans outstanding
totaled $232 million, a 73 percent increase over 1996. The company reported
increases in all key financial results, compared to 1996, including an ROE of
38.6 percent, ROA of 3.0 percent and an efficiency ratio of 31.6 percent.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (11)
<PAGE>
MULTIPLE DISTRIBUTION CHANNELS
Star Bank Leads. Others Follow.
Being a banking leader is nothing new for Star Bank. In 1995, we were the first
bank in the country to introduce our 24-Hour Banking System - an integrated
system that gave customers more ways to bank and access their money. In 1997,
we announced the ultimate in banking access with the addition of full Internet
Banking service. Now, Star Bank customers can have immediate, secure, no-fee
access to their personal account information on the Internet.
Star Bank Express - The next generation of banking, where technology and
convenience come together, is Star Bank Express, at Kenwood Towne Centre in
Cincinnati, featuring unique banking options from Voice Banking and PC Banking
to Video Banking. Available only at Star Bank Express is the Star Bank Advisor,
an interactive kiosk that helps customers plan their finances. Star Bank
Express is also a state-of-the-art merchant facility, available 24 hours a
day, seven days a week. Businesses can utilize the private, secure cash
counting area prior to making deposits. They can also self-serve their
small-denomination currency and coin needs via Star's new combination
merchant depository/coin-currency dispenser.
Branch Banking - It seems that there's a Star Bank branch everywhere. From
neighborhoods to shopping malls, Star has over 279 offices - including branches
inside grocery stores where customers can bank weekday evenings till 8:00, plus
Saturday and Sunday.
Super ATMs - All banks have ATMs, but only Star Bank customers have access to
over 600 Super ATMs where they can:
- - - Obtain full and mini statements and print out all of their transactions
since their last statement, or simply their last 10 transactions
- - - Reorder checks
- - - Request a copy of a check
- - - Purchase postage stamps
- - - Purchase long distance minutes
Voice Banking - All banks may offer customer service, but only
Star Bank customers have 24-hour Voice Banking which lets them:
- - - Talk with a Customer Service Representative 24 hours a day, 7 days a week
- - - Verify deposits, transfer funds and much more through our automated
account information system
- - - Pay bills with Star Bank's exclusive Star BillPay product. Customers use
the sound of their voice, not code numbers, to pay their bills. Customers
just speak the name of the company to be paid, enter the amount, and bills
are paid. It really is that simple.
ScreenPhone - It's more than just a telephone. This unique phone is an option
that provides customers account information, bill payment, and much more.
PC Banking - Some banks offer PC Banking, but Star Bank gives customers free
software and no-fee access to their account information. As soon as the
software is loaded on their computer, they can begin accessing their accounts.
And through the PC Banking product, Star Bank customers can also choose to pay
bills through Star Bank's BillPay, the exclusive Star Bank electronic bill
paying service.
Video Banking - All banks talk about technology, but Star Bank customers can
see it, too. Video Banking provides a video link so customers can bank
face-to-face with a Star banker any time, day or night.
Internet Banking - Other banks talk about Internet Banking, but only Star Bank
customers have immediate access to their account information on the Internet
for no charge. It's easy to find us at www.starbank.com. You can E-mail Star
Bank, plus find information on products and services, job opportunities and
much more.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (12)
<PAGE>
MARKET EXPANSION AND ACQUISITIONS
Star Banc Corporation operates under the growth strategy that
profitability is far more important than size. Star's recent financial results
are certainly evidence that size is not an essential condition for success.
Thus, any expansion or acquisition to enhance and extend our franchise must
meet Star Banc's disciplined criteria. Foremost among these is that
acquisitions must be accretive to earnings.
All of Star Banc's recent acquisitions have met these criteria and are
adding to the value of the Corporation and its earnings. It is our expectation
that the most recent acquisition, that of Great Financial Corporation,
headquartered in Louisville, Kentucky, will be as successful as our recent
prior purchases have been.
Star Banc has become proficient at the process of converting acquired
banks into Star Banks. Operations and information systems teams are experts on
the technical side, and we have an enviable record of customer and account
retention based on high quality communication processes and guaranteed service.
Employees of the new banks are fully and quickly trained in the Star Bank
sales and service culture and procedures. Current Star Bank employees are
assigned temporarily to new banks and branches as "Ambassadors." At the point
of conversion and after, they help see the new branches through the early days
of account openings, questions and new processes. New Star Bank signs,
marketing materials, sales tools and account literature are in place
immediately. At the same time, Star Bank acknowledges and respects the culture,
customers and new communities we enter, and we rely heavily on the wisdom and
community knowledge of those at the banks we merge into Star Bank. We
communicate fully and frequently with our new employees and our new customers
throughout the process, retaining as much familiarity as possible.
Star's most recent acquisition, which was completed on February 7, 1998,
opened new market areas of Kentucky to Star. Great Financial was an
outstanding organization with an 85-year history of quality customer service.
Combining with Great Financial gave Star Banc the opportunity to attract new
customers and further extend its platform of convenience and service into
geographic regions which were natural extensions of Star's existing Kentucky
franchise. Great Financial has operated consumer, mortgage banking, commercial
lending and private banking services in and around the major markets of
Louisville, Lexington and Owensboro, Kentucky.
Recent Acquisitions
TransOhio Federal Savings Bank
Cleveland and Northeastern Ohio 1994
Household Bank, FSB
Columbus and Central Ohio 1995
National City Bank branches
Connersville, IN 1996
AmeriFirst Bank branches
Southwestern Ohio 1997
Great Financial Corporation
Louisville, Central and Western Kentucky 1998
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (13)
<PAGE>
ADDITIONAL GROWTH STRATEGIES
Expense Control
Star works steadily to reduce all overhead costs that do not affect
customer service and revenue generation. We control expenses through the
judicious closing of traditional offices in "over branched" areas where another
Star office can serve customers. At the same time, our branch network grows
through acquisitions, the explosion of our new In-Store branches and our
corporate on-site branches.
We also lessen fixed costs through outsourcing of operations which can be
done more efficiently externally. Alternative delivery systems, such as our
Super ATMs, PC Banking, Internet Banking and 24-Hour Customer Service have
reduced our service delivery expenses, compared to new brick and mortar
traditional offices.
Staffing models for all branches ensure that we are making the most effective
use of our personnel and that there is peak staffing when our customers need
it most. Any increases in operating budgets are tied to revenue generation,
productivity or the achievement of specific customer service standards. Star's
emphasis on expense control, coupled with revenue generation, is unwavering
and ongoing. Accordingly, Star's efficiency ratio (expenses as a percentage of
revenues) has consistently improved over the past four years and currently
stands among the lowest in the industry.
Balance Sheet Management and Capital Management
Star Banc continues to pare lower yielding assets from its balance sheet.
We have significantly reduced the amount of lower yield securities from our
investment portfolio, as well as from the residential mortgage portfolio. We
have replaced lower yielding assets with higher yielding loans, especially
retail loans. Our management of the balance sheet maintains loan funding from
our core deposit base, the most efficient and least rate sensitive system of
funding, rather than from purchased funds.
Star Banc is very intentional in its management of capital. With our focus on
shareholder return, we carefully evaluate the capital necessary to continue
building the Corporation, including potential acquisitions and investments in
our lines of business. Concurrently, we consider dividend growth for our
shareholders, our stock repurchase program and regulatory capital requirements.
Only then, with a disciplined assessment of the return we can expect on each
allotment, do we allocate capital for the benefit of the Corporation's
profitability and its return to shareholders. Star increased the dividend by
25 percent in March 1997, the 25th consecutive year of dividend increases. Over
the last five years Star Banc has increased its dividend by more than 105
percent.
Building Shareholder Value
The primary focus of Star Banc Corporation is to build shareholder value
through the sound management of the Corporation. That is the result we strive
to achieve when we offer our customers outstanding service and the utmost in
convenience. Shareholder value is the goal of our expense control policies,
our balance sheet management, our capital allocations and our everyday
performance. The Corporation has outperformed the S&P 500 and peer banking
companies in total shareholder return.
BAR CHART OF TOTAL SHAREHOLDER RETURN
ANNUALIZED RETURNS (in percents)
Three Years
Star Banc Corporation 71.9%
S&P Regional Bank Index 47.8
S&P 500 31.1
Two Years
Star Banc Corporation 73.3%
S&P Regional Bank Index 43.1
S&P 500 27.9
One Year
Star Banc Corporation 90.6%
S&P Regional Bank Index 50.4
S&P 500 33.5
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (14)
<PAGE>
CONSOLIDATED SIX YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands except per share data) 5 Year
Compound
1997 1996 1995 1994 1993 1992 Growth Rate
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Interest income $ 804,552 $ 735,525 $ 710,404 $ 569,724 $ 518,167 $ 541,421 8.2%
Interest expense 342,653 317,326 332,196 223,618 194,691 233,038 8.0
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income 461,899 418,199 378,208 346,106 323,476 308,383 8.4
Taxable equivalent
adjustment(a) 3,400 3,300 3,356 3,069 3,283 4,479 (5.4)
- - --------------------------------------------------------------------------------------------------------------------------
Taxable equivalent
net interest income 465,299 421,499 381,564 349,175 326,759 312,862 8.3
Noninterest income 204,576 170,522 138,124 117,015 112,890 99,644 15.5
- - --------------------------------------------------------------------------------------------------------------------------
Net revenue 669,875 592,021 519,688 466,190 439,649 412,506 10.2
Noninterest expense 321,763 308,211 286,214 260,311 250,849 253,011 4.9
Provision for loan losses 53,614 40,773 25,101 24,372 33,008 40,898 5.6
Net income 194,754 158,359 136,603 116,591 100,273 76,119 20.7
- - --------------------------------------------------------------------------------------------------------------------------
Per Share(b)
Basic EPS $ 2.26 $ 1.79 $ 1.52 $ 1.30 $ 1.12 $ 0.86 21.3%
Diluted EPS 2.19 1.75 1.50 1.28 1.10 0.84 21.1
Common stock cash
dividends declared 0.80 0.63 0.53 0.47 0.39 0.35 18.0
Year-end book value 10.62 9.86 9.16 8.01 7.44 6.70 9.7
Year-end market value 57.38 30.63 19.83 12.13 11.67 12.00 36.8
- - --------------------------------------------------------------------------------------------------------------------------
Average Balances
Loans, net of
unearned interest $8,012,368 $7,255,113 $6,669,806 $5,721,667 $5,146,341 $4,926,900 10.2%
Investment securities 1,321,363 1,531,349 1,901,722 1,900,290 1,592,210 1,341,917 (0.3)
Money market investments 81,087 31,097 17,059 43,080 264,502 383,255 (26.7)
- - --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,414,818 8,817,559 8,588,587 7,665,037 7,003,053 6,652,072 7.2
Total assets 10,357,273 9,705,620 9,439,626 8,252,244 7,542,798 7,171,898 7.6
Noninterest-bearing deposits 1,487,192 1,345,296 1,188,364 1,065,933 1,036,141 925,338 10.0
Interest-bearing deposits 6,402,135 6,298,664 6,155,334 5,212,946 5,085,718 4,955,133 5.3
- - --------------------------------------------------------------------------------------------------------------------------
Total deposits 7,889,327 7,643,960 7,343,698 6,278,879 6,121,859 5,880,471 6.1
Short-term borrowings 1,016,900 898,025 1,014,552 995,901 621,482 498,014 15.4
Long-term debt 380,659 162,840 163,788 155,172 54,308 59,906 44.8
Shareholders' equity 861,029 835,566 777,674 702,605 640,868 579,486 8.2
- - --------------------------------------------------------------------------------------------------------------------------
Ratios
Return on average assets 1.88% 1.63% 1.45% 1.41% 1.33% 1.06%
Return on average equity 22.62 18.95 17.57 16.59 15.65 13.14
Net interest margin 4.94 4.78 4.44 4.55 4.67 4.70
Efficiency ratio 48.03 52.06 55.07 55.84 57.06 61.34
Dividend payout ratio 35.07 34.69 35.00 35.89 34.41 40.35
Tier 1 risk-based capital 8.77 7.64 7.97 8.66 11.10 10.64
Total risk-based capital 12.61 11.88 11.23 12.16 12.41 11.99
Leverage(c) 8.01 6.53 6.23 6.27 8.24 7.51
Average shareholders' equity
to average total assets 8.31 8.61 8.24 8.51 8.50 8.08
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Taxable equivalent adjustment was calculated utilizing a marginal federal
income tax rate of 35 percent for 1993-1997 and 34 percent for 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (15)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Star Banc Corporation ("the Corporation") reported record earnings for
1997 with an increase of 23.0 percent to $194,754,000, compared to $158,359,000
in 1996 and $136,603,000 in 1995. Basic earnings per share increased 26.3
percent to $2.26 in 1997, compared to $1.79 in 1996 and $1.52 in 1995. Diluted
earnings per share for 1997 was $2.19, compared to $1.75 in 1996 and $1.50 in
1995. Table 1 provides a summary of significant items affecting the change in
basic earnings per share for 1995 through 1997.
FIVE YEAR BAR CHART OF FULLY DILUTED EARNINGS PER SHARE
(in dollars)
1993 1994 1995 1996 1997
$1.10 $1.28 $1.50 $1.79* $2.19
*excluding SAIF assessment
On December 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per share." SFAS No.
128 replaces the presentation of primary and fully diluted earnings per share
with basic and diluted earnings per share. All earnings per share information
presented for prior periods has been restated in accordance with SFAS No. 128.
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 diluted earnings per share by $0.04.
Excluding this assessment, net income for 1997 increased 20.5 percent from
$161,609,000 for 1996. On the same basis, diluted earnings per share increased
22.3 percent from $1.79 in 1996.
Earnings results for 1997 reflected a 13.4 percent increase in tax
equivalized net revenues (excluding gains/(losses) on sales of securities) in
addition to continued reduction in the Corporation's efficiency ratio. The
Corporation's return on average assets and return on average equity reached
record levels increasing to 1.88 percent and 22.62 percent, respectively, in
1997. This compares to a return on average assets of 1.63 percent in 1996 and
1.45 percent in 1995 and a return on average shareholders' equity of 18.95
percent in 1996 and 17.57 percent in 1995.
Tax equivalized net interest income increased $44 million or 10.4 percent
in 1997. This increase was the result of a 16 basis point increase in net
interest margin and a 6.8 percent or $597 million increase in average earning
assets. Also contributing to the increase in net interest income was an
improved mix of earning assets from securities into higher yielding loans.
Excluding gains/(losses) on sales of securities and the 1996 SAIF special
assessment, noninterest income increased $36 million or 20.7 percent in 1997,
while noninterest expenses were up $19 million or 6.1 percent over 1996. This
continues the trend of the Corporation increasing net revenues more than twice
as much as noninterest expense. Noninterest expenses were up due in part to the
opening of new retail facilities and branch acquisitions in 1997 and 1996. In
addition, equipment expenses increased as a result of additional investments in
retail and data processing equipment. The provision for loan losses increased
$13 million or 31.5 percent in 1997 as a result of loan growth and increases in
net charge-offs. Net charge-offs increased to 0.50 percent of average loans in
1997, up 10 basis points from 1996.
Total assets at December 31, 1997, were $10.96 billion, up 8.6 percent
from $10.09 billion a year earlier. Total loans, net of unearned interest, were
$8.44 billion at the end of 1997, compared to $7.59 billion at the end of 1996.
Loan growth was led by a 14.7 percent increase in retail loans in 1997.
Deposits totaled $8.20 billion at December 31, 1997, up 4.1 percent compared to
$7.88 billion at December 31, 1996. The increase in deposits was due to an
increase in core deposit levels, primarily demand deposits and money market
deposit accounts.
In 1995, the Corporation established Star Banc Finance, Inc., a consumer
finance subsidiary. Star Banc Finance provides nontraditional consumer credit
products to a wider sphere of customers within our current markets and allows
the Corporation to compete more effectively with other non-bank credit
providers. As of December 31, 1997, Star Banc Finance had reached $232 million
in loans outstanding, a $98 million increase over the previous year, and has
exceeded its earnings goals since inception.
Mergers and Acquisitions
On February 7, 1998, the Corporation completed its acquisition of Great
Financial Corporation for 70 percent stock and 30 percent cash. The 70 percent
of Great Financial Corporation's shares were exchanged for common shares of
Star Banc Corporation, at an exchange ratio of 0.949 Star Banc shares for each
share of Great Financial Corporation. The remaining 30 percent of Great
Financial shares were exchanged for $44.00 in cash for each share. The
Corporation issued 9.5 million shares and the total value of the acquisition
was $648 million. This transaction is a tax-free exchange for shareholders
receiving stock and will be accounted for as a purchase transaction.
The Great Financial acquisition will add approximately $3.0 billion in assets
and $1.9 billion in deposits, in addition to 43 branch offices in Kentucky and
two in Indiana.
On June 14, 1996, the Corporation merged its Kentucky and Indiana banks
into Star Bank, N.A. ("the Bank"). This allowed customers to make deposits and
complete transactions at over 260 branch offices in Ohio, Kentucky, or Indiana.
The Corporation has continued to make acquisitions in order to enhance its
branch network. In 1997 and 1996, the Bank completed purchases of seven
branches in southwestern Ohio from AmeriFirst Bank and four branch offices in
Connersville, Indiana from National City Bank. These acquisitions added a total
of $163 million in deposits.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (16)
<PAGE>
TABLE 1 -- Analysis of Basic Earnings Per Share --
Dollar Change B/(W)
--------------------
1997 vs. 1996 vs.
1997 1996 1995(a) 1996 1995
- - -----------------------------------------------------------------------------
Interest income $ 9.34 $ 8.31 $ 7.89 $ 1.03 $ 0.42
Interest expense (3.98) (3.59) (3.69) (0.39) 0.10
- - -----------------------------------------------------------------------------
Net interest income 5.36 4.72 4.20 0.64 0.52
Provision for loan losses (0.62) (0.46) (0.28) (0.16) (0.18)
Noninterest income 2.37 1.93 1.54 0.44 0.39
Noninterest expense (3.73) (3.48) (3.18) (0.25) (0.30)
Income taxes (1.12) (0.92) (0.76) (0.20) (0.16)
- - -----------------------------------------------------------------------------
Basic earnings per share $ 2.26 $ 1.79 $ 1.52 $ 0.47 $ 0.27
- - -----------------------------------------------------------------------------
(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 and
selected average balances for each line of business in the year 1997. 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 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 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.
The Treasury/Other group includes the aggregate of interest rate risk from
all lines, in addition to the investment securities portfolio and residential
mortgage portfolio of the Corporation. Equity of the Corporation has not been
allocated to the various lines of business and is included in the
Treasury/Other corporate group for Table 2.
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 consumer
finance subsidiary.
Consumer Banking provided 43.5 percent of the line of business earnings in
1997, compared to 44.5 percent 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 20.1 percent in
1997, led by retail leasing which was up 56.3 percent. Home equity and credit
card loans were up 27.4 percent and 15.7 percent, respectively.
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 36.5 percent of the line of business earnings in
1997 compared to 39.3 percent in 1996.
Average loans of the Wholesale Banking group grew 6.3 percent in 1997, led
by a 17.2 percent increase in asset-based lending. Also showing strong growth
in 1997 were commercial leasing and real estate construction lending with
increases of 15.5 percent and 18.5 percent, respectively.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (17)
<PAGE>
TABLE 2 -- Line of Business Results --
For the year ended December 31, 1997 (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* $ 247,924 $ 111,637 $ 20,100 $ 85,638 $ 465,299
Noninterest income 123,411 23,118 58,535 (488) 204,576
- - -------------------------------------------------------------------------------------------------
Net revenue 371,335 134,755 78,635 85,150 669,875
Noninterest expense 216,243 35,457 27,317 42,746 321,763
Provision for loan losses 44,790 6,926 594 1,304 53,614
Income taxes 38,606 32,330 17,753 11,055 99,744
Net income 71,696 60,042 32,971 30,045 194,754
- - -------------------------------------------------------------------------------------------------
Average Balances:
Total loans $3,508,197 $3,176,007 $283,318 $1,044,846 $ 8,012,368
Total assets 4,128,952 3,445,192 342,296 2,440,833 10,357,273
Total deposits 6,911,276 581,776 347,867 48,408 7,889,327
- - -------------------------------------------------------------------------------------------------
*Fully taxable equivalent
</TABLE>
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 1997, cash management revenues
increased 16.0 percent, while international trade revenues, which includes
letters of credit, bankers acceptances, foreign exchange and foreign currency
trading, were up 3.7 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 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 for the Corporation grew 20.8 percent in 1997. This growth
was a result of record asset growth, new product introductions and continued
improvement in investment markets. For the Trust/Private Banking group, loans
increased 28.5 percent and deposits were up 23.7
percent in 1997. Trust and Private Banking provided 20.0 percent of the line of
business earnings in 1997, up from 16.2 percent in 1996.
Total trust assets under administration at December 31, 1997, were $48.4
billion, an increase of 60.0 percent compared to the prior year. In addition,
managed assets increased 30.0 percent to $9.6 billion. Assets in The Star Funds
family of mutual funds increased 28.4 percent in 1997, ending the year at $2.5
billion.
Treasury/Other
The operating results of the Corporation's investment securities portfolio
and residential mortgage portfolio are shown in this group. In addition, 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, liabilities and equity, 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (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 $44 million or 10.4 percent
in 1997, following a 10.5 percent increase in 1996. The increase in 1997 was
the result of a 16 basis point improvement in net interest margin, as discussed
below, as well as a $597 million or 6.8 percent increase in average earning
assets. The increase in 1996 was primarily the result of a 34 basis point
improvement in net interest margin. In addition, average earning assets were up
$229 million or 2.7 percent.
FIVE YEAR BAR CHART OF NET INTEREST INCOME
(in millions of dollars)
1993 1994 1995 1996 1997
$327 $349 $382 $421 $465
The net interest margin was 4.94 percent in 1997, 4.78 percent in 1996 and
4.44 percent in 1995. The improvement in 1997 was due to continued improvement
in the mix of earning assets as loan growth was partially funded by sales and
maturities of investment securities. In addition, retail loan and investment
security yields were up in 1997. Sales of securities in 1997 were used to fund
loan growth or were reinvested in higher yielding securities.
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.
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 $240 million at December 31, 1997, down
from $367 million at December 31, 1996. Interest rate swaps reduced net
interest income $0.7 million and net interest margin one basis point in 1997.
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. Interest rate swaps lowered net
interest income $3 million and net interest margin three basis points, in 1996,
and $6 million and seven basis points in 1995.
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 1995 through 1997. 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.
FIVE YEAR BAR CHART OF NET INTEREST MARGIN
(in percents)
1993 1994 1995 1996 1997
4.67% 4.55% 4.44% 4.78% 4.94%
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (19)
<PAGE>
TABLE 3 -- Average Balance Sheets and Average Rates --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------
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 $ 2,509,602 $217,404 8.66% $2,316,087 $201,373 8.69% $2,156,869 $198,087 9.18%
Real estate loans 2,678,529 230,850 8.62 2,587,489 219,611 8.49 2,540,854 213,014 8.38
Retail loans 2,824,237 262,632 9.30 2,351,537 216,453 9.20 1,972,083 178,047 9.03
- - ----------------------------------------------------------------------------------------------------------------------------
Total loans 8,012,368 710,886 8.87 7,255,113 637,437 8.79 6,669,806 589,148 8.83
Taxable investment
securities 1,260,764 87,199 6.92 1,479,146 95,080 6.43 1,879,480 121,724 6.48
Non-taxable invest-
ment securities 60,599 5,261 8.68 52,203 4,608 8.83 22,242 1,839 8.27
Money market
investments 81,087 4,606 5.68 31,097 1,700 5.47 17,059 1,049 6.15
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 9,414,818 807,952 8.58 8,817,559 738,825 8.38 8,588,587 713,760 8.31
Cash and due
from banks 450,188 445,025 425,201
Allowance for
loan losses (126,821) (114,179) (103,970)
Other assets 619,088 557,215 529,808
- - ----------------------------------------------------------------------------------------------------------------------------
Total assets $10,357,273 $9,705,620 $9,439,626
- - ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Savings and
NOW deposits $ 1,070,129 $ 27,384 2.56% $1,533,759 $ 35,623 2.32% $1,969,280 $ 44,055 2.24%
Money market
deposit accounts 2,051,990 63,204 3.08 1,415,448 44,822 3.17 772,020 28,577 3.70
Time deposits $100,000
and over 403,586 21,601 5.35 428,249 23,217 5.42 480,055 28,097 5.85
Time deposits under
$100,000 2,876,430 156,166 5.43 2,921,208 159,013 5.44 2,933,979 165,243 5.63
Short-term borrowings 1,016,900 49,247 4.84 898,025 42,999 4.79 1,014,552 55,227 5.44
Long-term debt 380,659 25,051 6.58 162,840 11,652 7.16 163,788 10,997 6.71
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 7,799,694 342,653 4.39 7,359,529 317,326 4.31 7,333,674 332,196 4.53
Noninterest-bearing
deposits 1,487,192 1,345,296 1,188,364
Other liabilities 209,358 165,229 139,914
Shareholders' equity 861,029 835,566 777,674
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $10,357,273 $9,705,620 $9,439,626
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.94% 4.78% 4.44%
Interest rate spread 4.19 4.07 3.78
- - ----------------------------------------------------------------------------------------------------------------------------
</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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (20)
<PAGE>
TABLE 4 -- Volume/Rate Variance Analysis --
<TABLE>
<CAPTION>
(dollars in thousands) Change from 1996 to 1997 Change from 1995 to 1996
- - ----------------------------------------------------------------------------------------------------
Increase (decrease) in: Volume Rate Total Volume Rate Total
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Commercial loans $ 17,285 $ (1,254) $ 16,031 $ 15,550 $(12,264) $ 3,286
Real estate loans 8,325 2,913 11,238 5,672 925 6,597
Retail loans 39,138 7,041 46,179 35,295 3,111 38,406
- - ----------------------------------------------------------------------------------------------------
Total loans 64,748 8,700 73,448 56,517 (8,228) 48,289
Investment securities (13,670) 6,443 (7,227) (23,451) (424) (23,875)
Money market instruments 2,740 168 2,908 864 (213) 651
- - ----------------------------------------------------------------------------------------------------
Total 53,818 15,311 69,129 33,930 (8,865) 25,065
- - ----------------------------------------------------------------------------------------------------
Interest expense:
Savings and NOW deposits (1,939) (518) (2,457) (9,743) 1,311 (8,432)
Money market deposit accounts 9,665 2,936 12,601 23,817 (7,572) 16,245
Time deposits $100,000 and over (1,343) (274) (1,617) (3,032) (1,848) (4,880)
Time deposits under $100,000 (2,447) (400) (2,847) (720) (5,510) (6,230)
Short-term borrowings 5,672 576 6,248 (7,268) (4,960) (12,228)
Long-term debt 14,669 (1,268) 13,401 (64) 719 655
- - ----------------------------------------------------------------------------------------------------
Total 24,277 1,052 25,329 2,990 (17,860) (14,870)
- - ----------------------------------------------------------------------------------------------------
Net variance $ 29,541 $ 14,259 $ 43,800 $30,940 $ 8,995 $ 39,935
- - ----------------------------------------------------------------------------------------------------
</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 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, 1997, 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. At December 31,
1997, the Corporation was well within policy guidelines.
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, 1997. Table 5
shows the Corporation in a slightly asset sensitive position through the
one-year repricing period in the amount of $191 million or 1.7 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (21)
<PAGE>
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 15 percent change in equity as compared to the
base case. As of December 31, 1997, 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
1997, the Corporation terminated two of its interest rate swap contracts in
order to reduce its liability rate sensitive position. The gain on the
termination of these swaps was deferred. The two interest rate swaps which were
terminated in 1997, were treated as hedges of the subordinated debt issuance at
the Bank, and had been added in 1996. Additionally, one swap which hedged rate
changes on residential mortgages matured in 1997, and 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 19 and 26 of the Notes to Consolidated
Financial Statements.
TABLE 5 -- Interest Rate Sensitivity (Gap Analysis) --
As of December 31, 1997 (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 $8,444 $3,552 $ 323 $ 431 $ 763 $2,806 $ 569
Investment securities 1,162 108 117 168 210 397 162
Money market instruments 238 238 -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------
Total 9,844 3,898 440 599 973 3,203 731
- - ------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Savings, NOW and MMDA 3,242 506 969 105 210 1,452 --
Other interest-bearing deposits 3,238 403 500 920 604 787 24
Short-term borrowings 1,114 1,110 4 -- -- -- --
Long-term debt 502 148 -- -- -- 106 248
- - ------------------------------------------------------------------------------------------------------
Total 8,096 2,167 1,473 1,025 814 2,345 272
- - ------------------------------------------------------------------------------------------------------
Interest rate swap positions -- (100) -- (140) -- 240 --
- - ------------------------------------------------------------------------------------------------------
Total gap 1,748 1,631 (1,033) (566) 159 1,098 459
- - ------------------------------------------------------------------------------------------------------
Cumulative gap $ -- $1,631 $ 598 $ 32 $ 191 $1,289 $1,748
- - ------------------------------------------------------------------------------------------------------
</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.
Financial Instruments Market Risk
Table 6 provides information about the Corporation's market sensitive
financial instruments. The Corporation's major market risk exposure is changing
interest rates in the United States. 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 1997 were
immaterial. Interest rate swap agreements are the primary type of derivative
used by the Corporation.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (22)
<PAGE>
TABLE 6 -- Financial Instruments Market Risk --
<TABLE>
<CAPTION>
As of December 31, 1997 (dollars in millions)
Later Fair
1998 1999 2000 2001 2002 Years Total Value
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 816 $ -- $ -- $ -- $ -- $ -- $ 816 $ 816
Commercial loans 2,226 101 89 72 80 94 2,662 2,732
Rate 8.77% 8.26% 8.27% 8.34% 8.25% 7.78% 8.67%
Retail loans 1,507 585 418 302 161 36 3,009 3,086
Rate 10.69% 8.89% 8.70% 8.31% 8.65% 9.45% 9.70%
Real estate loans 1,336 373 267 169 189 439 2,773 2,817
Rate 8.48% 8.44% 8.57% 8.46% 8.37% 8.33% 8.45%
- - --------------------------------------------------------------------------------------------------------
Total loans, net of unearned interest 5,069 1,059 774 543 430 569 8,444 8,635
Rate 9.36% 8.74% 8.70% 8.50% 8.63% 8.98% 9.11%
- - --------------------------------------------------------------------------------------------------------
Securities 603 173 111 64 49 162 1,162 1,163
Rate 6.87% 7.12% 7.04% 7.12% 7.12% 7.38% 7.02%
Noninterest-bearing deposits 702 254 254 254 254 -- 1,718 1,718
Rate -- -- -- -- -- -- --
Interest-bearing deposits 4,217 993 544 478 224 24 6,480 6,476
Rate 4.50% 4.21% 2.93% 2.53% 2.42% 6.53% 4.11%
Short-term borrowings 1,114 -- -- -- -- -- 1,114 1,114
Rate 4.96% -- -- -- -- -- 4.96%
Long-term debt 148 40 51 -- 15 248 502 520
Rate 6.72% 6.38% 6.65% -- 6.15% 6.47% 6.55%
Interest rate swaps (1) (1) (2) -- -- -- (4) (4)
- - --------------------------------------------------------------------------------------------------------
</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.
In addition to the items included in the above table, the Corporation also
enters into forward commitments related to residential real estate loans which
have interest rate risk. At December 31, 1997 the Corporation was committed to
deliver $105 million in residential real estate loans during 1998 with an
average weighted rate of 6.8 percent. The Corporation has no forward
commitments that extend beyond one year.
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 of a 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. At December 31, 1997 the
Corporation had foreign exchange contracts of $66 million outstanding. Of these
contracts, $58 million are to be completed during 1998, $2 million during 1999,
$2 million during 2000 and $4 million during 2001. The Corporation has no
foreign exchange contracts that extend beyond five years. Additional
disclosures related to derivatives are shown in Note 19 of the Notes to
Consolidated Financial Statements.
Noninterest Income
Noninterest income is a growing source of revenue for the Corporation,
representing 30.5 percent of tax equivalized net revenue in 1997, up from 28.8
percent in 1996. Noninterest income increased 20.0 percent to $205 million in
1997, compared to $171 million in 1996 and $138 million in 1995. Significant
growth occurred in several areas, with trust income, credit card income, ATM
income, and mortgage banking income all increasing over 20 percent in 1997.
Included in 1997 and 1996 were net losses on sales of investment
securities of $4.2 million and $2.5 million, respectively. The funds from these
sales were used to fund loan growth or 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 20.7 percent in 1997. 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.
Trust income increased 20.8 percent to $57 million in 1997, following a
13.0 percent increase in 1996. In both 1996 and 1997, 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
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (23)
<PAGE>
Funds family of proprietary mutual funds, a 98 percent increase in custodial
assets and higher market values.
At year-end 1997, total trust assets (both discretionary and
non-discretionary) were $48.4 billion, up from $30.2 billion at the end of 1996
and $21.6 billion at the end of 1995. In both 1997 and 1996, the Corporation
had significant increases in asset levels as a result of new business in each
of its trust areas.
Retail deposit fees and cash management income increased a combined $5
million or 9.4 percent following a 27.6 percent increase in 1996. The growth in
1997 was led by continued increases in income from cash management services and
recent branch acquisitions. The increase in 1996 was a result of increases in
cash management services, core deposit levels and transaction volumes, in
addition to the Household branch acquisition.
Credit card income continued to show strong growth in 1997, increasing $5
million or 27.3 percent, following a 26.9 percent increase in 1996. The strong
growth over the last two years is attributable in part to increases in the
credit card customer base of 5.9 percent in 1997 and 12.0 percent in 1996. In
addition, interchange income was up 48.5 percent and merchant activity
continued to increase, in 1997.
ATM income has had substantial growth in the last two years increasing $5
million or 50.3 percent in 1997, following a 33.7 percent increase in 1996. The
Corporation continues to add new automated teller machines as a result of
acquisitions and new installations, with bank-owned ATMs increasing to 545 at
December 31, 1997.
Mortgage banking income increased $5 million or 69.8 percent to $13
million in 1997, following a 219.9 percent increase in 1996. The increase in
1997 was due to higher levels of gains on sale of loans on the secondary
market, in addition to a $1.6 million gain on the one-time sale of $3.6 million
in mortgage servicing rights. Servicing income declined in 1997 as a result of
the sale of servicing rights originated in 1996 and the Corporation's decision
to sell 1997 mortgage originations on the secondary market with servicing
released. The 1996 increase in mortgage banking income was due to over $2
million in capitalized originated mortgage servicing rights, in addition to a
23.1 percent increase in servicing income. In addition, 1995 included a $1.2
million loss from the sale of $119 million in portfolio loans previously
discussed. The Corporation sold $335 million of residential mortgage loans into
the secondary market in 1997, compared to $311 million in 1996 and $230 million
in 1995 (excluding the $119 million sale).
All other income increased 15.6 percent to $38 million in 1997, following
a 28.8 percent increase in 1996. Included in 1997 was higher income as a result
of an additional investment in corporate owned life insurance programs. Higher
commissions from mutual fund and annuity sales also contributed to the increase
in 1997. The increase in 1996 was led by 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. In addition, international income, commissions on
mutual fund and annuity sales, and insurance commissions showed strong growth.
Table 7 provides a summary of changes in noninterest income for the last
three years.
TABLE 7 -- Noninterest Income --
<TABLE>
<CAPTION>
For the years ended December 31 (dollars in thousands)
% Increase/ % Increase/
(decrease) (decrease)
1997 1996 1995 1997/1996 1996/1995
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust income $ 56,661 $ 46,917 $ 41,512 20.8% 13.0%
Retail deposit fees 42,413 39,738 30,817 6.7 28.9
Cash management income 18,839 16,245 13,053 16.0 24.5
Credit card income 24,427 19,183 15,118 27.3 26.9
ATM income 15,377 10,231 7,652 50.3 33.7
Mortgage banking 12,832 7,556 2,362 69.8 219.9
Other income:
International fees 6,169 5,948 4,935 3.7 20.5
Corporate owned life insurance 5,786 3,079 2,774 87.9 11.0
Insurance commissions 3,525 3,888 3,298 (9.3) 17.9
Mutual fund and annuity sales 3,370 2,620 1,463 28.6 79.1
All other income 19,416 17,568 13,230 10.5 32.8
Investment securities gains/(losses)--net (4,239) (2,451) 1,910 n/m n/m
- - ---------------------------------------------------------------------------------------------------
Total noninterest income $204,576 $170,522 $138,124 20.0% 23.5%
- - ---------------------------------------------------------------------------------------------------
</TABLE>
n/m - not meaningful
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (24)
<PAGE>
Noninterest Expense
Total noninterest expense increased 4.4 percent to $322 million in 1997,
compared to $308 million in 1996 and $286 million in 1995. The Corporation's
efficiency ratio showed significant improvement, decreasing 403 basis points to
48.0 percent in 1997, compared to 52.1 percent in 1996 and 55.1 percent in
1995. The increase in noninterest expense in 1997 was due in part to new retail
facilities and branch acquisitions, in addition to increases in equipment,
marketing, credit card processing and automation costs. The improvement in the
efficiency ratio reflects management's continued commitment to control
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 diluted
earnings per share $0.04. Excluding this assessment, noninterest expenses were
up 6.1 percent, compared to 1996, and the Corporation's efficiency ratio
declined 319 basis points from 51.2 percent in 1996.
Salary expense increased only 4.6 percent in 1997, following a 7.5 percent
increase in 1996. Pension and other employee benefits were up only 1.4 percent
in 1997, following a 1.8 percent decline in 1996. Salaries increased in 1997
due to higher staff levels in retail banking, related to new facilities, and
expansion in the Finance Company. Pension and benefits expense was up slightly
as higher staff levels increased healthcare and payroll tax costs.
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. Full-time equivalent staff increased 111 FTE to 4,099 at December
31, 1997, compared to 3,988 at December 31, 1996 and 3,850 at December 31,
1995.
Equipment expense increased 14.8 percent in 1997, following a 6.4 percent
increase in 1996. Equipment expense was up in 1997 due to higher depreciation,
in addition to higher maintenance and repair costs. Increases in depreciation
expense in 1997 and 1996 were a result of acquisitions and openings of new
branch offices, in addition to purchases of personal computers and other
automation equipment.
Occupancy expense increased 6.8 percent to $24 million in 1997, following
a slight decline in 1996. The increase in 1997 was due to higher lease/rental
expenses, primarily related to branch acquisitions and new facilities. In 1996,
increased occupancy expenses related to recent branch acquisitions were offset
by lower levels of write-offs related to unoccupied space obligations.
Intangible amortization and state taxes were relatively flat in 1997,
while outside processing and credit card expenses were up in 1996 and 1997
primarily due to higher transaction volumes. Credit card expenses were up each
of the last two years due to increases in the cardholder base, higher
transaction volumes and the travel award program. State taxes declined slightly
in 1997 as a result of lower taxes in Kentucky related to the merger of Star
Bank, N.A., Kentucky into Star Bank, N.A.
Marketing expense was back up in 1997, with an increase of 26.2 percent,
following a decline in 1996. The increase in 1997 is related to new marketing
programs and corporate sponsorships in several markets in order to create
higher visibility and brand awareness of Star Bank. Marketing expense declined
in 1996 following the additional expenses incurred in 1995 for the introduction
of the Corporation's 24-hour remote banking retail delivery system.
Table 8 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 15 of the Notes to Consolidated Financial Statements.
FIVE YEAR BAR CHART OF EFFICIENCY RATIO
(in percents)
1993 1994 1995 1996 1997
57.06% 55.84% 55.07% 51.22%* 48.03%
*Excludes SAIF assessment
Income Taxes
The Corporation's effective tax rate was 33.2 percent in 1997, compared to
33.9 percent in 1996 and 33.4 percent in 1995.
The decline in the effective rate for 1997 was due to tax benefits
received from an additional investment in bank-owned life insurance programs,
in addition to benefits recorded on limited partnership investments.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (25)
<PAGE>
TABLE 8 -- Noninterest Expense --
For the years ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
% Increase/ % Increase/
(decrease) (decrease)
1997 1996 1995 1997/1996 1996/1995
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries $126,896 $121,366 $112,923 4.6% 7.5%
Pension and other
employee benefits 20,176 19,905 20,273 1.4 (1.8)
Occupancy expense--net 23,523 22,019 22,059 6.8 (0.2)
Equipment expense 19,892 17,329 16,284 14.8 6.4
Amortization of goodwill
and other intangible assets 17,379 17,282 14,037 0.6 23.1
Outside processing services 12,495 11,537 10,655 8.3 8.3
State taxes 10,671 10,999 8,597 (3.0) 27.9
Marketing expense 10,620 8,418 10,257 26.2 (17.9)
FDIC insurance 1,732 2,172 9,783 (20.3) (77.8)
All other noninterest
expense 78,379 72,184 61,346 8.6 17.7
- - ----------------------------------------------------------------------------------------
321,763 303,211 286,214 6.1 5.9
SAIF special assessment -- 5,000 -- -- --
- - ----------------------------------------------------------------------------------------
Total noninterest expense $321,763 $308,211 $286,214 4.4% 7.7%
- - ----------------------------------------------------------------------------------------
</TABLE>
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the year. Any of the Corporation's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than 2000. This could result in a system failure
or miscalculations causing disruptions in operations, including: a temporary
inability to process transactions, send invoices or statements, or engage in
similar normal business activities.
The Corporation created a task force in 1996 to study the issue. With
modifications to its existing software and limited conversions to new software,
the risks associated with the Year 2000 issue can be controlled.
The Corporation will use internal and external staff resources to
reprogram, replace and test all applications software for Year 2000
modifications. The Corporation plans to complete the majority of this process
by the end of 1998, with full implementation in 1999. The costs of the project
are primarily staff related and are being expensed as incurred. There are no
significant costs related to new systems, and the expected costs to be incurred
over the next two years are not expected to have a material effect on the
results of operation of the Corporation. The Corporation and its primary
subsidiary are working well within the Year 2000 guidelines issued by the
Office of the Comptroller of the Currency for national banks. The board of
directors receives quarterly updates on this issue.
The expected costs to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the availability of certain resources, third party
modification plans and other factors.
BALANCE SHEET
Loans
Loans, net of unearned interest, increased $857 million to $8.44 billion
at December 31, 1997, compared to $7.59 billion at December 31, 1996. The
Corporation experienced strong growth in the retail loan area with retail
leasing up $233 million or 33.4 percent and installment loans up 8.8 percent in
1997. Commercial loans also experienced strong growth in 1997 with an overall
increase of 12.6 percent, led by asset-based lending and commercial leasing
which were up 22.1 percent and 28.3 percent, respectively. Commercial real
estate and construction loans were up a combined $161 million or 11.6 percent
in 1997 with strong growth in construction lending.
Table 9 provides a summary of loans by type at year-end for each of the
past five years. Table 10 provides maturity distribution data for selected
types of loans.
Residential mortgage loans increased $13 million or 1.1 percent in 1997,
following a 3.2 percent decline in 1996. The only growth in residential
mortgages was in Star Banc Finance, Inc., which had an increase of $57 million
in 1997, while residential mortgages at the Bank declined $44 million. The
declines in the Bank's portfolio 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 continued to sell a large
percentage of its residential mortgage originations on the secondary market in
1997. In 1997, the Corporation also began selling all loans service released.
In 1997 the Corporation sold $331 million of residential mortgage loans into
the secondary market, compared to $311 million in 1996. As of December 31,
1997, the Corporation serviced $1.3 billion in mortgage loans for outside
investors, compared to $1.7 billion at December 31, 1996.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (26)
<PAGE>
TABLE 9 -- Loans by Type --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands)
1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $2,325,230 $2,101,187 $1,952,178 $1,847,848 $1,636,654
Commercial leasing 336,382 262,187 240,699 196,506 131,713
Real estate construction and development 372,355 260,582 250,467 227,879 180,470
Commercial real estate mortgage 1,184,315 1,134,707 1,082,001 981,954 909,084
Residential real estate mortgage 1,216,543 1,203,790 1,243,718 1,168,828 997,748
Credit card 439,371 420,427 338,138 228,673 172,534
Retail leasing 930,504 697,480 418,218 287,857 144,121
Other retail 1,639,566 1,506,818 1,400,362 1,310,012 1,122,083
- - -----------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned interest $8,444,266 $7,587,178 $6,925,781 $6,249,557 $5,294,407
- - -----------------------------------------------------------------------------------------------------------------
Percent of total loans by type
- - -----------------------------------------------------------------------------------------------------------------
Commercial 27.6% 27.7% 28.2% 29.6% 30.9%
Commericial leasing 4.0 3.4 3.5 3.1 2.5
Real estate construction and development 4.4 3.4 3.6 3.6 3.4
Commercial real estate mortgage 14.0 15.0 15.6 15.7 17.2
Residential real estate mortgage 14.4 15.9 18.0 18.7 18.8
Credit card 5.2 5.5 4.9 3.7 3.3
Retail leasing 11.0 9.2 6.0 4.6 2.7
Other retail 19.4 19.9 20.2 21.0 21.2
- - -----------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned interest 100.0% 100.0% 100.0% 100.0% 100.0%
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 10 -- Selected Loan Maturity Distribution --
As of December 31, 1997 (dollars in thousands)
Over One Over
One Year Through Five Five
or Less Years Years Total
- - --------------------------------------------------------------------------
Commercial $1,560,702 $623,215 $141,313 $2,325,230
Real estate construction
and development 141,471 177,236 53,648 372,355
- - --------------------------------------------------------------------------
Total $1,702,173 $800,451 $194,961 $2,697,585
- - --------------------------------------------------------------------------
Total of these selected loans due after one year with:
Predetermined interest rate $ 218,966
Floating interest rate 776,446
- - --------------------------------------------------------------------------
Asset Quality
As of December 31, 1997, the allowance for loan losses was $132 million or
1.56 percent of total loans, net of unearned interest. This compares to $119
million or 1.56 percent of total loans, net of unearned interest, as of
December 31, 1996. The provision for loan losses totaled $54 million in 1997,
$41 million in 1996 and $25 million in 1995. Table 11 provides a summary of
activity in the allowance for loan loss account by type of loan.
As shown in Table 11, net charge-offs increased in 1997 to 0.50 percent of
average outstanding loans, compared to 0.40 percent in 1996 and 0.21 percent in
1995. Although net charge-offs as a percent of average outstanding loans
increased in 1997, they remained below historical levels for the Corporation.
In addition, net charge-off levels began trending back down in the second half
of 1997.
The increase in net charge-off levels in 1997 was due to a higher level of
consumer charge-offs, in addition to a higher mix of consumer loans compared to
total loans. Net charge-offs in the retail area increased $13 million in 1997,
resulting in an increase of 33 basis points as a percentage of average loans.
This increase was led by credit cards as net charge-offs as a percent of
average loans increased 169 basis points to 5.36 percent. The increase in
credit card net charge-offs was consistent with national trends in 1997.
Partially offsetting the increase in retail charge-offs was a decline in
commercial charge-off levels, as commercial charge-offs as a percentage of
average loans declined 11 basis points to 0.31 percent.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (27)
<PAGE>
TABLE 11 -- Summary of Loan Loss Experience --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans--net of unearned interest $8,012,368 $7,255,113 $6,669,806 $5,721,667 $5,146,341
- - -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance--beginning of year $ 118,689 $ 106,909 $ 95,979 $ 83,156 $ 78,953
Charge-offs:
Commercial (13,142) (15,885) (11,280) (10,785) (20,752)
Real estate (1,468) (996) (2,157) (1,281) (2,516)
Retail (41,221) (26,772) (14,811) (12,504) (16,854)
- - -------------------------------------------------------------------------------------------------------------------
Total charge-offs (55,831) (43,653) (28,248) (24,570) (40,122)
- - -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 5,420 6,215 5,773 4,255 3,372
Real estate 836 595 1,087 1,507 633
Retail 9,327 7,850 7,217 7,259 7,312
- - -------------------------------------------------------------------------------------------------------------------
Total recoveries 15,583 14,660 14,077 13,021 11,317
- - -------------------------------------------------------------------------------------------------------------------
Net charge-offs (40,248) (28,993) (14,171) (11,549) (28,805)
Provision charged to earnings 53,614 40,773 25,101 24,372 33,008
- - -------------------------------------------------------------------------------------------------------------------
Balance--end of year $ 132,055 $ 118,689 $ 106,909 $ 95,979 $ 83,156
- - -------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans 0.50% 0.40% 0.21% 0.20% 0.56%
- - -------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan
losses to end of year loans, net
of unearned interest 1.56 1.56 1.54 1.54 1.57
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
Despite the increase in the retail area in 1997, net charge-offs of the
Corporation remain below national averages. This reflects the Corporation's
continued commitment to maintaining strict credit standards and addressing
problem credits at an early stage. Tables 12 and 13 provide information related
to nonperforming assets and loans 90 days or more past due.
FIVE YEAR BAR CHART OF NET CHARGE-OFFS TO AVERAGE LOANS
(in percents)
1993 1994 1995 1996 1997
0.56% 0.20% 0.21% 0.40% 0.50%
Although the Corporation has experienced increases in charge-off levels in
1997 and 1996, nonperforming loans and nonperforming assets declined to
historically low levels. Nonaccrual loans declined $14 million or 36.6 percent
at December 31, 1997 to $25 million following a 6.8 percent increase in 1996.
Nonperforming loans as a percentage of total loans decreased for the fourth
consecutive year to an historically low level of 0.30 percent at December 31,
1997. This compares to 0.52 percent at December 31, 1996 and 0.53 percent at
December 31, 1995. Nonperforming assets as a percentage of total loans and
other real estate owned was also at historically low levels in 1997, declining
to 0.33 percent at December 31, 1997, compared to 0.55 percent a year earlier.
This was the seventh straight year of decline in this ratio. The decrease in
nonperforming loans for 1997 was led by a $16 million decline in the
commercial loan and commercial leasing areas. Despite the increase in
charge-off levels in 1997, nonaccrual retail loans declined slightly in 1997.
Due to the uncertainty of economic conditions, it is difficult to project
future levels of nonperforming loans.
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 control in partial or total satisfaction of loans, in
addition to closed banking offices. Other real estate owned was $3 million at
December 31, 1997, a $1 million increase from $2 million at December 31, 1996.
This slight increase was due to the addition of several closed offices. Other
real estate owned has remained relatively flat in the $2 to $3 million range
since 1994.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (28)
<PAGE>
Loans past due 90 days or more increased to $15 million at December 31,
1997, compared to $12 million at December 31, 1996. The increase in 1997 was
primarily in the consumer loan area, which is consistent with the increase in
net charge-offs previously discussed. There were slight declines in the real
estate and commercial areas in 1997. 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, 1997, 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.
FIVE YEAR BAR CHART OF ALLOWANCE AS A % OF NONPERFORMING LOANS
(coverage ratio)
1993 1994 1995 1996 1997
163 272 289 301 529
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 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. As required by SFAS No. 114, impaired
loans (as defined by the statement) are measured based on (1) the present value
of the expected future cash flows discounted at the loan's effective interest
rate, or (2) 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 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,
including: the quality of the current loan portfolio, current economic
conditions, concentrations in loan types, geographic areas and industries,
evaluation of significant problem loans, an analysis of periodic loan reviews,
historical charge-off and recovery experience and other pertinent information.
These factors are taken in conjunction with a quantitative analysis of the
wholesale and retail portfolios to determine probable losses. It is these
probable losses for which reserves are specifically allocated. These estimates
TABLE 12 -- Nonperforming Assets --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $24,952 $39,375 $36,875 $34,990 $50,687
Loans which have been renegotiated 11 80 87 261 249
- - -------------------------------------------------------------------------------------------
Total nonperforming loans 24,963 39,455 36,962 35,251 50,936
Other real estate owned 2,734 1,923 3,006 2,793 3,984
- - -------------------------------------------------------------------------------------------
Total nonperforming assets $27,697 $41,378 $39,968 $38,044 $54,920
- - -------------------------------------------------------------------------------------------
Percentage of nonperforming loans
to loans, net of unearned interest 0.30% 0.52% 0.53% 0.56% 0.96%
- - -------------------------------------------------------------------------------------------
Percentage of nonperforming assets
to loans, net of unearned interest
and other real estate owned 0.33 0.55 0.58 0.61 1.04
- - -------------------------------------------------------------------------------------------
Percentage of allowance for loan
losses to nonperforming loans 529 301 289 272 163
- - -------------------------------------------------------------------------------------------
Loans past due 90 days or more $14,575 $11,909 $ 7,750 $ 8,264 $15,200
- - -------------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (29)
<PAGE>
are reviewed continually and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known. For 1998,
management expects net charge-offs of approximately 0.50 to 0.60 percent of
average loans. The estimated net charge-offs for the various loan portfolios
are as follows: commercial loans and leasing $13 million, commercial real
estate and construction $1 million, residential mortgages $1 million, credit
card loans $22 million, other retail loans $9 million and loans at the Finance
Company $6 million.
It is management's opinion that the allowance for loan losses at December
31, 1997 was adequate to absorb all estimated incurred 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, 1997 was $17
million, a decline of $14.5 million from December 31, 1996. The related
valuation allowance (as calculated under SFAS No. 114) on impaired loans at
December 31, 1997 was $1.1 million.
TABLE 13 -- Composition of Nonperforming Loans --
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------------------------------- ----------------------------------------------------
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 $11,586 $11 $11,597 0.50% $ 463 $23,379 $80 $23,459 1.28% $ 937
Commercial
leasing 805 -- 805 0.24 -- 4,998 -- 4,998 1.91 1
- - -------------------------------------------------------------------------------------------------------------------------------
Total
commercial
loans 12,391 11 12,402 0.47 463 28,377 80 28,457 1.20 938
- - -------------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Residential 5,416 -- 5,416 0.45 3,872 4,132 -- 4,132 0.34 3,421
Commercial
mortgage 3,587 -- 3,587 0.30 394 2,412 -- 2,412 0.21 1,142
Construction/
land
development -- -- -- -- 855 -- -- -- -- 1,018
- - -------------------------------------------------------------------------------------------------------------------------------
Total real
estate loans 9,003 -- 9,003 0.32 5,121 6,544 -- 6,544 0.25 5,581
- - -------------------------------------------------------------------------------------------------------------------------------
Retail loans:
Other retail 956 -- 956 0.06 2,023 1,928 -- 1,928 0.12 849
Credit cards 2,092 -- 2,092 0.48 6,593 2,272 -- 2,272 0.54 4,392
Retail leasing 510 -- 510 0.05 375 254 -- 254 0.03 149
- - -------------------------------------------------------------------------------------------------------------------------------
Total retail
loans 3,558 -- 3,558 0.12 8,991 4,454 -- 4,454 0.17 5,390
- - -------------------------------------------------------------------------------------------------------------------------------
Total loans $24,952 $11 $24,963 0.30% $14,575 $39,375 $80 $39,455 0.52% $11,909
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (30)
<PAGE>
TABLE 14 -- Investment Securities --
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------------------------ -----------------------------------------
Weighted Weighted
As of December 31, 1997 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 $ -- $ -- -- --% $ -- $ -- -- --%
One through five years 7,153 7,153 2.4 yrs. 6.85 -- -- -- --
Five through ten years 6,125 6,125 6.8 yrs. 6.71 -- -- -- --
Over ten years 1,650 1,650 14.2 yrs. 6.07 -- -- -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Total 14,928 14,928 5.5 yrs. 6.71 -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Within one year 227,336 227,336 0.5 yrs. 7.31 16,113 15,978 0.5 yrs. 7.67
One through five years 577,025 577,025 2.6 yrs. 7.26 41,218 40,874 2.8 yrs. 7.67
Five through ten years 77,338 77,338 7.3 yrs. 7.10 32,112 31,844 8.4 yrs. 7.67
Over ten years 32,661 32,661 15.5 yrs. 7.09 -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Total 914,360 914,360 2.9 yrs. 7.25 89,443 88,696 4.4 yrs. 7.67
- - ----------------------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions:
Within one year -- -- -- -- 20,223 20,594 0.5 yrs. 9.11
One through five years -- -- -- -- 6,172 6,285 2.6 yrs. 9.33
Five through ten years -- -- -- -- 13,703 13,954 8.5 yrs. 9.40
Over ten years -- -- -- -- 25,008 25,467 19.2 yrs. 9.11
- - ----------------------------------------------------------------------------------------------------------------------------
Total -- -- -- -- 65,106 66,300 9.5 yrs. 9.19%
- - ----------------------------------------------------------------------------------------------------------------------------
Other debt securities:
Within one year 93 93 0.5 yrs. 7.10 -- -- -- --
One through five years 422 422 3.2 yrs. 7.10 -- -- -- --
Five through ten years 507 507 8.1 yrs. 7.10 -- -- -- --
Over ten years 906 906 21.8 yrs. 7.10 -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Total 1,928 1,928 13.1 yrs. 7.10% -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock
and other equity securities 76,403 76,403 -- -- -- -- -- --
- - ----------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,007,619 $1,007,619 -- -- $154,549 $154,996 -- --
- - ----------------------------------------------------------------------------------------------------------------------------
</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.
Investment Securities
The Corporation's investment portfolio decreased $338 million to $1.16
billion at December 31, 1997, from $1.50 billion a year earlier. This decrease
was due to the sale of $190 million of available-for-sale securities, in
addition to scheduled maturities and paydowns of mortgage-backed securities.
The decline in securities was used to fund continued loan growth throughout
1997.
In 1997, the Corporation sold $190 million in mortgage-backed securities
at a loss of over $4 million. The funds from these sales were used to purchase
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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (31)
<PAGE>
The Corporation anticipates that the investment portfolio will continue to
be used to help fund expected loan growth in 1998. 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 mortgage-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 $90 million and a market value of $89
million at December 31, 1997. Table 14 provides information as to the
composition of the Corporation's investment securities portfolio as of December
31, 1997.
As of December 31, 1997, the Corporation's investment securities portfolio
included $1.01 billion in securities classified as available-for-sale and $155
million classified as held-to-maturity. As of December 31, 1997, the
Corporation reported a net unrealized gain of $15 million on investment
securities, with an offsetting increase to shareholders' equity of $9 million
(net of tax). In 1997, the unrealized gain/(loss) reported as a separate
component of equity changed from an unrealized net gain of $7 million to an
unrealized net gain of $9 million, increasing equity over $2 million. This
change was primarily the result of sales of lower yielding securities
previously discussed.
Deposits
Total deposits increased $321 million to $8.20 billion at December 31,
1997, compared to $7.88 billion a year earlier. The increase in 1997 was the
result of a $147 million increase in noninterest-bearing deposits and a $174
million increase in interest-bearing deposits.
Nonininterest-bearing deposits were up as a result of a 15.4 percent
increase in nonpersonal deposits and an 11.9 percent increase in personal
deposits. Partially offsetting these increases was a decline in official check
balances as the Bank transferred the processing and clearing of official checks
to a third party. Interest-bearing deposits were up in 1997 as a result of
continued increases in MMDA deposits. With the increase in core deposits in
1997, the Corporation reduced its level of national market funding as shown in
Table 15 by a $75 million decline in jumbo and eurodollar deposits of $100,000
and over.
The decline in NOW accounts since 1995 as 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 $414 million in 1997, while small CDs and savings deposits
both declined.
The declining rate environment over the last several years (particularly
for bank core deposits) has 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 1997, customers
continued to transfer their funds out of certificates of deposits and savings
accounts into tiered rate money market accounts. The Corporation has 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (32)
<PAGE>
TABLE 15 -- Deposits by Type --
<TABLE>
<CAPTION>
As of December 31 (dollars in thousands) 1997 1996 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $1,717,987 $1,571,080 $1,371,888 $1,214,703 $1,200,609
Interest-bearing deposits:
Savings 794,365 920,555 975,143 1,032,529 878,119
NOW 119,573 194,564 1,039,213 1,015,913 943,750
Money market deposit accounts 2,327,703 1,838,578 895,956 651,991 714,752
Time deposits $100,000 and over - domestic 334,687 397,322 409,515 378,480 351,095
Foreign deposits $100,000 and over 30,143 42,859 44,421 257,701 --
All other time deposits 2,873,117 2,911,303 2,957,862 2,812,498 1,927,241
- - ----------------------------------------------------------------------------------------------------------------------
Total deposits $8,197,575 $7,876,261 $7,693,998 $7,363,815 $6,015,566
- - ----------------------------------------------------------------------------------------------------------------------
Percent of total deposits by type
- - ----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 21.0% 20.0% 17.8% 16.5% 20.0%
Interest-bearing deposits:
Savings 9.7 11.7 12.7 14.0 14.6
NOW 1.5 2.5 13.5 13.8 15.7
Money market deposit accounts 28.3 23.3 11.6 8.9 11.9
Time deposits $100,000 and over - domestic 4.1 5.0 5.3 5.1 5.8
Foreign deposits $100,000 and over 0.4 0.5 0.6 3.5 --
All other time deposits 35.0 37.0 38.5 38.2 32.0
- - ----------------------------------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0% 100.0% 100.0% 100.0%
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 16 -- Maturity of Domestic Time Deposits $100,000 and Over --
As of December 31, 1997 (dollars in thousands)
- - -------------------------------------------------------------------
Three months or less $173,317
Over three months through six months 58,766
Over six months through twelve months 43,976
Over twelve months 58,628
- - -------------------------------------------------------------------
Total $334,687
- - -------------------------------------------------------------------
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 to facilitate
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, 1997, the Corporation was 99.6 percent core
funded from customers within its market area.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (33)
<PAGE>
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, 1997, there was $30 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, 1997, 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 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 1997, the
Corporation's subsidiary bank could have provided an additional $137 million in
dividends to the parent company, without additional regulatory approval and
still exceeded minimum regulatory capital ratios.
The following debt ratings assist the Bank and the Corporation in their
abilities to gather funds from the capital markets.
TABLE 17 -- Debt Ratings --
As of December 31, 1997
- - --------------------------------------------------------------------
Standard & Poor's Moody's Fitch
- - --------------------------------------------------------------------
Star Bank, N.A.
Short-term CDs A-1 P-1 F-1
Senior debt A A1 A+
Subordinated debt A- A3 A
Star Banc Corporation
Commercial paper A-2 P-2 F-1
- - --------------------------------------------------------------------
The Corporation issues commercial paper notes through a private placement
memorandum up to an aggregate amount of $150 million, with maturities of up to
270 days. The commercial paper program is backed-up by a $150 million facility
shared equally among six high grade commercial banks. The Corporation also
issues medium term notes through the universal shelf registration statement
(described below) up to an aggregate amount of $250 million, with maturities of
12 to 60 months. The proceeds of the notes from the commercial paper and medium
term notes programs are used to provide funding to Star Banc Finance, Inc. and
for general corporate purposes. At December 31, 1997, there was $102 million in
commercial paper outstanding.
In 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 $106 million to
$354 million at December 31, 1996. This increase was the result of the issuance
of medium term notes by the parent company.
In June 1997, the Corporation formed Star Capital I, a wholly owned
Delaware business trust, which issued $150 million of Corporation-obligated
mandatorily redeemable Floating Rate Capital Securities. The $149 million
outstanding at December 31, 1997 qualifies as tier 1 capital for regulatory
capital purposes. The proceeds from the sale of these securities were used for
general corporate purposes.
Capital Resources
The Corporation's total shareholders' equity increased $51 million or 6.0
percent to $906 million at December 31, 1997, compared to $855 million at
December 31, 1996. The increase was due to the retention of net income after
dividends on preferred and common shares, offset by an $86 million increase in
treasury shares as a result of the Corporation's buyback program.
The Corporation increased its annual dividend rate per common share 27.0
percent from $0.63 in 1996 to $0.80 in 1997. The dividend payout ratio for
1997 increased slightly to 35.1 percent, following payout ratios of 34.7
percent in 1996 and 35.0 percent in 1995.
In 1996, the board of directors of the Corporation approved the purchase
of a total of nine million shares over the next three years under its common
stock 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, 1997, the Corporation had repurchased 5,562,585 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
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (34)
<PAGE>
capital ratios as of December 31, 1997 amounted to 8.77 percent and 12.61
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 7.64 percent and 11.88 percent at
December 31, 1996. 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, 1997, the Corporation's leverage ratio was
8.01 percent, compared to 6.53 percent a year earlier. The increase in the
total risk-based capital ratio in 1997 was the result of the $150 million
issuance of trust preferred securities previously discussed. The issuance of
the trust preferred securities contributed to a 32.6 percent increase in tier 1
equity, while net risk-adjusted assets were up 15.4 percent at December 31,
1997.
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 18 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, 1997 and 1996.
TABLE 18 -- Regulatory Capital Ratios --
As of December 31 (dollars in thousands) 1997 1996
- - ---------------------------------------------------------------------------
Tier 1 capital:
Common shareholders' equity $ 906,013 $ 855,072
Trust preferred securities 148,581 --
Less: Unrealized gains/(losses)
on securities 9,342 7,126
Goodwill and other adjustments 207,067 215,630
- - ---------------------------------------------------------------------------
Total tier 1 capital 838,185 632,316
Tier 2 capital components:
Qualifying long-term debt 247,677 247,358
Allowance for loan losses 119,622 103,701
- - ---------------------------------------------------------------------------
Total risk-based capital $ 1,205,484 $ 983,375
- - ---------------------------------------------------------------------------
Risk-Weighted Assets:
Risk-weighted assets on-balance-sheet $ 8,622,239 $7,710,575
Risk-weighted assets off-balance-sheet 1,155,406 800,848
Less: Goodwill and other adjustments 220,282 230,389
- - ---------------------------------------------------------------------------
Net risk-weighted assets $ 9,557,363 $8,281,034
- - ---------------------------------------------------------------------------
Fourth quarter average assets,
net of adjustments $10,463,404 $9,678,184
- - ---------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 8.77% 7.64%
Total 12.61 11.88
Tier 1 leverage ratio 8.01 6.53
- - ---------------------------------------------------------------------------
FIVE YEAR LINE CHART OF COMMON STOCK PRICE & BOOK VALUE
(dollars per share)
1993 1994 1995 1996 1997
High $13.13 $14.92 $20.75 $31.38 $58.00
Low 11.00 11.17 12.08 18.71 29.70
Book Value 7.44 8.01 9.16 9.86 10.62
With the exception of historical information, the matters discussed or
incorporated by reference in this Annual Report may contain certain
forward-looking statements that involve risk and uncertainties including, but
not limited to, economic conditions, product demand and industry capability,
competitive products and pricing, new product development, the regulatory and
trade environment and other risks indicated in filings with the Securities and
Exchange Commission.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (35)
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As of December 31 (dollars in thousands) 1997 1996
- - ------------------------------------------------------------------------
Assets:
Cash and due from banks $ 577,479 $ 508,831
Money market investments 238,441 50,170
Investment securities:
Available-for-sale 1,007,619 1,332,312
Held-to-maturity (market value of
$154,996 in 1997 and $168,326 in 1996) 154,549 167,957
- - ------------------------------------------------------------------------
Total securities 1,162,168 1,500,269
Loans:
Commercial loans 2,719,626 2,406,540
Real estate loans 2,773,212 2,599,079
Retail loans 3,150,370 2,726,561
- - ------------------------------------------------------------------------
Total loans 8,643,208 7,732,180
Less: Unearned interest 198,942 145,002
- - ------------------------------------------------------------------------
8,444,266 7,587,178
Allowance for loan losses 132,055 118,689
- - ------------------------------------------------------------------------
Net loans 8,312,211 7,468,489
Premises and equipment 141,439 136,045
Acceptances--customers' liability 16,764 19,257
Other assets 510,399 410,754
- - ------------------------------------------------------------------------
Total assets $10,958,901 $10,093,815
- - ------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $ 1,717,987 $ 1,571,080
Interest-bearing deposits 6,479,588 6,305,181
- - ------------------------------------------------------------------------
Total deposits 8,197,575 7,876,261
Short-term borrowings 1,113,570 921,317
Long-term debt 353,742 247,359
Trust preferred securities 148,581 --
Acceptances outstanding 16,764 19,257
Other liabilities 222,656 174,549
- - ------------------------------------------------------------------------
Total liabilities 10,052,888 9,238,743
- - ------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock:
Shares authorized - 1,000,000
Shares issued - none -- --
Common stock:
Shares authorized - 100,000,000
Shares issued - 90,481,374 in 1997
and 1996 452,407 452,407
Surplus 84,015 76,045
Retained earnings 527,297 400,838
Treasury stock, at cost (5,192,374 shares
in 1997 and 3,722,931 shares in 1996) (167,048) (81,344)
Net unrealized gain on securities
available-for-sale 9,342 7,126
- - ------------------------------------------------------------------------
Total shareholders' equity 906,013 855,072
- - ------------------------------------------------------------------------
Total liabilities and
shareholders' equity $10,958,901 $10,093,815
- - ------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (36)
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 (amounts in thousands except per share data)
1997 1996 1995
- - ----------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $709,196 $635,619 $586,416
Interest on investment securities:
Taxable 87,199 95,080 121,724
Non-taxable 3,551 3,126 1,215
Interest on money market investments 4,606 1,700 1,049
- - ----------------------------------------------------------------------------
Total interest income 804,552 735,525 710,404
- - ----------------------------------------------------------------------------
Interest Expense:
Interest on deposits 268,355 262,675 265,972
Interest on short-term borrowings 49,247 42,999 55,227
Interest on long-term debt 25,051 11,652 10,997
- - ----------------------------------------------------------------------------
Total interest expense 342,653 317,326 332,196
- - ----------------------------------------------------------------------------
Net interest income 461,899 418,199 378,208
Provision for loan losses 53,614 40,773 25,101
- - ----------------------------------------------------------------------------
Net interest income after
provision for loan losses 408,285 377,426 353,107
- - ----------------------------------------------------------------------------
Noninterest Income:
Trust income 56,661 46,917 41,512
Retail deposit fees 42,413 39,738 30,817
Cash management income 18,839 16,245 13,053
Credit card income 24,427 19,183 15,118
ATM income 15,377 10,231 7,652
Mortgage banking income 12,832 7,556 2,362
Investment securities gains/(losses)-net (4,239) (2,451) 1,910
All other income 38,266 33,103 25,700
- - ----------------------------------------------------------------------------
Total noninterest income 204,576 170,522 138,124
- - ----------------------------------------------------------------------------
Noninterest Expense:
Salaries 126,896 121,366 112,923
Pension and other employee benefits 20,176 19,905 20,273
Equipment expense 19,892 17,329 16,284
Occupancy expense-net 23,523 22,019 22,059
All other expense 131,276 122,592 114,675
- - ----------------------------------------------------------------------------
321,763 303,211 286,214
SAIF special assessment -- 5,000 --
- - ----------------------------------------------------------------------------
Total noninterest expense 321,763 308,211 286,214
- - ----------------------------------------------------------------------------
Income before income tax 291,098 239,737 205,017
Income tax 96,344 81,378 68,414
- - ----------------------------------------------------------------------------
Net income $194,754 $158,359 $136,603
- - ----------------------------------------------------------------------------
Per Share:
Basic earnings per common share $ 2.26 $ 1.79 $ 1.52
Diluted earnings per common share 2.19 1.75 1.50
Dividends declared on common stock 0.80 0.63 0.53
Dividends declared on preferred stock -- 3.00 6.00
- - ----------------------------------------------------------------------------
Weighted average common shares 86,160 88,544 90,086
Weighted average diluted common shares 88,877 90,238 91,247
- - ----------------------------------------------------------------------------
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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (37)
<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, 1995 $ 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
Net income -- -- -- 194,754 -- -- 194,754
Cash dividends declared on
common stock -- -- -- (68,295) -- -- (68,295)
Issuance of common stock
and treasury shares -- -- 4,670 -- 20,777 -- 25,447
Purchase of treasury stock -- -- -- -- (105,558) -- (105,558)
Shares reserved to meet deferred
compensation obligations -- -- 2,868 -- (923) -- 1,945
Amortization of stock awards -- -- 432 -- -- -- 432
Change in net unrealized gain/
(loss) on available-for-sale
securities -- -- -- -- -- 2,216 2,216
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ -- $452,407 $84,015 $527,297 $(167,048) $9,342 $906,013
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (38)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (dollars in thousands)
1997 1996 1995
- - -----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 194,754 $ 158,359 $ 136,603
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 22,875 21,077 19,651
Intangible amortization 17,379 17,282 14,037
Provision for loan losses 53,614 40,773 25,101
Provision for deferred taxes 33,669 27,359 19,674
(Gain)/loss on sale of premises and
equipment-net 70 (166) (311)
(Gain)/loss on sale of securities-net 4,239 2,451 (1,910)
(Gain)/loss on sale of mortgage loans (4,987) (2,745) 1,546
Mortgage loans originated for sale on
the secondary market (335,008) (285,284) (235,026)
Proceeds from sale of mortgage loans on
the secondary market 330,281 311,012 191,760
Net change in other assets (106,254) (9,441) (96,360)
Net change in other liabilities 16,288 (2,352) 39,780
- - -----------------------------------------------------------------------------
Total adjustments 32,166 119,966 (22,058)
- - -----------------------------------------------------------------------------
Net cash provided by operating activities 226,920 278,325 114,545
- - -----------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity
securities 55,653 60,497 223,349
Proceeds from maturities of available-for-
sale securities 325,646 327,685 123,150
Proceeds from sales of available-for-sale
securities 189,627 143,222 520,772
Purchase of held-to-maturity securities (42,551) (44,024) (43,895)
Purchase of available-for-sale securities (192,265) (285,173) (170,488)
Net change in loans (996,209) (724,428) (780,130)
Proceeds from sales of loans 104,833 31,170 134,595
Proceeds from sales of premises and equipment 351 856 2,091
Purchase of premises and equipment (22,135) (16,933) (19,977)
Net change due to acquisitions of branch
offices 83,711 32,513 568,488
- - -----------------------------------------------------------------------------
Net cash provided by/(used in)
investing activities (493,339) (474,615) 557,955
- - -----------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net change in deposits 228,498 120,174 (314,496)
Net change in short-term borrowings 192,253 186,301 (299,684)
Principal payments on long-term debt -- (12,780) (5,470)
Proceeds from issuance of long-term debt 106,051 98,754 --
Proceeds from issuance of trust preferred
securities 148,554 -- --
Proceeds from issuance of common stock 16,424 8,880 4,598
Purchase of treasury stock (105,558) (80,581) (12,081)
Shares reserved to meet deferred
compensation obligations 1,945 1,624 1,111
Dividends paid (64,829) (53,274) (46,397)
- - -----------------------------------------------------------------------------
Net cash provided by/(used in)
financing activities 523,338 269,098 (672,419)
- - -----------------------------------------------------------------------------
Net change in cash and cash equivalents 256,919 72,808 81
Cash and cash equivalents at beginning
of year 559,001 486,193 486,112
- - -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 815,920 $ 559,001 $ 486,193
- - -----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands)
1997 1996 1995
- - -----------------------------------------------------------------------------
Cash Paid During the Year for:
Interest $ 341,318 $ 323,211 $ 321,300
Income taxes 47,348 53,815 45,394
- - -----------------------------------------------------------------------------
Noncash transfer of loans to other real
estate owned 1,713 1,457 1,327
- - -----------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (39)
<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") follow 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, 1996 and 1995 have been restated to conform to the
1997 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 279 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.
Additional disclosures related to investment securities 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. All accrued interest receivable is reversed when
loans are put on nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses, which is reported as a deduction from
loans, is available for loan charge-offs. The allowance is increased by
provisions which are charged to earnings and recoveries of loans previously
charged off. The allowance is reduced by loan charge-offs.
The Corporation follows 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 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (40)
<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 control 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 noninterest expense.
Mortgage Servicing Rights
In 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 125 supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights" which was adopted by
the Corporation in 1996. SFAS No. 125 requires that a servicing asset (or
servicing liability) be recognized each time the Corporation undertakes the
obligation to service a financial asset. Currently the Corporation recognizes
servicing assets on mortgage loans sold on the secondary market.
SFAS No. 125 requires that at the time a loan is sold or securitized, the
servicing asset is measured by allocating the total cost of the loan between
the mortgage servicing right and the loan based on their relative fair values.
Under SFAS No. 125, servicing assets are assessed for impairment based on their
relative fair value. In addition, mortgage servicing assets must be stratified
based on one or more predominant risk characteristics of the underlying loans
and impairment is recognized through a valuation allowance for each impaired
stratum. The effect of the adoption of SFAS No. 125 was not material to the
Corporation.
Mortgage servicing rights are amortized as a reduction of servicing
revenues over the period of the estimated lives of the underlying loans, in
proportion with estimated net servicing income. See Note 7 for additional
information and required disclosures under SFAS No. 125.
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 12 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 25 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
10.
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. Substantially all the derivatives of the Corporation are
accounted for as "hedges." Interest rate swap transactions are analyzed as to
the spread, asset yield or liability cost being protected. The specific asset
or liability or class of assets or liabilities are identified and the
correlation between the hedged item, the derivative instrument and the
associated interest rate risk is documented. The Corporation periodically
reviews the correlation between the rates on the derivative and the hedged
items, in addition to the changes in the market value of the derivative and the
changes in the fair value of the hedged item. If the underlying designated
hedged item were to mature or be sold, the related derivative instrument would
be marked-to-market or terminated with any gain or loss recognized in the
current period. Additional disclosures related to derivatives are shown in Note
19.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (41)
<PAGE>
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 15.
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
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") for all publicly held companies. SFAS
No.128 replaces the presentation of primary EPS with a presentation of basic
EPS and requires the presentation of basic and diluted EPS on the consolidated
income statements. Basic EPS excludes all dilution, while diluted EPS reflects
the potential dilution that could occur if securities, stock options or other
contracts to issue stock were exercised resulting in the issuance of common
shares. See Note 23 for the reconciliation of the computation of basic and
diluted earnings per share as required by SFAS No. 128.
All prior period EPS data has been restated in accordance with SFAS No.
128.
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 $142 million and $133 million at December 31,
1997 and 1996, 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, 1997 and
1996.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
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 $ 89,443 $ -- $ 747 $ 88,696 $ 113,754 $ -- $1,045 $ 112,709
Obligations of state and
political subdivisions 65,106 2,048 854 66,300 54,203 1,920 506 55,617
- - --------------------------------------------------------------------------------------------------------------
Total held-to-maturity
securities $ 154,549 $ 2,048 $1,601 $ 154,996 $ 167,957 $ 1,920 $1,551 $ 168,326
- - --------------------------------------------------------------------------------------------------------------
Available-for-Sale
U.S. Treasuries and agencies $ 14,727 $ 205 $ 4 $ 14,928 $ 20,282 $ 160 $ 7 $ 20,435
Mortgage-backed securities 899,115 15,369 124 914,360 1,250,598 15,828 4,998 1,261,428
Other debt securities 1,935 9 16 1,928 1,434 6 1 1,439
Federal Reserve/FHLB stock
and other equity securities 77,093 1 691 76,403 49,010 -- -- 49,010
- - --------------------------------------------------------------------------------------------------------------
Total available-for-sale
securities $ 992,870 $15,584 $ 835 $1,007,619 $1,321,324 $15,994 $5,006 $1,332,312
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (42)
<PAGE>
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at December 31, 1997.
Amortized Fair
(dollars in thousands) Cost Value
- - -----------------------------------------------------------------------
Held-to-Maturity
One year or less $ 36,336 $ 36,572
After one year through five years 47,390 47,159
After five years through ten years 45,815 45,798
After ten years 25,008 25,467
- - -----------------------------------------------------------------------
Total $ 154,549 $ 154,996
- - -----------------------------------------------------------------------
Available-for-Sale
One year or less $ 223,658 $ 227,429
After one year through five years 574,908 584,600
After five years through ten years 82,578 83,970
After ten years 34,633 35,217
- - -----------------------------------------------------------------------
Total $ 915,777 $ 931,216
- - -----------------------------------------------------------------------
Note: Maturity information related to mortgage-backed securities included
above is presented based upon weighted average maturities anticipating future
prepayments.
As of December 31, 1997, the Corporation reported a net unrealized gain of
$15 million for available-for-sale securities. For 1997, the unrealized
gain/(loss) reported as a separate component of equity (net of tax) changed
from an unrealized gain of $7 million to an unrealized gain of $9 million,
increasing equity $2 million.
The following table provides information as to the amount of gross gains
and (losses) realized through the sales of available-for-sale investment
securities.
(dollars in thousands) 1997 1996 1995
- - ----------------------------------------------------------------------
Debt securities:
Gross gains $ 280 $ 3 $ 3,275
Gross (losses) (4,519) (2,450) (1,365)
Equity securities losses -- (4) --
- - ----------------------------------------------------------------------
Net securities gains/(losses) $(4,239) $(2,451) $ 1,910
- - ----------------------------------------------------------------------
Securities with a carrying value of $915 million at December 31, 1997 and
$1.28 billion at December 31, 1996, 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) 1997 1996
- - ------------------------------------------------------------------
Loans on nonaccrual status $24,952 $39,375
Restructured loans 11 80
- - ------------------------------------------------------------------
Total nonperforming loans $24,963 $39,455
- - ------------------------------------------------------------------
Interest that would have been recognized
on nonperforming loans in accordance
with their original terms $ 3,834 $ 3,934
Actual interest recorded for nonaccrual
and restructured loans 845 2,055
- - ------------------------------------------------------------------
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, 1997, 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, 1997, loans held for sale, included in total loans,
amounted to $36 million, compared to $22 million at December 31, 1996.
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
$39,807,000 and $54,766,000 at December 31, 1997 and 1996, respectively. During
1997, new loans and repayments related to outstanding loans amounted to
$11,819,000 and $7,907,000, respectively. $18,871,000 included in 1996 was
removed from 1997 loans due to retirement of a director during 1997. 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (43)
<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) 1997 1996 1995
- - ------------------------------------------------------------------
Balance--beginning of year $118,689 $106,909 $ 95,979
Loans charged off (55,831) (43,653) (28,248)
Recoveries on loans
previously charged off 15,583 14,660 14,077
- - ------------------------------------------------------------------
Net charge-offs (40,248) (28,993) (14,171)
Provision charged
to earnings 53,614 40,773 25,101
- - ------------------------------------------------------------------
Balance--end of year $132,055 $118,689 $106,909
- - ------------------------------------------------------------------
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 $24 million for 1997
and $32 million for 1996. 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 or 1997.
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, 1997 and 1996.
(dollars in thousands) 1997 1996
- - --------------------------------- ---------------------- ---------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
- - ------------------------------------------------------------------------------
Impaired Loans:
Valuation allowance required $ 5,517 $1,112 $ 2,215 $ 785
No valuation allowance required 11,190 -- 29,018 --
- - ------------------------------------------------------------------------------
Total impaired loans $16,707 $1,112 $31,233 $ 785
- - ------------------------------------------------------------------------------
NOTE 6 - Premises and Equipment
Premises and equipment as of December 31 are summarized in the following
table.
(dollars in thousands) 1997 1996
- - ------------------------------------------------------------------
Land $ 15,561 $ 15,754
Bank buildings 90,949 89,567
Furniture, fixtures & equipment 89,596 78,674
Leasehold improvements 23,968 20,999
Construction in progress 1,255 1,799
- - ------------------------------------------------------------------
Total premises and equipment 221,329 206,793
Less: Accumulated depreciation
and amortization 79,890 70,748
- - ------------------------------------------------------------------
Net premises and equipment $141,439 $136,045
- - ------------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment
amounted to $16,440,000 in 1997, $15,106,000 in 1996 and $13,894,000 in 1995.
Total rental expense was $18,991,000 in 1997, $16,052,000 in 1996 and
$15,506,000 in 1995.
Future minimum rental payments related to non-cancelable operating leases
having initial terms in excess of one year are $12,468,000 in 1998, $11,210,000
in 1999, $10,152,000 in 2000, $8,743,000 in 2001, $8,079,000 in 2002 and
$35,390,000 in later years.
NOTE 7 - Mortgage Servicing Rights
Effective January 1, 1997, the Corporation adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 supersedes SFAS No. 122 which was adopted by the
Corporation in 1996.
The value of pre-SFAS No. 122 purchased mortgage servicing rights (PMSRs)
was established using the amount of consideration paid, which is based on
current market conditions at the time the loan was purchased. In 1997, the
Corporation sold all servicing rights capitalized in 1996 and began selling all
new mortgage servicing assets to a third party on a quarterly basis. The value
of the 1997 servicing assets was established based on the future sale
commitment of those assets.
Quarterly impairment testing is performed using a discounted cash flow
methodology assuming current national prepayment speeds and a current discount
rate. Discount rates used for impairment testing were 9.25 percent at December
31, 1997 and 8.0 percent at December 31, 1996. Impairment is recognized through
a valuation allowance for each impaired stratum.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (44)
<PAGE>
The following is a summary of mortgage servicing rights at December 31,
1997 and 1996.
Mortgage Servicing Rights:
(dollars in thousands) 1997 1996
- - ------------------------------------------------------------
Balance at beginning of year $ 12,820 $ 10,344
Amount capitalized 3,497 4,685
Amortization (1,483) (2,209)
Sales (5,548) --
- - ------------------------------------------------------------
Balance at end of year 9,286 12,820
- - ------------------------------------------------------------
Fair Value at end of year $ 10,568 $ 15,455
- - ------------------------------------------------------------
There was no valuation allowance established related to mortgage servicing
rights at December 31, 1997 or 1996.
NOTE 8 - Deposits
The following is a summary of the Corporation's total deposits as of
December 31.
(dollars in thousands) 1997 1996
- - ---------------------------------------------------------------
Noninterest-bearing deposits $1,717,987 $1,571,080
Savings 794,365 920,555
NOW 119,573 194,564
Money market deposit accounts 2,327,703 1,838,578
Time deposits $100,000 and over 364,830 440,181
All other time deposits 2,873,117 2,911,303
- - ---------------------------------------------------------------
Total interest-bearing deposits 6,479,588 6,305,181
- - ---------------------------------------------------------------
Total deposits $8,197,575 $7,876,261
- - ---------------------------------------------------------------
Maturities of total time deposits at December 31, 1997 were $2.39 billion
less than one year, $824 million 1-5 years and $27 million over 5 years.
NOTE 9 - Short-Term Borrowings
The following table is a summary of short-term borrowings for the last
three years.
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
- - ------------------------------ ----------------- ------------------ ------------------
Amount Rate Amount Rate Amount Rate
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At year end:
Federal funds purchased $ 456,660 5.5% $ 254,877 5.6% $ 211,854 5.8%
Securities sold under
agreements to repurchase 552,505 4.7 599,207 4.3 471,987 5.1
Commercial paper 102,103 5.8 66,078 5.5 36,810 5.7
Other short-term borrowings 2,302 4.5 1,155 4.4 14,365 4.5
- - --------------------------------------------------------------------------------------
Total 1,113,570 5.1 921,317 4.8 735,016 5.3
- - --------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased 331,971 5.5 281,102 5.3 440,335 5.9
Securities sold under
agreements to repurchase 580,856 4.4 512,193 4.3 479,285 4.9
Commercial paper 101,616 5.5 91,797 5.5 11,861 5.9
Other short-term borrowings 2,457 4.0 12,933 6.0 83,071 5.7
- - --------------------------------------------------------------------------------------
Total $1,016,900 4.8% $ 898,025 4.8% $1,014,552 5.4%
- - --------------------------------------------------------------------------------------
Maximum month-end balances:
Federal funds purchased $ 621,921 $ 375,109 $ 544,269
Securities sold under
agreements to repurchase 600,176 599,207 549,437
Commercial paper 125,007 130,097 36,810
Other short-term borrowings 7,746 75,046 295,007
- - --------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (45)
<PAGE>
NOTE 10 - Income Taxes
At December 31, 1997, included in the Corporation's consolidated balance
sheet was a net deferred tax liability of $89,805,000, compared to $54,591,000,
at December 31, 1996. 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,
1997 and 1996 were as follows:
(dollars in thousands) 1997 1996
- - ---------------------------------------------------------------------
Allowance for loan losses $ 46,260 $ 41,689
Deferred loan fees/costs 995 1,133
Deferred compensation 4,499 3,391
Intangible asset amortization 280 458
Other 3,166 3,044
- - ---------------------------------------------------------------------
Total deferred tax asset 55,200 49,715
- - ---------------------------------------------------------------------
Leased assets (120,078) (84,868)
Pension liabilities (6,410) (5,559)
Depreciation of fixed assets (6,364) (5,953)
Unrealized gain on securities (5,402) (3,862)
FHLB stock dividend (2,504) (1,735)
Intangible assets/purchase
accounting adjustments (1,021) (277)
Other (3,226) (2,052)
- - ---------------------------------------------------------------------
Total deferred tax liability (145,005) (104,306)
- - ---------------------------------------------------------------------
Net deferred tax asset/(liability) $ (89,805) $ (54,591)
- - ---------------------------------------------------------------------
Income tax expense for the last three years consisted of the following:
(dollars in thousands) 1997 1996 1995
- - --------------------------------------------------------------------
Current payable:
Federal $61,388 $52,668 $47,704
State 1,276 1,351 1,036
- - --------------------------------------------------------------------
Total current
income tax 62,664 54,019 48,740
- - --------------------------------------------------------------------
Deferred federal income tax
resulting from:
Allowance for loan losses (4,571) (4,122) (4,416)
Leasing 35,210 29,525 23,137
Intangible assets 549 32 (1,299)
Other-net 2,492 1,924 2,252
- - --------------------------------------------------------------------
Total deferred
federal income tax 33,680 27,359 19,674
- - --------------------------------------------------------------------
Income tax $96,344 $81,378 $68,414
- - --------------------------------------------------------------------
A reconciliation of the statutory tax rate to the effective tax rate is as
follows:
1997 1996 1995
- - ---------------------------------------------------------------------
Statutory tax rate 35.0 % 35.0 % 35.0 %
Adjustments to statutory
tax rate:
Tax-exempt interest income (0.8) (1.0) (1.1)
Other-net (1.0) (0.1) (0.5)
- - ---------------------------------------------------------------------
Effective tax rate 33.2 % 33.9 % 33.4 %
- - ---------------------------------------------------------------------
NOTE 11 - Long-Term Debt
The following is a summary of the Corporation's long-term debt as of
December 31.
(dollars in thousands) 1997 1996
- - ----------------------------------------------------------------
Parent company:
5.95% to 6.97% Medium term notes-- $106,065 $ --
semiannual payments of interest,
principal due 1999 through 2002
Star Bank, N.A.:
6 3/8% Subordinated notes--semiannual
payments of interest, principal
due 2004 148,799 148,606
6 5/8% Subordinated notes--semiannual
payments of interest, principal
due 2006 98,878 98,753
- - ----------------------------------------------------------------
Total long-term debt $353,742 $247,359
- - ----------------------------------------------------------------
The parent company has a line of credit of $150 million, of which the
total amount was available as of December 31, 1997.
The following table presents the scheduled payments of the Corporation's
long-term debt.
(dollars in thousands) 1997 1996
- - ----------------------------------------------------------------
1998 $ -- $ --
1999 54,987 --
2000 36,121 --
2001 -- --
2002 14,957 --
Later Years 247,677 247,359
- - ----------------------------------------------------------------
Total long-term debt $353,742 $247,359
- - ----------------------------------------------------------------
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (46)
<PAGE>
NOTE 12 - Trust Preferred Securities
In 1997, the Corporation formed Star Capital I ("The Trust"), a wholly
owned Delaware business trust, which issued $150 million of
Corporation-obligated mandatorily redeemable Floating Rate Securities ("Capital
Securities"). The Trust used the proceeds from the issuance of the Capital
Securities to purchase a like amount of Floating Rate Junior Subordinated
Debentures ("the Debentures") of the parent company. The Debentures are the
sole assets of the Trust and are eliminated, along with the related income
statement effects, in the consolidated financial statements of the Corporation.
The Corporation used the proceeds from the sale of the Debentures for general
corporate purposes, which included repurchase of common equity of the
Corporation, repayment of indebtedness, investments in or extensions of credit
to its subsidiaries and the financing of possible acquisitions.
The Capital Securities accrue and pay distributions quarterly at an annual
rate equal to three month LIBOR plus 0.765% of the liquidation amount of
$1,000 per Capital Security. The parent company has fully and unconditionally
guaranteed the obligations of the Trust. The guarantee covers the payment of
distributions and payments on liquidation of the Trust or the redemption of the
Capital Securities, but only to the extent of the funds held by the Trust. The
Corporation has the right to defer payment of interest on the Debentures at any
time or from time to time for a period not exceeding 20 consecutive quarters,
provided that no deferred period extends beyond the stated maturity of the
Debentures.
The Capital Securities are mandatorily redeemable upon the maturity of the
Debentures on June 15, 2027, or upon earlier redemption as provided by the
indenture. The parent company can redeem the Debentures in whole or in part on
or after June 15, 2007 or any time in whole upon the occurrence of a Special
Event (as defined in the offering circular). For financial reporting purposes
the Corporation treats the Capital Securities as debt and the distributions to
the security holders are recorded as interest expense.
NOTE 13 - 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.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31,
1997 and 1996.
(dollars in thousands) 1997 1996
- - ------------------------------------------------------------
Projected benefit obligation:
Vested benefits $65,099 $54,539
Nonvested benefits 1,621 1,276
- - ------------------------------------------------------------
Accumulated benefit obligation 66,720 55,815
Effect of projected future
compensation levels 8,554 6,639
- - ------------------------------------------------------------
Projected benefit obligation 75,274 62,454
Plan assets 104,230 85,538
- - ------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 28,956 23,084
Unrecognized net (gain)/loss due to
past experience different from
assumptions made (1,413) 2,706
Unrecognized prior service cost (249) (270)
Unrecognized net asset being
recognized over 16 years (4,783) (6,034)
- - ------------------------------------------------------------
Prepaid pension cost in
consolidated balance sheets $22,511 $19,486
- - ------------------------------------------------------------
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, 1997 were 209,800 shares of the Corporation's stock with
a value of $12 million. December 31, 1996 plan assets included 289,800 shares
with a value of $9 million.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (47)
<PAGE>
Net pension cost, which amounted to a credit for 1995 through 1997,
included the following components:
(dollars in thousands) 1997 1996 1995
- - ---------------------------------------------------------------------
Service cost - benefits
earned during the
period $ 2,401 $ 2,465 $ 2,108
Interest cost of
projected benefit
obligation 4,710 4,174 3,806
Actual total return
on plan assets (21,805) (10,846) (11,245)
Net amortization
and deferral 11,670 1,987 3,273
- - ----------------------------------------------------------------------
Net periodic
pension (credit) $ (3,024) $ (2,220) $ (2,058)
- - ----------------------------------------------------------------------
In determining the projected benefit obligation, the following weighted
average rates were used.
1997 1996 1995
- - ---------------------------------------------------------------------
Discount rate 7.00% 7.75% 7.50%
Future salary increases 4.50 4.50 4.00
Long-term return on assets 11.00 10.10 9.58
- - ---------------------------------------------------------------------
NOTE 14 - Other Postretirement Benefits
The Corporation provides health care benefits to current retirees, and
their spouses, who 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, 1997 and 1996.
(dollars in thousands) 1997 1996
- - ------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 3,200 $ 2,995
Fully eligible active participants -- --
- - ------------------------------------------------------------------
Total 3,200 2,995
- - ------------------------------------------------------------------
Unrecognized net gain/(loss) 1,503 1,903
Unrecognized transition
obligation being amortized over 14 years (3,518) (3,909)
- - ------------------------------------------------------------------
Accrued postretirement obligation
in consolidated balance sheets $ 1,185 $ 989
- - ------------------------------------------------------------------
The components of the net periodic cost of postretirement benefits for
1995 through 1997 were as follows:
(dollars in thousands) 1997 1996 1995
- - -----------------------------------------------------------------
Interest cost of projected
benefit obligation $ 196 $ 150 $ 194
Amortization of unrecognized
transition obligation 391 391 391
Net amortization
and deferral (111) (172) (185)
- - -----------------------------------------------------------------
Net periodic
postretirement
benefit cost $ 476 $ 369 $ 400
- - -----------------------------------------------------------------
The weighted average discount rates used in determining the amount of the
accumulated benefit obligation were 6.00 percent as of December 31, 1997 and
6.75 percent as of December 31, 1996. The measurement of the accumulated
benefit obligation assumed a health care cost trend rate of 11.00 and 10.00
percent for 1996 and 1997, respectively, 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, 1997 by $291,000
and increase the aggregate of the service and interest cost components of the
net periodic benefit cost for the year by $17,000.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (48)
<PAGE>
NOTE 15 - Stock Options and Compensation Plans
In 1997, the shareholders of the Corporation approved the adoption of the
Star Banc Corporation 1996 Stock Incentive Plan ("the Plan") replacing the 1986
and 1991 plans. 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. All stock options granted expire
ten years after date of grant.
The following is a summary of options, restricted stock and awards
outstanding and exercised under the 1996 Stock Incentive Plan, the Directors
Plan and the StarShare Option Plans.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------- -----------------------------------
Restricted Stock Stock Weighted-Average Stock Stock Weighted-Average
and 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 6,248,043 $16.81 90,000 5,414,919 $13.24
Granted 10,000 1,228,325 55.10 -- 1,290,900 29.44
Exercised -- (803,449) 11.88 -- (430,212) 9.77
Cancelled -- (186,418) 19.52 -- (27,564) 15.38
- - ---------------------------------------------------------------------------------------------------------------
Number of shares outstanding
at end of year 100,000 6,486,501 24.60 90,000 6,248,043 16.81
- - ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year 3,424,749 $14.48 3,071,650 $12.27
Weighted average fair value
of options granted $40.00 $15.00 -- $6.25
Available for future grant under
the Stock Incentive Plans 6,874,949 214,656
- - ---------------------------------------------------------------------------------------------------------------
StarShare Stock Option Plans:
Options outstanding at
beginning of year 1,491,261 $29.35 187,563 $11.75
Granted -- -- 1,420,875 30.33
Exercised (119,322) 25.91 (94,371) 11.75
Cancelled (261,323) 30.27 (22,806) 18.36
- - ---------------------------------------------------------------------------------------------------------------
Options outstanding at
end of year 1,110,616 29.51 1,491,261 29.35
- - ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year 256,772 $26.76 78,486 $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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (49)
<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 1996
and 1997, respectively: expected volatility of 16.03 percent and 22.42 percent,
risk-free interest rates of 6.00 percent and 15.00 percent, dividend yields of
2.02 percent and 1.43 percent, and for both years, expected lives of five
years.
The following table summarizes information about stock options outstanding
at December 31, 1997, under the 1996 Stock Incentive Plan, 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 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock Incentive and Directors Plans:
$ 5.58 - 8.54 183,922 3.52 Years $ 7.31 183,922 $ 7.31
11.25 - 11.92 1,975,954 6.26 Years 11.40 1,720,085 11.42
12.08 - 17.75 921,242 5.93 Years 13.80 768,616 13.85
19.17 - 22.92 1,074,633 7.98 Years 20.39 484,345 20.34
24.83 - 30.33 1,107,675 8.94 Years 30.30 267,781 30.30
39.75 - 57.38 1,223,075 9.87 Years 55.19 -- --
- - -------------------------------------------------------------------------------------------------
5.58 - 57.38 6,486,501 7.56 Years 24.60 3,424,749 14.48
- - -------------------------------------------------------------------------------------------------
StarShare Stock Option Plans:
11.75 - 12.00 49,287 5.08 Years 11.75 49,338 11.75
30.33 1,061,329 8.94 Years 30.33 207,434 30.33
- - -------------------------------------------------------------------------------------------------
$11.75 - 30.33 1,110,616 8.77 Years $29.51 256,772 $26.76
- - -------------------------------------------------------------------------------------------------
</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 1996 and 1997 would have been
$157,333,000 and $191,178,000, respectively. Pro forma basic earnings per share
would have been $1.78 in 1996 and $2.22 in 1997. Pro forma diluted earnings per
share would have been $1.74 in 1996 and $2.15 in 1997. 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 was $365,000 in 1996 and $432,000 in
1997.
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 trea-sury stock held at
December 31, 1997 and 1996 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 $40 million.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (50)
<PAGE>
NOTE 16 - 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 1996, the board of directors of the Corporation approved the purchase
of a total of nine million shares over the next three years under its common
stock 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, 1997, the Corporation had repurchased 5,562,585 shares through the
buyback program.
NOTE 17 - 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, at December 31, 1997 and 1996, 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 1997 and 1996.
<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, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $1,205,484 12.61% $764,590 8.00% $955,737 10.00%
Star Bank, N.A. 958,651 10.31 743,754 8.00 929,692 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 838,185 8.77 382,295 4.00 573,442 6.00
Star Bank, N.A. 594,624 6.40 371,877 4.00 557,816 6.00
Tier 1 Capital (to Average Assets):
Consolidated 838,185 8.01 418,537 4.00 523,171 5.00
Star Bank, N.A. 594,624 5.82 408,486 4.00 510,608 5.00
- - ---------------------------------------------------------------------------------------------------
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
- - ---------------------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (51)
<PAGE>
NOTE 18 - 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 19 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) 1997 1996
- - ----------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $3,635 $ 3,290
Standby letters of credit 382 272
Commercial and other letters of credit 8 15
- - ----------------------------------------------------------------------------
Financial instruments whose notional or
contract amounts exceed the amount of
credit risk:
Forward commitments $ 105 $ 39
Interest rate swap agreements 240 367
Foreign currency spot and forward contracts 66 53
- - ----------------------------------------------------------------------------
NOTE 19 - 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 1997 were immaterial.
The Corporation has entered into interest rate swap agreements as part of
its overall management of interest rate risk. The Corporation's interest rate
swap agreements are the standard fixed/floating type of swap agreement. All of
the interest rate swaps are treated as hedges, and accordingly, are accounted
for on the same basis as the underlying asset or liability being hedged. The
income or expense related to derivative financial instruments is recognized on
an accrual basis, over the estimated life of the hedged instrument, as an
adjustment to interest income or expense.
The Corporation enters into foreign exchange forward contracts to
accommodate the business needs of its customers and for proprietary trading
purposes. Foreign exchange-based forward contracts provide for the delayed
delivery or purchase of foreign currency. The majority of foreign exchange
contracts relate to major foreign currencies such as Canadian dollars, British
pounds, Deutsche marks and Japanese yen. The foreign exchange risk associated
with these contracts is mitigated by entering into offsetting foreign exchange
contracts. Adjustments to the fair value of foreign exchange forward contracts
are included in other income on the income statement. As of December 31, 1997,
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (52)
<PAGE>
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, 1997, 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 both
1997 and 1995, the Corporation terminated one of its interest rate swap
contracts in order to reduce its liability rate sensitive position at that
time. These terminations resulted in the deferral of a $395,000 gain in 1997
and a $547,000 loss in 1995.
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, 1997.
<TABLE>
<CAPTION>
Maturities of Derivative Products as of December 31,
-------------------------------------------------------
2002
(dollars in thousands) 1998 1999 2000 2001 and after Total
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Receive fixed rate swaps
Notional value $ -- $ -- $240,000 $ -- $ -- $240,000
Weighted average receive rate -- -- 5.41% -- -- 5.41%
Weighted average pay rate -- -- 5.85% -- -- 5.85%
Forward Commitments $105,349 -- -- -- -- $105,349
Foreign Currency Spot and
Forward Contracts 57,647 2,002 1,850 4,029 292 65,820
- - ------------------------------------------------------------------------------------------------------
Total notional/contract amount $162,996 $ 2,002 $241,850 $ 4,029 $ 292 $411,169
- - ------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20 - 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 21 - 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 1997 was approximately $272
million. During 1997, the Bank declared $135 million in cash dividends to the
parent company. There were no dividends requiring regulatory agency approval in
1997. The amount of dividends available to the parent company from the Bank at
January 1, 1998 was $16 million.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (53)
<PAGE>
NOTE 22 - Subsequent Event (unaudited)
On February 7, 1998, the Corporation acquired Great Financial Corporation
for 70 percent stock and 30 percent cash. The 70 percent of Great Financial's
shares were exchanged for common shares of Star Banc Corporation stock at an
exchange ratio of 0.949 Star Banc shares for each share of Great Financial. The
remaining 30 percent of Great Financial shares were exchanged for $44 in cash
for each share.
The Corporation issued 9.5 million shares and the total value of this
transaction was $648 million. This transaction is structured as a tax-free
exchange for shareholders receiving stock and will be accounted for as a
purchase transaction.
The following table presents an Unaudited Pro forma Combined Summary of
Operations of the Corporation and Great Financial for the year ended December
31, 1997. The Unaudited Pro forma Combined Summary of Operations is presented
as if the Great Financial merger had been effective January 1, 1997.
(dollars in thousands, except per share data) 1997
- - --------------------------------------------------------------
Net interest income $536,256
Net income 197,936
Basic earnings per common share 2.07
Diluted earnings per common share 2.01
- - --------------------------------------------------------------
NOTE 23 - Earnings per Share
The following table shows the amounts used in the computation of basic
and diluted earnings per share, in accordance with SFAS No. 128.
(dollars in thousands except per share data)
1997 1996 1995
- - ---------------------------------------------------------------------
Net income $194,754 $158,359 $136,603
Dividends on preferred stock -- (5) (76)
- - ---------------------------------------------------------------------
Net income available to
common shareholders $194,754 $158,354 $136,527
- - ---------------------------------------------------------------------
Weighted average shares:
Common shares 86,160 88,544 90,086
Convertible preferred shares -- 20 233
Stock awards (see note 15) 49 20 --
Stock option (see note 15) 2,668 1,654 928
- - ---------------------------------------------------------------------
Weighted average diluted
common shares 88,877 90,238 91,247
- - ---------------------------------------------------------------------
Basic earnings per share $2.26 $1.79 $1.52
(net income available to
common shareholders'
divided by weighted
average common shares)
- - ---------------------------------------------------------------------
Diluted earnings per share $2.19 $1.75 $1.50
(net income divided by
weighted average diluted
common shares)
- - ---------------------------------------------------------------------
As a result of adoption of SFAS No. 128, earnings per share amounts for
prior periods were restated. The effect of the change on previously reported
earnings per share is as follows.
1996 1995
- - ---------------------------------------------------------------------
Reported primary earnings per share $1.79 $1.52
Effect of SFAS No. 128 -- --
- - ---------------------------------------------------------------------
Basic earnings per share as restated 1.79 1.52
- - ---------------------------------------------------------------------
Reported fully diluted earnings per share 1.79 1.51
Effect of SFAS No. 128 (0.04) (0.01)
- - ---------------------------------------------------------------------
Diluted earnings per share as restated 1.75 1.50
- - ---------------------------------------------------------------------
NOTE 24 - 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) 1997 1996
- - --------------------------------------------------------------
Intangibles from acquisitions:
Excess of cost over fair value
of assets acquired $ 61,334 $ 65,909
Core deposit benefits 89,433 89,809
Other identified intangibles 57,082 59,682
Mortgage servicing rights 9,286 12,820
Purchased credit card relationships 4,733 2,300
- - --------------------------------------------------------------
Total intangible assets $221,868 $230,520
- - --------------------------------------------------------------
NOTE 25 - Other Noninterest Expense
The following are included in all other expense for the years ended
December 31.
(dollars in thousands) 1997 1996 1995
- - ------------------------------------------------------------------
Amortization of intangibles $17,379 $17,282 $14,037
Outside processing services 12,495 11,537 10,655
State taxes 10,671 10,999 8,597
Marketing 10,620 8,418 10,257
FDIC insurance 1,732 2,172 9,783
- - ------------------------------------------------------------------
NOTE 26 - 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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (54)
<PAGE>
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.
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 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) 1997 1996
- - ---------------------------------------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 815,920 $ 815,920 $ 559,001 $ 559,001
Investment securities 1,162,168 1,162,615 1,500,269 1,500,638
Net loans 8,312,211 8,503,332 7,468,489 7,549,304
Financial liabilities:
Deposits (8,197,575) (8,193,583) (7,876,261) (7,875,464)
Short-term borrowings (1,113,570) (1,113,570) (921,317) (921,317)
Long-term debt (502,323) (520,387) (247,359) (244,964)
Off-balance-sheet instruments:(1)
Commitments to extend credit (341) (341) (642) (642)
Standby letters of credit (1,084) (1,084) (835) (835)
Foreign currency contracts -- 273 -- 163
Interest rate swap agreements
hedging:
Loans (267) (4,133) (172) (7,745)
Debt -- -- 42 (2,741)
Forward commitments -- (1,025) -- 205
- - ---------------------------------------------------------------------------------------------
</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.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (55)
<PAGE>
NOTE 27 - Parent Company Financial Information
Balance Sheets
As of December 31 (dollars in thousands) 1997 1996
- - ------------------------------------------------------------------------------
Assets:
Investment in subsidiaries:
Banking subsidiary $ 812,182 $754,801
Nonbank subsidiaries 32,381 17,768
- - ------------------------------------------------------------------------------
Total investment
in subsidiaries 844,563 772,569
Cash and cash equivalents 18,229 38,242
Other investments 13,091 10,774
Receivables from subsidiaries 411,108 124,145
Other assets 9,983 3,445
- - ------------------------------------------------------------------------------
Total assets $1,296,974 $949,175
- - ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Short-term borrowings $ 102,103 $ 66,078
Long-term debt 254,646 --
Other liabilities 34,212 28,025
Shareholders' equity 906,013 855,072
- - ------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,296,974 $949,175
- - ------------------------------------------------------------------------------
Statements of Income
For the years ended December 31 (dollars in thousands)
1997 1996 1995
- - ------------------------------------------------------------------------------
Revenue:
Dividends from subsidiaries
Banking subsidiary $135,000 $201,700 $ 31,550
Nonbank subsidiaries 225 1,600 --
- - ------------------------------------------------------------------------------
Total dividends
from subsidiaries 135,225 203,300 31,550
Fees and assessments from subsidiaries 430 170 --
Other income 14,012 6,070 3,486
- - ------------------------------------------------------------------------------
Total revenue 149,667 209,540 35,036
- - ------------------------------------------------------------------------------
Expense:
Interest on short-term borrowings 5,636 5,002 703
Interest on long-term debt 8,951 1,382 1,541
Other operating expense 5,292 6,293 3,247
- - ------------------------------------------------------------------------------
Total expense 19,879 12,677 5,491
- - ------------------------------------------------------------------------------
Income before income tax benefit 129,788 196,863 29,545
Income tax benefit (3,063) (1,738) (836)
Equity in undistributed income of subsidiaries 61,903 (40,242) 106,222
- - ------------------------------------------------------------------------------
Net income $194,754 $158,359 $136,603
- - ------------------------------------------------------------------------------
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (56)
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
For the years ended December 31 (dollars in thousands) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 194,754 $ 158,359 $ 136,603
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiaries (61,903) 40,242 (106,222)
Depreciation and amortization 2,171 706 829
Net change in receivables from subsidiaries 2,574 2,274 14,850
Net change in other assets (6,188) 1,456 (4,165)
Net change in other liabilities 10,269 2,560 2,912
- - ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 141,677 205,597 44,807
- - ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital contributions to subsidiaries (7,875) (1,900) (25,000)
Net change in advances to subsidiaries (290,139) (91,275) (26,858)
Cash received from sale of interest in partnership to subsidiary -- 27,063 --
Other investing activity (2,288) (2,625) (1,749)
- - ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (300,302) (68,737) (53,607)
- - ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net change in short-term borrowings 36,025 29,265 36,813
Principal payments on long-term debt -- (12,780) (5,470)
Proceeds from issuance of long-term debt 254,605 -- --
Dividends paid (64,829) (53,274) (46,397)
Proceeds from issuance of common stock 16,424 8,880 4,598
Purchase of treasury stock (105,558) (80,581) (12,081)
Shares reserved to meet deferred compensation obligations 1,945 1,624 1,111
- - ------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financial activities 138,612 (106,866) (21,426)
- - ------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (20,013) 29,994 (30,226)
Cash and cash equivalents at beginning of year 38,242 8,248 38,474
- - ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18,229 $ 38,242 $ 8,248
- - ------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
For the years ended December 31 (dollars in thousands) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------
Cash Paid (Received) During the Year for:
Interest expense $ 12,793 $ 6,708 $ 2,450
Income taxes, net of tax payments received from subsidiaries (9,770) (7,020) (4,139)
- - ------------------------------------------------------------------------------------------------------
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (57)
<PAGE>
NOTE 28 - Summary of Quarterly Financial Information (unaudited)
The following is a summary of quarterly results of operations for 1997 and
1996.
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) Quarter Ended
1997 Dec. 31 Sept. 30 June 30 Mar. 31
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $118,728 $116,184 $114,923 $112,064
Provision for loan losses 12,000 14,250 13,725 13,639
Net interest income after provision for loan losses 106,728 101,934 101,198 98,425
Noninterest income 55,163 53,943 50,039 45,431
Noninterest expense 84,892 81,151 79,541 76,179
Income taxes 25,276 24,581 24,083 22,404
Net income 51,723 50,145 47,613 45,273
- - --------------------------------------------------------------------------------------------------
Per share: (a)
Basic earnings per share $ 0.60 $ 0.58 $ 0.55 $ 0.52
Diluted earnings per share 0.58 0.57 0.54 0.51
Cash dividends declared on common stock 0.20 0.20 0.20 0.20
Book value of common shares at quarter-end 10.62 10.36 9.93 9.68
Market price -- high 58.00 47.06 44.75 45.25
low 46.13 42.63 38.88 29.70
Weighted average common shares outstanding 85,928 85,948 86,021 86,753
Weighted average diluted common shares 88,767 88,704 88,728 89,316
- - --------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 1.92% 1.90% 1.86% 1.83%
Return on average equity 22.97 23.00 22.74 21.71
Net interest margin 4.95 4.93 4.96 4.93
Efficiency ratio 48.58 47.46 47.97 48.12
Noninterest income as a percent of net revenue 31,57 31.55 30.18 28.69
- - --------------------------------------------------------------------------------------------------
Quarter Ended
1996 Dec. 31 Sept. 30 June 30 Mar. 31
- - --------------------------------------------------------------------------------------------------
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)
Basic earnings per share $ 0.48 $ 0.43 $ 0.45 $ 0.43
Diluted earnings per share 0.47 0.43 0.44 0.42
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 common shares outstanding 87,860 88,089 88,832 89,406
Weighted average diluted common shares 89,843 89,826 90,355 90,728
- - --------------------------------------------------------------------------------------------------
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
Efficiency ratio 51.02 53.49 51.85 51.86
Noninterest income as a percent of net revenue 28.25 29.06 29.29 28.63
- - --------------------------------------------------------------------------------------------------
(a) Earnings per share and weighted average share amounts have been restated
for adoption of SFAS No. 128.
</TABLE>
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (58)
<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 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 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
internal 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, 1997 and
1996 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, 1997. 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, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
January 12, 1998
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (59)
<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
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
John T. Taylor
Member of the Managing Committee since 1998
Executive Vice President since 1998
Regional Chairman/Louisville since 1998
CORPORATE DIRECTORS
Paul M. Baker 3,4
Formerly Chairman, Great Financial Corporation
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
Formerly Chairman, U.S. Precision Lens, Inc.
Thomas J. Klinedinst, Jr. 3,4
Chairman and Chief Executive Officer, Thos. E. Wood, Inc.
Charles S. Mechem, Jr. 2
Chairman, Cincinnati Bell, Inc.
Commissioner Emeritus, Ladies Professional Golf Association
Daniel J. Meyer 2
Chairman, President 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.
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
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (60)
<PAGE>
BANKING SUBSIDIARY DIRECTORS & REGIONAL ADVISORY BOARDS
Banking Subsidiary Directors
Star Bank, N.A.
Cincinnati, Ohio
Paul M. Baker
James R. Bridgeland, Jr.
Laurance L. Browning, Jr.
Victoria B. Buyniski
Samuel M. Cassidy
V. Anderson Coombe
John C. Dannemiller
Jerry A. Grundhofer
J.P. Hayden, Jr.
Roger L. Howe
Thomas J. Klinedinst, Jr.
Charles S. Mechem, Jr.
Daniel J. Meyer
David B. O'Maley
O'dell M. Owens, M.D., M.P.H.
Thomas E. Petry
Oliver W. Waddell
Regional Advisory Boards
Ohio
Butler County (Hamilton)
Samuel Boymel
James M. Dixon
Edward L. Dwyer
Jacque R. Huber
James G. Robinson
Thomas G. Stretch
Northern Ohio (Cleveland, Akron, Canton)
Margot James Copeland
John V. McFadden
William P. Mulligan
Tony Philiou
Melvin G. Pye, Jr.
Andrew E. Randall
Edwin Z. Singer
Central Ohio (Columbus)
Todd Barnum
Frank S. Benson, III
Thomas R. Green
William H. Guy
Carl Horton
Thomas J. Lakin
Circleville
Roger Bennington
Philip L. Evans
Robert M. Johnson
Rita J. Knece
Gerald A. Leist
Richard M. Patrick
Hillsboro
Jeffrey S. Beery, M.D.
William L. Cornelius
Douglas R. Daniel
Jeffrey J. Duncan
William H. Siddons
Ronald L. Swonger
Dr. Ralph E. Williams
Preble County (Eaton)
Thomas B. Atkinson
Dennis Behnken
Daniel M. Duke
Floyd C. Geeding
Frederick M. Haber
Gene R. Lindley
Dr. Mark W. Ulrich
Sidney
Timothy J. Geise
Martin L. Given
Scott J. Hinsch, Jr.
Roger L. Lentz
Diane Meyer
Charles G. Rhyan
Thomas E. Shoemaker
Bradley L. Smith
Tri-State (Gallipolis, Ironton, Portsmouth)
Jeanie Balzer
Donald L. Crance
Robert L. Dalton
Douglas R. Daniel
Robert E. Dever
Bill W. Dingus
Bernard L. Edwards
D. Dean Evans
Charles C. Klein
Dean F. Massie, M.D.
John V. Reinhardt
James W. Staker
J. Craig Strafford, M.D.
Wayne F. White
Troy
James W. Brown, III
Rebekah Mohr Brown
William H. Earhart
Mark T. Hamler
Stanley M. Harrison
Robert R. Koverman
Stewart I. Lipp
George N. Meeker
Max A. Myers
Michael E. Pfeffenberger
Steven K. Staley
Jerrold R. Stammen
Timothy J. Weaver
Brian R. Williamson
Kentucky
Central Kentucky
Joseph A. Campanella
Walter G. Ecton, Jr.
Nicholas C. Ellison
Robert C. Froman
Robert B. Geiger
Ralph V. Haile, Jr.
David M. Hall
Kenneth F. Harper
Hugh G. Hines, Jr.
Stanley H. Jones
Glenn R. Marshall
Robert E. Milward
Morrison J. Pickerill
David H. Pribble
John S. Smith
William J. Welty
Louisville
Madeline Abramson
Prentice E. Brown
Ishmon F. Burks
Joseph A. Campanella
Richard K. Davis
Stuart J. Frankenthal
Michael B. Mountjoy
Douglas A. Mussler
Bradford T. Ray
Debbie Scoppechio
Jack H. Shipman
Dick Swope
John T. Taylor
Western Kentucky
Kathy P. Beechem
Vivian M. Bowles, OSU, Ed.D.
Greg Carlson
George L. Greenwell
Arthur L. Harreld
Leslie M. Riherd, M.D.L.
Dean Rodney
Don Wetzel
Indiana
Eastern Indiana (Richmond)
R. Reed Adelsperger
Joseph A. Campanella
J. Richard Cox
Roger A. Hamilton
Boyd Huff
Ronald L. Oberle
David W. Stidham
Southeastern Indiana (Lawrenceburg)
John E. Borgman
Douglas R. Denmure
Robert Hastings
Patricia Krider
Donald Laker
Mark J. Neff
Johnny Nugent
Sheldon A. Rox
A. W. Stryker
Walter C. Wilson
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (61)
<PAGE>
CORPORATE INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of Star Banc Corporation will be held at
11:00 a.m. (EDT), Tuesday, April 14, 1998, in the Taft Ballroom, Third Floor of
the Westin Hotel, Fifth and Vine Streets, Downtown Cincinnati.
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. is Distributor of The Star Funds.
Star Bank is Investment Adviser to The Star Funds.
Products and services, including the Star Family of Mutual Funds, available
through branch-based investment centers at Star Bank, 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. or Investar Insurance
Agency, Inc. None of these companies is affiliated with Star Bank.
This annual report has been produced on recycled paper.
STAR BANC CORPORATION
BANK WITHOUT BOUNDARIES (62)
EXHIBIT 21
STAR BANC CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Star Bank, N.A. (A)
The Miami Valley Insurance Company (C)
Star Banc Finance, Inc. (A)
Star Capital Corporation (A)
P.N.B. Insurance Agency (B) *
First-In-Leasing, Inc. (B) *
(A) Ohio Corporation
(B) Indiana Corporation
(C) Arizona Corporation
* Inactive
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report incorporated by reference in this
Form 10-K, into the Company's previously filed Registration
Statement Files No. 2-94845, No. 33-9494, No. 33-10085, No. 33-
24672, No. 33-46018, No. 33-61308, No. 333-20133, and
No. 333-42041.
/s/ ARTHUR ANDERSEN LLP
_____________________________
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 27, 1998
<PAGE>
EXHIBIT 24
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 1997, 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 9th
day of December, 1997.
/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
_____________________________________ Director
V. Anderson Coombe
/s/ John C. Dannemiller
_____________________________________ Director
John C. Dannemiller
/s/ Jerry A. Grundhofer
_____________________________________ Director
Jerry A. Grundhofer
/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
_____________________________________ Director
O'dell M. Owens, M. D.
/s/ Thomas E. Petry
_____________________________________ Director
Thomas E. Petry
/s/ Oliver W. Waddell
_____________________________________ Director
Oliver W. Waddell
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 577,479
<INT-BEARING-DEPOSITS> 11,616
<FED-FUNDS-SOLD> 226,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,007,619
<INVESTMENTS-CARRYING> 154,549
<INVESTMENTS-MARKET> 1,162,615
<LOANS> 8,444,266
<ALLOWANCE> 132,055
<TOTAL-ASSETS> 10,958,901
<DEPOSITS> 8,197,575
<SHORT-TERM> 1,113,570
<LIABILITIES-OTHER> 239,420
<LONG-TERM> 502,323
0
0
<COMMON> 452,407
<OTHER-SE> 453,606
<TOTAL-LIABILITIES-AND-EQUITY> 10,958,901
<INTEREST-LOAN> 709,196
<INTEREST-INVEST> 90,750
<INTEREST-OTHER> 4,606
<INTEREST-TOTAL> 804,552
<INTEREST-DEPOSIT> 268,355
<INTEREST-EXPENSE> 342,653
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<SECURITIES-GAINS> (4,239)
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<INCOME-PRETAX> 291,098
<INCOME-PRE-EXTRAORDINARY> 291,098
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<CHANGES> 0
<NET-INCOME> 194,754
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.19
<YIELD-ACTUAL> 4.94
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<ALLOWANCE-CLOSE> 132,055
<ALLOWANCE-DOMESTIC> 132,055
<ALLOWANCE-FOREIGN> 0
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</TABLE>
