UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-7601
STAR BANC CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0838189
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
425 Walnut Street, Cincinnati, OH 45202
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 632-4000
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
107,064,254 common shares, par value $5, outstanding at November 1, 1998
- - ------------------------------------------------------------------------
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<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1998
Page
Table of Contents Number
- - ------------------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights......................................... 3
Report of Independent Public Accountants..................... 4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements............. 5 - 8
Notes to Condensed Consolidated Financial Statements.... 9 - 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................18 - 30
Part II. Other Information:
Item 1. Legal Proceedings.................................... none
Item 2. Changes in Securities................................ none
Item 3. Defaults Upon Senior Securities...................... none
Item 4. Submission of Matters to a Vote of Security Holders.. none
Item 5. Other Information.................................... none
Item 6. Exhibits and Reports on Form 8-K..................... 31
Signatures............................................................. 31
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
STAR BANC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
<CAPTION>
Third Quarter Year through September 30,
------------------------------------- -------------------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
------------ ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net income...............................$ 48,131 $ 56,288 (14.5)% $ 186,072 $ 160,584 15.9 %
Per share:
Basic earnings per common share........$ 0.45 $ 0.58 (22.4)% $ 1.76 $ 1.66 6.0 %
Diluted earnings per common share...... 0.44 0.57 (22.8) 1.71 1.61 6.2
Common dividends declared.............. 0.23 0.20 15.0 0.69 0.60 15.0
Book value per common share............ 15.73 10.76 46.2 15.73 10.76 46.2
Market value per common share.......... 66.13 45.94 43.9 66.13 45.94 43.9
Average balances:
Total assets...........................$ 17,118,615 $ 12,458,204 37.4 % $ 16,091,445 $ 12,213,498 31.8 %
Earning assets......................... 15,110,094 11,314,574 33.5 14,317,729 11,134,958 28.6
Loans, net of unearned interest........ 11,610,024 9,531,320 21.8 11,340,444 9,320,082 21.7
Deposits............................... 12,955,089 9,439,602 37.2 11,976,004 9,386,671 27.6
Total shareholders' equity............. 1,650,753 1,007,597 63.8 1,534,103 988,202 55.2
Ratios:
Return on average assets............... 1.12 % 1.79 % 1.55 % 1.76 %
Return on average equity............... 11.57 22.16 16.22 21.73
Average total shareholders' equity
to average total assets.............. 9.64 8.09 9.53 8.09
Risk-based capital ratios:
Tier 1............................... 8.11 8.70 8.11 8.70
Total................................ 11.36 12.54 11.36 12.54
Leverage - average assets (a).......... 6.75 7.73 6.75 7.73
Net interest margin.................... 4.43 4.86 4.53 4.86
Noninterest expense to net revenue..... 62.23 49.14 53.94 49.61
Noninterest income as a percent
of net revenue....................... 34.50 31.38 33.20 30.18
Net income to net revenue.............. 18.82 28.05 25.54 27.61
(a) - defined by regulatory authorities as tier 1 equity to the current
quarter's adjusted average assets.
</TABLE>
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<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Star Banc Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
STAR BANC CORPORATION (an Ohio corporation) as of September 30, 1998, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and the condensed
consolidated statements of changes in shareholders' equity and cash flows for
the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Star Banc Corporation
as of December 31, 1997 (not presented herein), and, in our report dated
January 12, 1998, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
October 9, 1998
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<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks.............................$ 681,774 $ 648,253
Money market investments............................ 16,092 238,540
Investment securities:
Available-for-sale................................ 2,596,298 1,285,717
Held-to-maturity (market value of $142,184 at
September 30, 1998 and $154,996 at December 31,
1997............................................ 139,928 154,549
----------- -----------
Total securities.................................. 2,736,226 1,440,266
Loans:
Commercial loans.................................. 3,661,128 3,199,355
Real estate loans................................. 4,319,586 3,501,820
Retail loans...................................... 3,996,496 3,379,097
----------- -----------
Total loans..................................... 11,977,210 10,080,272
Less: Unearned interest......................... 268,431 199,025
----------- -----------
11,708,779 9,881,247
Allowance for loan losses................. 178,575 154,072
----------- -----------
Net loans....................................... 11,530,204 9,727,175
Loans held for sale................................. 745,687 219,324
Premises and equipment.............................. 231,467 176,202
Acceptances - customers' liability.................. 22,398 16,764
Other assets........................................ 1,327,220 599,878
----------- -----------
Total assets....................................$17,291,068 $13,066,402
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing deposits......................$ 2,318,305 $ 1,953,682
Interest-bearing deposits......................... 10,633,730 7,817,731
----------- -----------
Total deposits................................ 12,952,035 9,771,413
Short-term borrowings............................... 1,666,592 1,292,918
Long-term debt...................................... 484,607 539,035
Guaranteed preferred beneficial interests in
Corporation's Junior subordinated debentures...... 148,617 148,581
Acceptances outstanding............................. 22,398 16,764
Other liabilities................................... 337,577 240,901
----------- -----------
Total liabilities............................... 15,611,826 12,009,612
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock:
Shares authorized - 1,000,000
Shares outstanding - none
Common stock:
Shares authorized - 400,000,000 at September 30,
1998 and 200,000,000 at December 31, 1997
Shares issued - 107,367,845 at September 30, 1998
And 100,809,333 at December 31, 1997............ 536,540 504,047
Surplus............................................. 389,921 100,169
Retained earnings................................... 735,404 611,244
Treasury stock, at cost - 614,088 shares at
September 30, 1998 and 5,192,374 shares at
December 31, 1997................................. (9,497) (167,048)
Employee Stock Ownership Plan shares purchased
With debt......................................... -- (1,846)
Net unrealized gain/(loss) on available-for-sale
securities....................................... 26,874 10,224
----------- -----------
Total shareholders' equity...................... 1,679,242 1,056,790
----------- -----------
Total liabilities and shareholders' equity......$17,291,068 $13,066,402
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Third Quarter Nine Months
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans..............$255,584 $215,672 $752,070 $625,072
Interest and fees on loans held for sale 10,904 2,575 25,848 6,083
Interest on investment securities:
Taxable............................... 46,016 24,300 118,209 76,961
Non-taxable........................... 1,754 1,495 4,879 4,374
Interest on money market investments.... 561 1,325 2,261 2,632
-------- -------- -------- --------
Total interest income................. 314,819 245,367 903,267 715,122
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits.................... 117,940 84,128 325,784 247,387
Interest on short-term borrowings....... 19,087 14,774 59,606 41,465
Interest on long-term debt.............. 11,413 9,938 34,835 23,742
-------- -------- -------- --------
Total interest expense................ 148,440 108,840 420,225 312,594
-------- -------- -------- --------
Net interest income................. 166,379 136,527 483,042 402,528
Provision for loan losses............... 22,101 16,900 48,946 49,114
-------- -------- -------- --------
Net interest income after
provision for loan losses......... 144,278 119,627 434,096 353,414
-------- -------- -------- --------
NONINTEREST INCOME:
Trust income............................ 18,771 15,318 53,892 43,519
Retail deposit income................... 16,182 13,708 45,349 38,552
Mortgage banking income................. 18,338 7,141 49,835 19,990
Cash management income.................. 6,300 5,123 16,696 14,081
Credit card income...................... 6,798 6,656 18,491 17,696
Electronic banking income............... 5,147 4,164 13,790 11,794
Investment securities gains/(losses)-net -- (971) 305 (4,594)
All other income........................ 16,711 11,834 43,521 34,499
-------- -------- -------- --------
Total noninterest income.............. 88,247 62,973 241,879 175,537
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries................................ 52,490 40,341 146,077 117,156
Pension and other employee benefits..... 7,162 6,445 22,383 19,515
Equipment expense....................... 8,045 6,266 22,753 18,134
Occupancy expense - net................. 8,897 7,036 24,698 20,498
All other expense....................... 52,620 38,530 147,063 113,230
-------- -------- -------- --------
129,214 98,618 362,974 288,533
Merger related charges.................. 29,970 -- 29,970 --
-------- -------- -------- --------
Total noninterest expense............. 159,184 98,618 392,944 288,533
-------- -------- -------- --------
INCOME BEFORE TAX....................... 73,341 83,982 283,031 240,418
Income tax.............................. 25,210 27,694 96,959 79,834
-------- -------- -------- --------
NET INCOME..............................$ 48,131 $ 56,288 $186,072 $160,584
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains/(losses) on
securities:
Unrealized holding gains/(losses)
arising during period........... 10,834 8,125 16,848 1,730
Less: Reclassification adjust-
ment for (gains)/losses
included in net income..... -- 631 (198) 2,986
-------- -------- -------- --------
Other comprehensive income.............. 10,834 8,756 16,650 4,716
-------- -------- -------- --------
COMPREHENSIVE INCOME....................$ 58,965 $ 65,044 $202,722 $165,300
======== ======== ======== ========
PER SHARE:
Basic earnings per common share.........$ 0.45 $ 0.58 $ 1.76 $ 1.66
Diluted earnings per common share....... 0.44 0.57 1.71 1.61
Common stock cash dividends declared.... 0.23 0.20 0.69 0.60
The accompanying notes are an integral part of these statements.
</TABLE>
-6-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<CAPTION>
Employee
Stock
Ownership
Series B Unrealized Plan Shares
Preferred Common Retained Treasury Gain/(Loss) Purchased Total
Stock Stock Surplus Earnings Stock on Securities With Debt Equity
-------- --------- --------- --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997..... $ -- $ 503,601 $ 90,921 $ 468,627 $ (81,344) $ 7,034 $ (2,451) $ 986,388
Net income.................. 160,584 160,584
Cash dividends declared
on common stock............ (57,076) (57,076)
Issuance of common stock
and treasury shares........ 333 2,506 13,236 16,075
Purchase of treasury
stock...................... (84,828) (84,828)
Shares reserved to meet
deferred compensation
obligations................ 2,474 (783) 1,691
Amortization of stock
awards..................... 321 321
Change in net unrealized
gain/(loss) on available-
for-sale securities........ 4,716 4,716
ESOP debt reduction, net..... 436 436
-------- --------- --------- --------- ---------- ----------- ------------- ----------
Balance, Sept. 30, 1997...... $ -- $ 503,934 $ 96,222 $ 572,135 $(153,719) $ 11,750 $ (2,015) $1,028,307
======== ========= ========= ========= ========== =========== ============= ==========
Balance, January 1, 1998..... $ -- $ 504,047 $ 100,169 $ 611,244 $(167,048) $ 10,224 $ (1,846) $1,056,790
Net income.................. 186,072 186,072
Cash dividends declared
on common stock............ (74,912) (74,912)
Issuance of common stock
and treasury shares........ 6,234 27,758 9,592 43,584
Retirement of shares........ (3) (43) (46)
Acquisition of Great
Financial.................. 26,262 259,015 13,000 159,613 457,890
Purchase of treasury
stock...................... (10,393) (10,393)
Shares reserved to meet
deferred compensation
obligations................ 2,454 (1,261) 1,193
Amortization of stock
awards..................... 568 568
Change in net unrealized
gain/(loss) on available-
for-sale securities........ 16,650 16,650
ESOP debt reduction, net..... 1,846 1,846
-------- --------- --------- --------- ---------- ----------- ------------- ----------
Balance, Sept. 30, 1998...... $ -- $ 536,540 $ 389,921 $ 735,404 $ (9,497) $ 26,874 $ -- $1,679,242
======== ========= ========= ========= ========== =========== ============= ==========
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 186,072 $ 160,584
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 25,724 20,678
Intangible amortization............................... 43,351 19,412
Provision for loan losses............................. 48,946 49,114
Provision for deferred taxes.......................... 36,650 24,259
(Gain)/loss on sale of premises and equipment - net... (20) (1,422)
(Gain)/loss on sale of securities - net............... (305) 4,590
(Gain)/loss on sale of mortgage loans................. (8,386) (8,093)
Proceeds from sale of mortgage loans ................. 1,778,754 903,855
Mortgage loans originated for sale on the secondary
market..............................................(2,046,120) (938,948)
Net change in other assets............................ (126,826) (90,654)
Net change in other liabilities....................... 22,825 22,672
---------- ----------
Total adjustments................................... (225,407) 5,463
---------- ----------
Net cash provided by/(used in) operating activities.. (39,335) 166,047
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 23,964 40,250
Proceeds from maturities of available-for-sale securities. 668,664 331,605
Proceeds from sales of available-for-sale securities...... 348,048 215,354
Purchase of held-to-maturity securities................... (9,567) (31,879)
Purchase of available-for-sale securities.................(1,061,524) (262,451)
Net change in loans....................................... (786,588) (886,857)
Proceeds from sales of loans.............................. 151,793 71,521
Proceeds from sales of premises and equipment............. 168 698
Purchase of premises and equipment........................ (37,593) (20,261)
Acquisition of Great Financial
Corporation (net of cash acquired)....................... (134,858) --
Net change due to acquisition (sale) of branch offices.... 901,611 69,922
---------- ----------
Net cash provided by/(used in) investing activities..... 64,118 (472,098)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... (4,708) (93,146)
Net change in short-term borrowings....................... 195,523 406,008
Principal payments on long-term debt...................... (411,313) (6)
Proceeds from issuance of long-term debt.................. 52,914 71,098
Proceeds from issuance of capital securities.............. -- 148,554
Proceeds from issuance of common stock.................... 30,504 16,075
Purchase of treasury stock................................ (10,393) (84,828)
Shares reserved to meet deferred compensation obligations. 1,193 1,691
Dividends paid............................................ (67,430) (53,610)
---------- ----------
Net cash provided by/(used in) financing activities..... (213,710) 411,836
---------- ----------
Net change in cash and cash equivalents................... (188,927) 105,785
Cash and cash equivalents at beginning of year............ 886,793 634,055
---------- ----------
Cash and cash equivalents at end of year..................$ 697,866 $ 739,840
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for the nine months ended September 30 1998 1997
---------- ----------
Interest................................................$ 406,658 $ 314,260
Income taxes............................................ 39,166 39,464
Noncash transfer of loans to other real estate owned...... 5,600 2,421
The accompanying notes are an integral part of these statements.
</TABLE>
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Basis of Presentation
- - ------------------------------
These condensed consolidated financial statements have been prepared by
Star Banc Corporation ("the Corporation") pursuant to the rules and regulations
of the Securities and Exchange Commission and, therefore, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Corporation's annual
report on Form 10-K for the year ended December 31, 1997, filed with the
Securities and Exchange Commission.
These condensed consolidated financial statements include the accounts of
the Corporation and all of its subsidiaries and reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the periods reported. All such adjustments are of a normal recurring
nature.
DERIVATIVE FINANCIAL INSTRUMENTS
As noted in the footnotes to its annual report on Form 10-K, the
Corporation utilizes derivative financial instruments, primarily interest rate
swaps and foreign exchange forward contracts for hedging purposes to reduce
exposure to adverse changes in interest rates and foreign currency exchange
rates. Substantially all derivatives of the Corporation are accounted for as
"hedges." Interest rate swap transactions are analyzed as to the spread, asset
yield or liability cost being protected. The specific asset or liability or
class of assets or liabilities are identified and the correlation between the
hedged item, the derivative instrument and the associated interest rate risk is
documented. The Corporation periodically reviews the correlation between the
rates on the derivative and the hedged items, in addition to the changes in the
market value of the derivative and the changes in the fair value of the hedged
item. If the underlying designated hedged item were to mature or be sold, the
related derivative instrument would be marked-to-market or terminated with any
gain or loss recognized in the current period.
NOTE 2. Investment Securities
- - ------------------------------
The following table summarizes unrealized gains and losses for held-to-
maturity and available-for-sale securities at September 30, 1998 and
December 31, 1997. (Dollars are in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------- -------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
- - ----------------
Mortgage-backed
securities $ 68,136 $ -- $ 523 $ 67,613 $ 89,443 $ -- $ 747 $ 88,696
Obligations of state and
political subdivisions 71,792 3,205 426 74,571 65,106 2,048 854 66,300
Other debt securities -- -- -- -- -- -- -- --
---------- ------- ------- ---------- ---------- ------- ------- -----------
Total held-to-
maturity securities $ 139,928 $ 3,205 $ 949 $ 142,184 $ 154,549 $ 2,048 $ 1,601 $ 154,996
========== ======= ======= ========== ========== ======= ======= ==========
</TABLE>
-9-
<PAGE>
NOTE 2. (cont.)
- - -------
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------- -------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
- - ------------------
U.S. Treasuries and
agencies $ 85,881 $ 1,368 $ 21 $ 87,228 $ 153,567 $ 475 $ 85 $ 153,957
Mortgage-backed
securities 2,282,814 36,777 734 2,318,857 952,285 15,756 306 967,735
Obligations of state
and political
subdivisions 48,528 3,958 2 52,484 46,502 1,387 8 47,881
Other debt securities 2,173 3 4 2,172 14,333 79 16 14,396
Federal Reserve/FHLB
stock and other
equity securities 135,557 -- -- 135,557 102,737 8 997 101,748
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total available-for-
sale securities $2,554,953 $42,106 $ 761 $2,596,298 $1,269,424 $17,705 $ 1,412 $1,285,717
========== ======= ======= ========== ========== ======= ======= ==========
</TABLE>
As of September 30, 1998, the Corporation reported a net unrealized gain
of $41.3 million for available-for-sale securities. For the first nine months
of 1998, the after-tax net unrealized gain/(loss) reported as a separate
component of equity increased from a net unrealized gain of $10.2 million to a
net unrealized gain of $26.9 million, increasing shareholders' equity $16.7
million.
During the first quarter of 1998 approximately $615 million in mortgage loans
were converted to mortgage backed securities.
The following table presents the amortized cost and fair value of held-to-
maturity and available-for-sale debt securities at September 30, 1998. (Dollars
in thousands)
Amortized Fair
Held-to-Maturity Cost Value
- - ---------------- ----------- -----------
One year or less $ 24,470 $ 24,846
After one year through five years 37,729 38,008
After five years through ten years 40,915 41,555
After ten years 36,814 37,775
----------- -----------
Total $ 139,928 $ 142,184
=========== ===========
Available-for-Sale
- - ------------------
One year or less $ 778,471 $ 790,701
After one year through five years 1,105,326 1,123,106
After five years through ten years 444,428 452,544
After ten years 91,171 94,390
----------- -----------
Total $ 2,419,396 $ 2,460,741
=========== ===========
Note: Maturity information related to mortgage-backed securities included above
is presented based upon weighted average maturities anticipating future
prepayments.
-10-
<PAGE>
NOTE 3. Loans
- - --------------
The following table summarizes the composition of the loan portfolio, net
of unearned interest, as of September 30, 1998 and December 31, 1997.
(Dollars are in thousands)
September 30, December 31,
1998 1997
---------- ----------
Commercial loans:
Corporate loans $2,773,107 $2,452,283
Asset-based lending 404,654 325,140
Commercial leasing 378,110 336,354
Industrial revenue bonds 34,727 27,481
---------- ----------
Total commercial loans 3,590,598 3,141,258
---------- ----------
Real estate loans:
Residential mortgage 1,846,149 1,427,912
Commercial mortgage 1,825,442 1,575,616
Construction and land development 647,995 498,292
---------- ----------
Total real estate loans 4,319,586 3,501,818
---------- ----------
Retail loans:
Installment 2,177,478 1,861,446
Credit cards 414,089 446,219
Retail leasing 1,207,028 930,504
---------- ----------
Total retail loans 3,798,595 3,238,169
---------- ----------
Total loans, net of unearned interest $11,708,779 $9,881,247
========== ==========
NOTE 4. Impaired Loans
- - -----------------------
The following table shows the Corporation's recorded investment in
impaired loans and the related valuation allowance calculated under SFAS
No. 114 (as amended by SFAS No. 118) at September 30, 1998 and
December 31, 1997. (Dollars are in thousands)
September 30, 1998 December 31, 1997
--------------------- ---------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Impaired Loans:
Valuation allowance required $ 8,706 $ 1,915 $ 21,132 $ 4,638
No valuation allowance required 27,087 -- 13,159 --
--------- -------- --------- --------
Total impaired loans $ 35,793 $ 1,915 $ 34,291 $ 4,638
========= ======== ========= ========
The average recorded investment in impaired loans for the nine months
ended September 30, 1998 was $33 million, compared to $36 million for the same
period in 1997. As a general policy, the Corporation applies both principal and
interest payments received on impaired loans as a reduction of principal.
Interest income recognized on impaired loans totaled $129,000 and $512,000 in
the first nine months of 1998 and 1997, respectively.
-11-
<PAGE>
NOTE 5. Allowance for Loan Losses
- - ---------------------------------
A summary of the activity in the allowance for loan losses is shown in the
following table. (Dollars are in thousands)
Nine Months Ended Year Ended
September 30, December 31,
-------------------- ------------
1998 1997 1997
--------- --------- ---------
Balance - beginning of period $ 154,071 $ 136,754 $ 136,754
Loans charged-off (58,741) (46,719) (62,218)
Recoveries on loans previously charged-off 14,931 12,543 16,421
--------- --------- ---------
Net charge-offs (43,810) (34,176) (45,797)
Provision charged to earnings 48,946 49,114 63,114
Allowances of banks purchased 19,368 -- --
--------- --------- ---------
Balance - end of period $ 178,575 $ 151,692 $ 154,071
========= ========= =========
NOTE 6. Deposits
- - -----------------
The following table summarizes the composition of deposits of the
Corporation as of September 30, 1998 and December 31, 1997. (Dollars are in
thousands)
September 30, December 31,
1998 1997
----------- ----------
Noninterest-bearing deposits $ 2,318,305 $1,953,682
Interest-bearing deposits:
Savings 1,020,933 889,936
NOW accounts 187,381 155,923
Money market deposit accounts 3,732,576 2,605,013
Time deposits $100,000 and over - domestic 912,059 829,023
Foreign deposits $100,000 and over 11,920 30,143
All other deposits 4,768,861 3,307,693
----------- ----------
Total interest-bearing deposits 10,633,730 7,817,731
----------- ----------
Total deposits $12,952,035 $9,771,413
=========== ==========
NOTE 7. Guaranteed Preferred Beneficial Interests In Corporation's Junior
Subordinated Debt
- - --------------------------------------------------------------------------
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 $4,460,000 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
acquisitions.
-12-
<PAGE>
NOTE 7. (cont.)
- - -------
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 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 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.
NOTE 8. Income Tax
- - ------------------
The components of the net deferred tax liability included in other
liabilities on the Corporation's consolidated balance sheets at September
30, 1998 and December 31, 1997 are shown in the following table. (Dollars
are in thousands)
September 30, December 31,
1998 1997
--------- ---------
Allowance for loan losses $ 54,224 $ 53,812
Deferred compensation 5,519 4,499
Deferred loan fees and costs 1,974 1,526
Intangible asset amortization 2,146 280
Other 9,935 3,593
--------- ---------
Total deferred tax asset 73,798 63,710
--------- ---------
Leased assets (153,328) (120,078)
Fixed asset depreciation (7,156) (6,634)
Pension liabilities (6,541) (6,410)
Unrealized gain on securities (14,471) (6,073)
FHLB stock dividends (8,625) (3,244)
Purchase accounting/intangible assets (1,684) (1,517)
Mortgage servicing rights (4,148) --
Other (6,367) (3,226)
--------- ---------
Total deferred tax liability (202,320) (147,182)
--------- ---------
Net deferred tax liability $(128,522) $ (83,472)
========= =========
The Corporation has not recorded a valuation reserve related to deferred tax
assets.
-13-
<PAGE>
NOTE 9. Other Noninterest Expense
- - ---------------------------------
The following are included in all other expense for the three months and
nine months ended September 30, 1998 and 1997. (Dollars are in thousands)
Three Months Nine Months
----------------- -----------------
1998 1997 1998 1997
------- -------- ------- --------
Amortization of intangible assets $11,344 $ 4,549 $27,583 $13,903
Outside processing services 5,146 3,873 14,378 11,972
State taxes 4,012 3,127 11,731 9,043
Marketing 3,139 3,108 10,633 8,643
Note 10. Merger Related Charges
- - --------------------------------
As a result of the acquisition of Trans Financial Inc., the Corporation
and Trans Financial incurred $30 million in merger-related charges. The
following table summarizes the pre-tax merger related charges included in
the third quarter 1998 income statement: (Dollars are in thousands)
Severance $ 8,995
Occupancy/Equipment 5,343
Conversion and contract terminations 4,701
Other merger related charges 10,931
-------
Merger related charges included in noninterest expense $29,970
=======
Severance charges include the cost of severance, other benefits, and
outplacement costs associated with the termination of employees primarily in
centralized corporate support and data processing functions. Occupancy /
equipment represent write-offs for redundant office space and equipment.
Conversion and contract terminations include preparation and mailing of numerous
customer communications for the acquisition and conversion of customer accounts,
and printing and distributing training materials. Other merger related charges
includes outside consulting fees, the establishment of a charitable foundation
and other direct charges. An additional $12.3 million loan loss provision
charged to earnings at the merger date was recorded in connection with a change
in the managment of Trans Financial's problem loans.
The following table presents a summary of activity with respect to the
Company's merger related charges payable:
Amount charged to operating expense $ 29,970
Cash outlays (17,170)
Non-cash writedowns (5,882)
---------
Balance at September 30, 1998 $ 6,918
=========
-14-
<PAGE>
NOTE 11. Mortgage Servicing Assets
- - -----------------------------------
The Corporation recognizes servicing assets on residential mortgage loans
to be sold on the secondary market. The value of mortgage servicing assets are
established based on either the amount of consideration paid for loans purchased
or pricing determined using a valuation model which calculates the present value
of estimated future cash flows based on the market rate at the time the loan was
originated. The Corporation sold all mortgage servicing assets originated in
1997 to a third party on a quarterly basis, therefore the value of those assets
are established based on the future sale commitment. Mortgage servicing assets
are amortized as a reduction of servicing revenues, over the period of the
estimated lives of the underlying loans, in proportion with estimated net
servicing income.
Quarterly impairment testing of all mortgage servicing assets is performed
using a discounted cash flow methodology assuming current national prepayment
speeds and a current discount rate. The discount rates assumed were 9.50
percent at September 30, 1998 and 9.25 percent at December 31, 1997. Impairment
will be recognized through a valuation allowance for each impaired stratum.
The following is a summary of mortgage servicing assets included in other
assets at September 30, 1998 and December 31, 1997. (Dollars are in thousands)
Sept. 30, Dec. 31,
Mortgage Servicing Assets: 1998 1997
-------- --------
Balance at beginning of year $ 56,156 $ 54,418
Amount capitalized/acquired 106,226 19,270
Amount sold (7,631) (9,610)
Amortization (15,766) (7,922)
Valuation reserve (230) --
-------- --------
Balance at end of period $138,755 $ 56,156
======== ========
NOTE 12. 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 for the three months
and nine months ended September 30, 1998.
Three Months Nine Months
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- --------
Net income $48,131 $56,288 $186,072 $160,584
Dividends on preferred stock -- -- -- --
------- ------- -------- --------
Net income available to common
shareholders $48,131 $56,288 $186,072 $160,584
======= ======= ======== ========
Weighted average shares:
Common shares 107,218 96,248 105,477 96,523
Convertible preferred shares -- -- -- --
Stock awards 66 51 63 47
Stock options 3,049 2,996 3,063 2,880
------- ------- -------- --------
Weighted average diluted common
shares 110,333 99,295 108,603 99,450
======= ======= ======== ========
-15-
<PAGE>
NOTE 12. (cont.)
- - ----------------
Three Months Nine Months
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- --------
Basic earnings per share
(net income available to common
shareholders' divided by weighted
average common shares) $ 0.45 $ 0.58 $ 1.76 $ 1.66
======= ======= ======== ========
Diluted earnings per share
(net income divided by weighted
average diluted common shares) $ 0.44 $ 0.57 $ 1.71 $ 1.61
======= ======= ======== ========
NOTE 13. Comprehensive Income
- - ------------------------------
During the year, the Corporation adopted FASB Statement No. 130,
"Reporting Comprehensive Income". Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
At period end the Corporation held securities classified as available-for-
sale, which have unrealized gains (losses). The before tax and after tax amount
for the three months and nine months ended September 30, 1998 and 1997 is
summarized below.
Three Months Six Months
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Net unrealized holding
gains(losses) before tax $16,474 $12,459 $25,357 $ 2,723
Tax (expense)/benefit (5,640) (4,334) (8,509) (993)
Reclassification adjustment
for gains(losses)
included in net income -- 971 (305) 4,594
Tax (expense)/benefit -- (340) 107 (1,608)
------- ------- ------- -------
$10,834 $ 8,756 $16,650 $ 4,716
======= ======= ======= =======
NOTE 14. Acquisitions
- - ----------------------
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 has been accounted for as a
purchase transaction. The allocation of the purchase price for Great Financial
is preliminary and may change as certain estimates and contingencies are
finalized, although any adjustments are not expected to be material.
-16-
<PAGE>
NOTE 14. (cont.)
- - -----------------
The following table presents an Unaudited Pro Forma Combined Summary of
Operations of the Corporation and Great Financial for the three months and
nine months ended September 30, 1997. The Unaudited Pro Forma Combined
Summary of Operations is presented as if the Great Financial merger had
been effective January 1, 1997. (dollars are in thousands except per share
data)
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Net interest income $154,826 $457,026
Net income 59,031 167,891
Basic earnings per common share 0.56 1.58
Diluted earnings per common share 0.54 1.54
On June 19, 1998, Star Bank, N.A., the primary subsidiary of the
Corporation acquired 49 Bank One branches, including approximately $1.1 billion
in deposits and approximately $120 million in loans. The acquisition was
accounted for as a purchase transaction with an initial premium of approximately
$116 million. The allocation of the purchase price for the branches is
preliminary and may change as certain estimates and contingencies are finalized,
although any adjustments are not expected to be material.
On August 21, 1998, the Corporation acquired Trans Financial, Inc. ("Trans
Financial") through a stock-for-stock fixed exchange of 0.9003 Star Banc shares
for each share of Trans Financial stock. This transaction was structured as a
tax-free exchange for shareholders and was accounted for as a pooling-of-
interests. All financial information previously reported by the Corporation,
except dividends per share, has been restated for the Trans Financial
acquisition.
On July 1, 1998, the Corporation and Firstar Corporation ("Firstar")
announced it had signed a definitive agreement to merge through an exchange of
shares valued at approximately $7.2 billion. Firstar is a $20.7 billion
Milwaukee, Wisconsin-based financial services holding company. Under the terms
of the agreement, Firstar shareholders will receive a tax-free exchange of 0.76
shares of common stock of the combined company for each share of Firstar common
stock and shareholders of Star Banc will retain one share of common stock in the
combined company for each Star Banc share. This transaction is expected to be
accounted for as a pooling-of-interest. The combined company will be known as
Firstar Corporation.
-17-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - ------------------------------------------------------------------------
Overview
- - --------
Net income of Star Banc Corporation ("the Corporation") for the quarter ended
September 30, 1998, was $48,131,000, a 14.5 percent decrease compared to the
third quarter of 1997. Net income for the first nine months of 1998 was
$186,072,000, a 15.9 percent increase over the same period in 1997. Diluted
earnings per common share was $0.44 for the third quarter of 1998, compared to
$0.58 for the third quarter of 1997, a decrease of 22.4 percent. For the first
nine months of 1998 diluted earnings per common share was $1.71, a 6.2 percent
increase over the same period in 1997.
On August 21, 1998, the Corporation completed the acquisition of Trans
Financial Inc., a $2.2 billion financial services holding company based in
Bowling Green, Kentucky. The purchase of Trans Financial Inc. was a tax-free
stock-for-stock exchange which was accounted for as a pooling-of-interest.
Under the terms of this agreement, the Corporation exchanged 0.9003 shares of
Star Banc common stock for each share of Trans Financial. The Corporation
issued 10.7 million shares of stock in this transaction. As a result of this
acquisition, all prior period financial information has been restated to include
the historical results of Trans Financial Inc.
In connection with the acquisition of Trans Financial Inc., the Corporation
incurred pre-tax merger-related charges of $30.0 million. These charges
included $9.0 million in severance and employee related costs, $5.3 million in
occupancy and equipment charges, $4.7 million in conversion costs and contract
terminations, $3.0 million to establish a charitable foundation for the Bowling
Green area and $8.0 million in other merger costs such as legal and investment
banking fees. In addition, a $12.3 million provision for loan losses was
charged to earnings on the merger date, in connection with a change in the
management of Trans Financial problem loans. Excluding merger-related charges
and the additional provision, net income for the third quarter was $75.6
million, a 34.3 percent increase over the third quarter of 1997. Diluted
earnings per share was $0.69 for the third quarter 1998, a 21.1 percent increase
over the same period of 1997. Return on average assets was 1.75 percent for the
third quarter and 1.77 percent for the first nine months of 1998, compared to
1.79 percent and 1.76 percent, respectively, for the same periods in 1997. Due
primarily to the acquisition of Great Financial Corporation (discussed below),
return on average equity declined to 18.17 percent for the third quarter and
18.61 percent for the first nine months of 1998, compared to 22.16 percent and
21.73 percent, respectively, for the same periods in 1997.
On February 7, 1998, the Corporation completed the acquisition of Great
Financial Corporation ("GFC") for 70 percent stock and 30 percent cash. The
Corporation issued 9.5 million shares and the total value of the acquisition was
$648 million. This transaction was a tax-free exchange for shareholders
receiving stock and was accounted for as a purchase transaction. The GFC
acquisition added 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 19, 1998, Star Bank, N.A. ("the Bank") completed the acquisition of
49 branch offices located in 26 counties throughout Ohio from Bank One. In this
acquisition the Bank acquired $1.1 billion in deposits and $120 million in loans
for a premium of $117 million. The remaining cash received in this transaction
was invested in mortgage-backed securities.
-18-
<PAGE>
On July 1, 1998, Star Banc Corporation and Firstar Corporation ("Firstar")
announced they had signed a definitive agreement to merge through an exchange of
shares valued at approximately $7.2 billion. The merger is a tax-free stock
exchange and will be accounted for as a pooling-of-interest. Firstar is a $20
billion financial services holding company based in Milwaukee, Wisconsin. The
combined company will provide a full range of consumer banking, commercial
banking, trust and investment management services and products to more than 3
million customers, with approximately 720 branch locations in eight Midwest
states and Arizona, in addition to trust operations in Florida. Under the terms
of the agreement, Firstar shareholders will receive 0.76 shares of common stock
of the combined company for each share of Firstar common stock and Star Banc
shareholders will retain one share of common stock in the combined company for
each common share of Star Banc. The combined company will be known as Firstar
Corporation, and its corporate headquarters will be located in Milwaukee, with
consumer banking and specialized lending operations located in Cincinnati. All
required regulatory approvals and shareholder approval has been received and the
transaction will close November 20, 1998.
Financial Condition
- - -------------------
Total assets at September 30, 1998 amounted to $17.29 billion, up $4.2
billion from $13.07 billion at December 31, 1997. Total loans, net of
unearned interest, increased $1.83 billion to $11.71 billion at September
30, 1998, compared to $9.88 billion at December 31, 1997. These increases
were due to the acquisitions of GFC and the Bank One branch offices. The
acquisition of GFC added $2.81 billion in total assets and $1.87 billion
in loans. Also in the first half of 1998, the Corporation swapped
$615 million in residential mortgages to investment securities. Outside
of the changes in residential mortgages the Corporation experienced
strong loan growth in several loan areas for the first nine months of
1998, led by retail leasing up $277 million or 29.7 percent and residential
mortgages which were up $418 million or 29.3 percent. Commercial loans
also showed strong growth increasing $449 million or 14.3 percent in the
first nine months of 1998.
Investment securities increased $1.29 billion to $2.74 billion at September
30, 1998 compared to $1.44 billion at December 31, 1997. This increase was due
in part to the GFC acquisition and the residential mortgage swaps previously
discussed. In addition, the Corporation purchased $784 million in securities
with the cash received in the Bank One branch acquisition, resulting in a total
of $1.06 billion in mortgage-backed securities purchased in the first nine
months of 1998. As of September 30, 1998, the Corporation's investment
securities portfolio included $2.60 billion in securities classified as
available-for-sale and $140 million classified as held-to-maturity. The
securities added as a result of the GFC acquisition and the mortgage swaps were
all classified as available-for-sale. At September 30, 1998, the Corporation
reported a net unrealized gain of $41.3 million on available-for-sale
securities, with an offsetting increase to shareholders' equity of $16.7 million
(net of tax). For the first nine months of 1998, the after-tax net unrealized
gain/(loss) reported as a separate component of equity increased from an
unrealized gain of $10.2 million to an unrealized gain of $26.9 million,
increasing equity $16.7 million.
Total deposits increased $3.18 billion to $12.95 billion at September 30, 1998
from $9.77 billion at December 31, 1997. The acquisition of GFC and the Bank
One offices added $3.08 billion in deposits, with $1.71 billion in certificates
of deposit, $996 million in savings, NOW and money market accounts and $376
million in noninterest bearing deposits. Excluding GFC and Bank One, total
deposits increased $101 million in the first nine months of 1998, with money
market deposit accounts up $620 million, while small CDs declined $88 million
and savings and NOW accounts declined $238 million. Noninterest-bearing deposits
were relatively flat for first nine months of 1998, as increases in business
-19-
<PAGE>
accounts were offset by declines in personal accounts. The Corporation has
continued to experience a decline in savings accounts (excluding the
acquisitions) through the first nine months of 1998, as customers continue to
transfer funds into tiered rate money market deposits and other higher yielding
nonbank products.
Results of Operations
- - ---------------------
Net interest income, the Corporation's principal source of earnings,
increased $29.8 million or 21.9 percent in the third quarter of 1998, compared
to the same period in 1997. For the first nine months of 1998, net interest
income increased $80.5 million or 20.0 percent. The increase in 1998 was due to
increased volumes from continued strong loan growth and the earning assets added
as a result of the GFC and Bank One branch acquisitions. The increase due to
higher earning asset volumes has been partially offset by negative earning asset
mix changes. As a result of the GFC and Bank One acquisitions, the majority of
the assets acquired were lower yielding residential mortgages and mortgage-
backed securities. In addition, growth in Trans Financials' earning assets was
more heavily weighted toward residential mortgages and mortgage-backed
securities. For the first nine months of 1998, average loans increased $2.02
billion or 21.7 percent, with residential mortgages increasing $494 million or
33.4 percent. Investment securities increased $826 million or 50.7 percent,
compared to the same period in 1997.
Net interest margin decreased 43 basis points to 4.43 percent for the third
quarter and 33 basis points to 4.53 percent for the first nine months of 1998,
compared to 4.86 percent for the same periods in 1997. These decreases in net
interest margin reflect the decline in rates on earning assets related to the
addition of residential mortgages and investment securities associated with the
Great Financial, Bank One and Trans Financial acquisitions, as discussed above.
Also contributing to the decline in net interest margin were increases in the
cost of supporting funds of eight basis points for the third quarter and 16
basis point for the first nine months of 1998, compared to the same periods in
1997. These increases were principally due the higher costs of Great
Financials' interest-bearing deposits and other funding sources, as compared to
similar funds at Star Bank. As a result, the acquisition of GFC compressed the
Corporation's overall net interest margin. Tables 1 and 2 provide detailed
information on the average balances, interest income/expense and rates earned or
paid by major balance sheet category.
An additional $12.3 million loan loss provision charged to earnings at the
merger date was recorded in connection with a change in the management of Trans
Financial problem loans. Excluding this merger-related charge, the provision
for loan losses decreased $7.1 million in the third quarter and $12.5 million
for the first nine months of 1998, compared to the same periods in 1997. As
discussed further in the Asset Quality section, the provision was down as a
result of lower levels of charge-offs (as a percentage of average loans) in
1998.
Noninterest income continues to be a growing source of revenue, representing
34.5 percent of the Corporation's tax-equivalent net revenues for the third
quarter and 33.2 percent for the first nine months of 1998, compared to 31.4
percent and 30.2 percent respectively, for the same periods in 1997.
Noninterest income was $88.2 million for the third quarter and $241.9 million
for the first nine months of 1998, increases of 40.1 percent and 37.8 percent,
from the same periods of 1997. Excluding gains/(losses) on sales of securities,
noninterest income increased $61.4 million or 34.1 percent in the first nine
months of 1998, compared to the same period in 1997. The acquisitions of GFC
and Trans Financial has added a significant mortgage servicing operation to the
Corporation contributing greatly to
-20-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
<CAPTION>
Third Quarter, 1998 Third Quarter, 1997
-------------------------------- ---------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans....................$ 3,829,344 $ 83,717 8.68 % $ 3,492,064 $ 78,045 8.87 %
Real estate loans................... 4,055,570 87,052 8.58 2,946,845 64,806 8.79
Retail loans........................ 3,725,110 85,155 9.10 3,092,411 73,315 9.44
----------- --------- ----------- ---------
Total loans.................... 11,610,024 255,924 8.78 9,531,320 216,166 9.03
Loans held for sale................. 592,107 10,904 7.37 158,739 2,575 6.49
Taxable investment securities....... 2,780,531 46,016 6.61 1,470,648 24,300 6.60
Non-taxable investment securities... 88,101 2,586 11.74 62,807 2,201 14.02
Money market investments............ 39,331 561 5.65 91,060 1,325 5.77
----------- --------- ----------- ---------
Total interest-earning assets.. 15,110,094 $ 315,991 8.33 % 11,314,574 $ 246,567 8.68 %
========= ==== ========= ====
Cash and due from banks............. 670,423 517,781
Allowance for loan losses........... (180,862) (149,650)
Other assets........................ 1,518,960 775,499
----------- -----------
Total assets...................$17,118,615 $12,458,204
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.....................$ 1,277,009 $ 7,882 2.45 % $ 1,186,263 $ 7,558 2.53 %
Money market deposit accounts....... 3,634,400 31,943 3.49 2,376,027 19,161 3.20
Time deposits $100,000 and over..... 842,302 11,930 5.62 531,965 7,474 5,57
Time deposits under $100,000........ 4,887,035 66,185 5.37 3,632,423 49,935 5.45
Short-term borrowings............... 1,494,628 19,087 5.07 1,185,525 14,774 4.94
Long-term debt...................... 690,294 11,413 6.59 592,589 9,938 6.68
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................. 12,825,668 $ 148,440 4.59 % 9,504,792 $ 108,840 4.55 %
========= ==== ========= ====
Noninterest-bearing deposits........ 2,314,343 1,712,924
Other liabilities................... 327,851 232,891
Shareholders' equity................ 1,650,753 1,007,597
----------- -----------
Total liabilities and
shareholders' equity.........$17,118,615 $12,458,204
=========== ===========
Net interest margin................. 4.43 % 4.86 %
Interest rate spread................ 3.74 4.13
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of
nonaccruing loans is included in average amounts outstanding.
</TABLE>
-21-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
<CAPTION>
Year through September 30, 1998 Year through September 30, 1997
-------------------------------- ---------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans....................$ 3,859,172 $ 253,296 8.77 % $ 3,397,579 $ 226,644 8.92 %
Real estate loans................... 3,928,303 254,028 8.63 2,921,354 190,193 8.68
Retail loans........................ 3,552,969 245,965 9.25 3,001,149 209,751 9.33
----------- --------- ----------- ---------
Total loans.................... 11,340,444 753,289 8.87 9,320,082 626,588 8.98
Loans held for sale................. 471,303 25,848 7.23 125,720 6,083 6.45
Taxable investment securities....... 2,376,545 118,209 6.63 1,568,258 76,961 6.55
Non-taxable investment securities... 76,664 7,198 12.52 59,466 6,449 14.46
Money market investments............ 52,773 2,261 5.73 61,432 2,632 5.73
----------- --------- ----------- ---------
Total interest-earning assets.. 14,317,729 $ 906,805 8.45 % 11,134,958 $ 718,713 8.62 %
========= ==== ========= ====
Cash and due from banks............. 619,350 499,584
Allowance for loan losses........... (174,645) (145,174)
Other assets........................ 1,329,011 724,130
----------- -----------
Total assets...................$16,091,445 $12,213,498
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.....................$ 1,233,246 $ 23,354 2.53 % $ 1,226,788 $ 23,632 2.58 %
Money market deposit accounts....... 3,213,749 82,549 3.43 2,274,623 52,204 3.07
Time deposits $100,000 and over..... 753,163 31,700 5.63 531,067 22,060 5.55
Time deposits under $100,000........ 4,635,118 188,181 5.43 3,679,864 149,491 5.43
Short-term borrowings............... 1,576,438 59,606 5.06 1,129,370 41,465 4.91
Long-term debt...................... 705,617 34,835 6.59 481,194 23,742 6.59
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................. 12,117,331 $ 420,225 4.64 % 9,322,906 $ 312,594 4.49 %
========= ==== ========= ====
Noninterest-bearing deposits........ 2,140,728 1,674,329
Other liabilities................... 299,283 228,061
Shareholders' equity................ 1,534,103 988,202
----------- -----------
Total liabilities and
shareholders' equity.........$16,091,445 $12,213,498
=========== ===========
Net interest margin................. 4.53 % 4.86 %
Interest rate spread................ 3.81 4.13
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of
nonaccruing loans is included in average amounts outstanding.
</TABLE>
-22-
<PAGE>
the increase in noninterest income as mortgage banking income increased $11.2
million or 157 percent in the third quarter of 1998. The Corporation also had
strong growth in several other areas, led by trust income, which increased 22.6
percent for the third quarter and 23.4 percent for the first nine months of 1998
due to new business in all product lines and improved market conditions.
Service charges on deposits, including retail deposit and cash management income
increased 19.4 percent in the third quarter and 17.9 percent for the first nine
months of 1998 due to higher demand deposit levels and increased transaction
volumes, in addition to the acquisition of GFC. Other areas of strong growth in
noninterest income for 1998 include insurance commissions and electronic banking
income.
Noninterest expense totaled $159.2 million in the third quarter and $392.9
million for the first nine months of 1998, increases of 61.4 percent and 36.2
percent, respectively, compared to the same periods of 1997. Excluding merger-
related costs, noninterest expense increased 31.0 percent in the third quarter
and 25.8 percent for the first nine months of 1998. The increase in noninterest
expenses in 1998 was primarily a result of the acquisitions of GFC and the Bank
One branches, in addition to additional branch openings and expansion at Star
Banc Finance, Inc. Increases related to the Great Financial and Bank One
acquisitions occurred in the following categories: salaries, occupancy,
equipment, state taxes, communications, marketing, mortgage servicing and
amortization of intangibles. Incentive accruals, based on higher profit levels
and increases in staff levels, are also up in 1998. Although expenses grew
significantly due to the acquisitions, significant cost savings and
efficiencies are expected in the future as a result of these acquisitions.
The Corporation's effective tax rate for the first nine months of 1998 was
34.3 percent up from 33.2 percent for the same period in 1997. This increase
was due in part to higher levels of nondeductible intangible amortization
expense.
YEAR 2000
- - ---------
The Corporation's Year 2000 project is directed by a Year 2000 Project
Management Office ("PMO"), chaired by the Executive Vice President of Consumer
Banking. The PMO provides direct oversight of the Year 2000 initiative and
meets twice a month to review the project's progress. The Corporation's
Board of Directors receives project updates at every regular meeting.
The Corporation has completed its assessment of Year 2000 issues, developed a
plan, and arranged for the required resources to complete the necessary
remediation efforts. The Corporation is utilizing both internal and external
resources to reprogram, or replace, and test the software and hardware for Year
2000 modifications. Currently, the Corporation has remediated, tested and
returned to production more than half of its applications. Testing and
remedation of all applications will be substantially completed by the end of
1998. The Corporation has established a separate test environment to
accommodate its Year 2000 testing activity and the anticipated need to test
with its customers and other third parties during 1999.
The Corporation relies on several third party service providers for key
business processesand works closely to monitor their Year 2000 efforts. The
Corporation is in the process of obtaining written and verbal verification
from significant third party service providers and vendors of their Year 2000
readiness. Validation of Year 2000 readiness of all the Corporation's vendors
continues with a particular focus on the readiness and alternatives, where
possible, for vendors that have been identified as critical.
-23-
<PAGE>
While the Corporation continues to discuss these matters with, obtain
written certification from, and test the systems of such other companies as to
Year 2000 compliance, no assurance that any potential impact associated with
incompatible systems after December 31, 1999 will have no material adverse
effect on the Corporation's business, financial condition or results of
operations.
The Corporation previously established business continuity plans for its
various lines of business and is assessing these plans for the possible
impact of Year 2000 anticipated failures. Existing business continuity plans
will be adjusted where appropriate for those scenarios that may have the
most severe impact on its operations. This activity is expected to be
substantially complete by December 31, 1998.
The costs of the Year 2000 project are primarily staff related and are
expensed as incurred. Currently, the Corporation estimates that the total cost
of the Year 2000 project will be approximately $12 million. The Corporation
has incurred approximately $4.8 million of expenses through September 30, 1998,
and expects to incur approximately $6.5 million in expenses in 1998.
Recently Issued Accounting Standards
- - ------------------------------------
On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130 (SFAS No.
130), "Reporting Comprehensive Income." SFAS No. 130 requires the reporting of
comprehensive income as part of the Corporation's financial statements, in
addition to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain information
that historically has not been recognized in the calculation of net income.
Refer to Footnote No. 12 to the consolidated financial statements for further
information.
On January 1, 1998, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" became effective and supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
requires disclosure on a business segment basis, as defined by the Corporation,
a description of products and services, interest income and expense, profit or
loss and assets as measured by the Corporation's management in assessing
performance of its business segments. This statement is not required to be
applied to interim periods for 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivatives Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as an asset or liability measured at its fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
the Corporation has not yet determined the impact of adopting SFAS No. 133 on
the financial statements. However it could increase volatility in earnings and
comprehensive income.
-24-
<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 3 SUMMARY OF LOAN LOSS EXPERIENCE
For the Periods Ended September 30
(Dollars in thousands)
Third Quarter Nine Months
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Average loans - net of unearned
interest..................... $11,610,024 $ 9,531,320 $11,340,444 $ 9,320,082
=========== =========== =========== ===========
Allowance for loan losses:
Balance - beginning of
period..................... $ 176,857 $ 146,505 $ 154,071 $ 136,754
Charge-offs:
Commercial................. (13,993) (4,075) (20,430) (13,322)
Real estate................ (1,278) (551) (2,529) (1,611)
Retail..................... (12,262) (10,600) (35,782) (31,786)
----------- ----------- ----------- -----------
Total charge-offs........ (27,533) (15,226) (58,741) (46,719)
----------- ----------- ----------- -----------
Recoveries:
Commercial................. 4,196 1,021 5,894 4,479
Real estate................ 89 312 706 671
Retail..................... 2,865 2,180 8,331 7,393
----------- ----------- ----------- -----------
Total recoveries......... 7,150 3,513 14,931 12,543
----------- ----------- ----------- -----------
Net charge-offs........ (20,383) (11,713) (43,810) (34,176)
Provision charged to
earnings................... 22,101 16,900 48,946 49,114
Allowances of banks purchased -- -- 19,368 --
----------- ----------- ----------- -----------
Balance - end of period...... $ 178,575 $ 151,692 $ 178,575 $ 151,692
=========== =========== =========== ===========
Ratio of net charge-offs to
average loans - net of
unearned interest............ 0.70% 0.49% 0.52% 0.49%
=========== =========== =========== ===========
-25-
<PAGE>
Asset Quality
- - -------------
As of September 30, 1998, the allowance for loan losses was $178.6 million or
1.53 percent of loans, net of unearned interest. This compares to an allowance
of $154.1 million or 1.56 percent of loans, net of unearned interest, at
December 31, 1997. The allowance as a percentage of nonperforming loans
increased slightly to 359 percent at September 30, 1998 compared to 325 percent
at December 31, 1997.
As previously discussed, a $12.3 million provision for loan losses was
charged to earnings at the time of the Trans Financial merger. As a result of
the change in management of Trans Financial problem loans, approximately $12.1
million of loans were charged-off in conformity with Star Bank's policy of
aggressively eliminating problem credits. Excluding the additional merger-
related charge-offs, net charge-offs totaled $8.3 million in the third quarter
of 1998, a decrease of $3.4 million compared to the third quarter of 1997. For
the first nine months of 1998 net charge-offs totaled $31.8 million, a decline
of $2.4 million compared to 1997. Annualized net charge-offs as a percentage of
average outstanding loans were 0.28 percent for the third quarter of 1998, down
14 basis points from the first two quarters of 1998 and down 21 basis points
compared to 0.49 percent for the same period in 1997. Table 3 provides a
summary of activity in the allowance for loan losses account by type of loan.
Excluding the merger-related charge-offs, the percentage of net charge-offs
to average loans has continued to trend downward over the last year. This
decline in net charge-offs has been primarily in the commercial loan area,
partially offset by continued increases in retail loans. Net charge-offs for
retail loans declined slightly in the third quarter of 1998, compared to the
prior year, as net charge-offs on credit cards decreased $550,000 million
compared to the third quarter of 1997. Installment loan and retail leasing
charge-offs increased $524,000 compared to the third quarter of 1997, primarily
due to higher loan volumes. Net charge-offs on commercial loans have continued
to decline in 1998, as third quarter net charge-offs decreased $4.0 million
compared to the same period in 1997. The acquisition of GFC has resulted in
slight increases in residential and retail loan charge-off levels in the third
quarter of 1998, primarily as a result of higher loan volumes.
As shown in Tables 4 and 5, nonperforming assets levels increased $1.2
million to $54.0 million at September 30, 1998, compared to $52.9 million at
September 30, 1997. The increase in the third quarter was due primarily to
increases in nonaccrual residential mortgages and OREO related to GFC.
Increases in nonaccrual commercial and commercial real estate loans were offset
by a decline in restructured loans. Nonperforming assets increased $2.8 million
in the nine months ended September 30, 1998, due primarily to GFC. The
percentage of nonperforming loans to end of period loans decreased nine basis
points to 0.42 percent, compared to 0.51 at September 30, 1997 and was down six
basis points from December 31, 1997. Loans past due 90 days or more and still
accruing interest increased $18.4 million in the first nine months of 1998, and
increased $18.5 million compared to September 30, 1997. The increase in loans
past due 90 days or more since September 30, 1997 was due to increases in
residential mortgages related to GFC and commercial loans.
Certain accruing FHA/VA loans, in addition to insured FHA and guaranteed VA
loans which are contractually past due 90 days or more, are purchased by the
Corporation from GNMA pools it services or from third parties. By purchasing
delinquent loans out of pools, the Corporation is able to retain the benefit of
the net interest rate differential between the coupon rate the Corporation (as
servicer) would otherwise be obligated to pay the GNMA security holder and the
Corporation's current cost of funds. Most of the Corporation's investment in
delinquent FHA and VA loans is recoverable through claims
-26-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 4 NONPERFORMING ASSETS
(Dollars in thousands)
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Loans on nonaccrual status....... $ 49,701 $ 46,755 $ 37,810
Loans which have been
renegotiated................... 8 698 12,146
------------ ------------ -------------
Total nonperforming loans...... 49,709 47,453 49,956
Other real estate owned.......... 4,306 3,804 2,896
------------ ------------ -------------
Total nonperforming assets..... $ 54,015 $ 51,257 $ 52,852
============ ============ =============
Percentage of nonperforming
loans to loans* ............... 0.42% 0.48% 0.51%
============ ============ =============
Percentage of nonperforming
assets to loans* and other
real estate owned.............. 0.46% 0.52% 0.54%
============ ============ =============
Loans past due 90 days
or more........................ $ 35,012 $ 16,567 $ 16,461
============ ============ =============
* Net of unearned interest.
</TABLE>
-27-
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 5 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------------------ ------------------------------------------------
Nonperforming Loans 90 Days Nonperforming Loans 90 Days
-------------------------------------- or ------------------------------------- or
Non- Restruc- Percentage More Non- Restruc- Percentage More
accrual tured Total of Loans Past Due accrual tured Total of Loans Past Due
------------------------------------------------ ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial:
Corporate.................$25,971 $ 8 $25,979 0.80 % $6,158 $28,965 $ 11 $28,976 1.03 % $ 748
Commercial leasing........ 84 -- 84 0.02 -- 806 -- 806 0.23 --
------- --- ------- ------ ------- --- ------- -------
Total commercial loans.. 26,055 8 26,063 0.73 6,158 29,771 11 29,782 0.95 748
------- --- ------- ------ ------- --- ------- -------
Real estate loans:
Residential............... 9,324 -- 9,324 0.51 14,848 6,894 678 7,572 0.53 4,627
Commercial mortgage....... 6,961 -- 6,961 0.38 893 4,913 -- 4,913 0.31 644
Construction/land
development............. 2,406 -- 2,406 0.37 1,201 1,556 -- 1,556 0.31 1,025
------- --- ------- ------ ------- --- ------- -------
Total real estate loans. 18,691 -- 18,691 0.43 16,942 13,363 678 14,041 0.40 6,296
------- --- ------- ------ ------- --- ------- -------
Retail loans:
Other retail.............. 2,086 -- 2,086 0.10 5,257 1,019 9 1,028 0.06 2,469
Credit cards.............. 2,515 -- 2,515 0.61 5,894 2,092 -- 2,092 0.47 6,679
Retail leasing............ 354 -- 354 0.03 761 510 -- 510 0.05 375
------- --- ------- ------ ------- --- ------- -------
Total retail loans...... 4,955 -- 4,955 0.14 11,912 3,621 9 3,630 0.11 9,523
------- --- ------- ------ ------- --- ------- -------
Total loans.............$49,701 $ 8 $49,709 0.42 % $35,012 $46,755 $698 $47,453 0.48 % $16,567
======= === ======= ==== ======= ======= ==== ======= ==== =======
</TABLE>
-28-
<PAGE>
made against FHA and VA. Any credit losses incurred are no greater than if the
FHA/VA loans remained in the GNMA pools and the Corporation remained as
servicer. The same risk from foreclosure or loss of interest exists for the
Corporation as servicer or owner of the loan. At September 30, 1998, the
Corporation held in its loan portfolio $118 million of these FHA/VA buyout
loans.
The specific valuation allowance recorded on impaired loans, as prescribed
by Statement of Financial Accounting Standards No. 114 (as amended by SFAS No.
118), is included in the total allowance for loan losses. In addition to the
valuation allowance on impaired loans, the adequacy of the total allowance for
loan losses is monitored on a continual basis and is based on management's
evaluation of several key factors: the quality of the current loan portfolio,
current economic conditions, evaluation of significant problem loans, an
analysis of periodic internal loan reviews, delinquency trends and ratios,
changes in the mix and levels of various loan types, historical charge-off and
recovery experience and other pertinent information. These estimates are
reviewed continually and, as adjustments become necessary, they are reported in
earnings in the period in which they become known. Management believes that the
allowance for loan losses at September 30, 1998 was adequate to absorb all
anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at September 30, 1998 was $36
million with a related valuation allowance calculated under SFAS No. 114 of $2
million.
Liquidity, Capital Resources and Cash Flows
- - -------------------------------------------
To ensure that adequate funds are always available to meet unexpected
customer demands for funds, such as high levels of deposit withdrawals or loan
demand, or other aspects of the banking business, the Corporation has succeeded
in developing and maintaining a large stable base of core funding from customers
based in its local market areas. By policy, the Corporation limits the amount
its banking subsidiary can borrow, subject to the Corporation's ability to
borrow funds in the capital markets in an efficient and cost effective manner.
Star Bank N.A. (the Bank) is a member of the Federal Home Loan Bank of
Cincinnati and is able to issue national market retail and institutional
certificates of deposit as a funding source. In 1994, the Bank prepared an
offering circular in order to issue senior or subordinated bank notes of up to
$500 million with terms that can vary from 30 days to 30 years. In December
1997, the Bank issued $100 million in subordinated notes under this offering
circular. In addition to these funding alternatives, the Corporation maintains
a presence in the national fed funds, repurchase agreements, and eurodollar
markets.
The Corporation issues commercial paper notes through a private placement
memorandum up to a maximum aggregate amount of $150 million, with maturities of
up to 270 days. The proceeds of the notes from the commercial paper program are
used for general corporate purposes and to provide funding to Star Banc Finance,
Inc. As of September 30, 1998, $109 million in commercial paper was
outstanding. The Corporation's consolidated long-term debt, which consists of
subordinated and senior notes issued by the Bank and medium term notes issued by
the Parent Company, declined $54 million in the first nine months of 1998 to
$485 million. The decline in long-term debt was due to the payoff of $105
million in FHLB long-term advances previously held by Trans Financial, partially
offset by an increase in medium term notes outstanding.
-29-
<PAGE>
In 1996, the Board of Directors approved the purchase of a total of nine
million shares under the Corporation's buyback program over the next three
years. The repurchased shares are held as treasury shares for reissue in
connection with employee stock options. The Corporation repurchased 188,000
shares in 1998 for a total of 5.7 million shares repurchased under the buyback
program. All remaining treasury shares acquired through the buyback program
were reissued for the GFC acquisition. On August 21, 1998, in connection with
the acquisition of Trans Financial Inc., the Corporation rescinded its buyback
program.
Total shareholders' equity increased $622 million in the first nine months to
$1.68 billion at September 30, 1998. This increase was the result of the $458
million in equity added for Great Financial, in addition to the retention of
earnings for the first nine months of 1998. The suspension of the buyback
program in the first quarter of 1998 has resulted in a $44 million increase in
equity related to shares issued from the exercise of stock options. The
Corporation also raised its quarterly dividend rate per common share from $0.20
in 1997 to $0.23 in 1998, a 15.0 percent increase.
Banking industry regulators define minimum capital requirements for banks and
bank holding companies. The Corporation's tier 1 and total risk-based capital
ratios at September 30, 1998 were 8.11 percent and 11.36 percent, respectively,
well above the minimum requirements of 4.0 percent for tier 1 capital to risk-
weighted assets and 8.0 percent for total capital to risk-weighted assets.
These compare to tier 1 and total ratios of 8.77 percent and 12.61 percent at
December 31, 1997. Regulatory authorities have also established a minimum
adjusted equity-to-average quarterly assets ("leverage") ratio of 3.0 percent.
As of September 30, 1998 the Corporation's leverage ratio was 6.75 percent
compared to 8.01 percent at December 31, 1997. The decreases in the
Corporation's tier 1 and total capital ratios in the first half of 1998 were due
to the increase in intangible assets related to the Bank One branch acquisition.
As shown in the Condensed Consolidated Statements of Cash Flows, through the
first nine months of 1998, the Corporation used $39 million in cash flows from
operating activities, compared to $166 million provided by operating activities
for the same period in 1997. This change is due to the high level of
residential mortgage origination's at the end of the third quarter significantly
increasing loans held-for-sale additional cash should be provided when these
loans are sold on the secondary market.
With the exception of historical information, the matters discussed or
incorporated by reference in this quarterly Form 10Q 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.
-30-
<PAGE>
PART II. OTHER INFORMATION
- - ---------------------------
ITEMS 1. through 5. are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) The Corporation filed a Current Report on Form 8-K on
July 2, 1998 (as amended on July 10, 1998) announcing
the signing of a definitive agreement to merge with
Firstar Corporation.
SIGNATURES
- - ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
November 13, 1998 /s/ Jerry A. Grundhofer
- - ----------------------- ------------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
November 13, 1998 /s/ David M. Moffett
- - ----------------------- ------------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-31-
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
For the Periods Ended September 30
(Amounts in thousands, except per share data)
Third Quarter Nine Months
1998 1997 1998 1997
- - ----------------------------------------------------------------------------
Net income........................ $48,131 $56,288 $186,072 $160,584
Preferred dividends............... -- -- -- --
- - ----------------------------------------------------------------------------
Net income available to common
shareholders.................... $48,131 $56,288 $186,072 $160,584
- - ----------------------------------------------------------------------------
Weighted average shares:
Common shares..................... 107,218 96,248 105,477 96,523
Convertible preferred shares...... -- -- -- --
Stock awards...................... 66 51 63 47
Stock options..................... 3,049 2,996 3,063 2,880
- - ----------------------------------------------------------------------------
Weighted average diluted common
shares........................... 110,333 99,295 108,603 99,450
- - ----------------------------------------------------------------------------
Basic earnings per share.......... $ 0.45 $ 0.58 $ 1.76 $ 1.66
(net income available to common
shareholders divided by weighted
average of common shares)
- - ----------------------------------------------------------------------------
Diluted earnings per share........ $ 0.44 $ 0.57 $ 1.71 $ 1.61
(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.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, THE CONSOLIDATED BALANCE SHEETS, AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 681,774 681,774
<INT-BEARING-DEPOSITS> 16,092 16,092
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,596,298 2,596,298
<INVESTMENTS-CARRYING> 139,928 139,928
<INVESTMENTS-MARKET> 142,184 142,184
<LOANS> 11,708,779 11,708,779
<ALLOWANCE> 178,575 178,575
<TOTAL-ASSETS> 17,291,068 17,291,068
<DEPOSITS> 12,952,035 12,952,035
<SHORT-TERM> 1,666,592 1,666,592
<LIABILITIES-OTHER> 359,975 359,975
<LONG-TERM> 633,224 633,224
0 0
0 0
<COMMON> 536,540 536,540
<OTHER-SE> 1,142,702 1,142,702
<TOTAL-LIABILITIES-AND-EQUITY> 17,291,068 17,291,068
<INTEREST-LOAN> 255,584 752,070
<INTEREST-INVEST> 47,770 123,088
<INTEREST-OTHER> 11,465 28,109
<INTEREST-TOTAL> 314,819 903,267
<INTEREST-DEPOSIT> 117,940 325,784
<INTEREST-EXPENSE> 148,440 420,225
<INTEREST-INCOME-NET> 166,379 483,042
<LOAN-LOSSES> 22,101 48,946
<SECURITIES-GAINS> 0 305
<EXPENSE-OTHER> 159,184 392,944
<INCOME-PRETAX> 73,341 283,031
<INCOME-PRE-EXTRAORDINARY> 48,131 186,072
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 48,131 186,072
<EPS-PRIMARY> 0.45 1.76
<EPS-DILUTED> 0.44 1.71
<YIELD-ACTUAL> 4.43 4.53
<LOANS-NON> 49,701 49,701
<LOANS-PAST> 35,012 35,012
<LOANS-TROUBLED> 8 8
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 176,857 154,071
<CHARGE-OFFS> 27,533 58,741
<RECOVERIES> 7,150 14,931
<ALLOWANCE-CLOSE> 178,575 178,575
<ALLOWANCE-DOMESTIC> 178,575 178,575
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
