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 March 31, 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.
95,681,595 common shares, par value $5, outstanding at May 1, 1998
- ------------------------------------------------------------------
-1-
<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 1998
Page
Table of Contents Number
- ------------------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights......................................... 3
Report of Independent Public Accountants..................... 4
Item 1. Financial Statements:
Condensed Consolidated Financial Statements............. 5 - 8
Notes to Condensed Consolidated Financial Statements.... 9 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................17 - 25
Part II. Other Information:
Item 1. Legal Proceedings.................................... none
Item 2. Changes in Securities................................ none
Item 3. Defaults Upon Senior Securities...................... none
Item 4. Submission of Matters to a Vote of Security Holders.. none
Item 5. Other Information.................................... none
Item 6. Exhibits and Reports on Form 8-K..................... 26
Signatures............................................................. 26
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
STAR BANC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
<CAPTION>
First Quarter
-------------------------------------
Percent
1998 1997 Change
------------ ------------ ---------
<S> <C> <C> <C>
Net income...............................$ 59,344 $ 45,273 31.1 %
Per share:
Basic earnings per common share........$ 0.65 $ 0.52 25.0 %
Diluted earnings per common share...... 0.63 0.51 23.5
Common dividends declared.............. 0.23 0.20 15.0
Book value per common share............ 14.78 9.68 52.7
Market value per common share.......... 59.13 39.88 48.3
Average balances:
Total assets...........................$ 12,691,023 $ 10,043,432 26.4 %
Earning assets......................... 11,354,929 9,158,952 24.0
Loans, net of unearned interest........ 9,420,121 7,680,842 22.6
Deposits............................... 9,332,437 7,765,475 20.2
Total shareholders' equity............. 1,195,573 845,598 41.4
Ratios:
Return on average assets............... 1.90 % 1.83 %
Return on average equity............... 20.13 21.71
Average total shareholders' equity
to average total assets.............. 9.42 8.42
Risk-based capital ratios:
Tier 1............................... 9.03 7.11
Total................................ 12.57 11.26
Leverage - average assets (a).......... 8.08 6.17
Net interest margin.................... 4.73 4.93
Noninterest expense to net revenue..... 47.90 48.12
Noninterest income as a percent
of net revenue....................... 31.38 28.69
Net income to net revenue.............. 30.37 28.59
(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 March 31, 1998, and the
related condensed consolidated statements of income, changes in shareholders'
equity, and cash flows for the three-month periods ended March 31, 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
April 13, 1998
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<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks.............................$ 572,507 $ 577,479
Money market investments............................ 42,574 238,441
Investment securities:
Available-for-sale................................ 2,052,274 1,007,619
Held-to-maturity (market value of $146,656 at
March 31, 1998 and $154,996 at December 31,
1997............................................ 146,006 154,549
----------- -----------
Total securities.................................. 2,198,280 1,162,168
Loans:
Commercial loans.................................. 2,883,216 2,719,626
Real estate loans................................. 3,598,645 2,773,212
Retail loans...................................... 3,389,354 3,150,370
----------- -----------
Total loans..................................... 9,871,215 8,643,208
Less: Unearned interest......................... 204,586 198,942
----------- -----------
9,666,629 8,444,266
Allowance for loan losses................. 151,193 132,055
----------- -----------
Net loans....................................... 9,515,436 8,312,211
Loans held for sale................................. 290,496 --
Premises and equipment.............................. 176,435 141,439
Acceptances - customers' liability.................. 11,113 16,764
Other assets........................................ 1,049,162 510,399
----------- -----------
Total assets....................................$13,856,003 $10,958,901
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing deposits......................$ 1,944,618 $ 1,717,987
Interest-bearing deposits......................... 8,430,980 6,479,588
----------- -----------
Total deposits................................ 10,375,598 8,197,575
Short-term borrowings............................... 1,277,976 1,113,570
Long-term debt...................................... 371,808 353,742
Guaranteed preferred beneficial interests in
Corporation's Junior subordinated debentures...... 148,593 148,581
Acceptances outstanding............................. 11,113 16,764
Other liabilities................................... 258,141 222,656
----------- -----------
Total liabilities............................... 12,443,229 10,052,888
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock:
Shares authorized - 1,000,000
Shares outstanding - none
Common stock:
Shares authorized - 200,000,000
Shares issued - 96,180,268 at March 31, 1998 and
90,481,374 at December 31, 1997................. 480,901 452,407
Surplus............................................. 354,225 84,015
Retained earnings................................... 577,635 527,297
Treasury stock, at cost - 613,147 shares at
March 31, 1998 and 5,192,374 shares at
December 31, 1997................................. (9,076) (167,048)
Net unrealized gain/(loss) on available-for-sale
securities....................................... 9,089 9,342
----------- -----------
Total shareholders' equity...................... 1,412,774 906,013
----------- -----------
Total liabilities and shareholders' equity......$13,856,003 $10,958,901
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
-5-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
First Quarter
------------------
1998 1997
-------- --------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans..............$208,180 $167,412
Interest and fees on loans held for sale 3,269 --
Interest on investment securities:
Taxable............................... 27,271 23,620
Non-taxable........................... 917 802
Interest on money market investments.... 1,336 365
-------- --------
Total interest income................. 240,973 192,199
-------- --------
INTEREST EXPENSE:
Interest on deposits.................... 82,156 64,607
Interest on short-term borrowings....... 16,981 11,580
Interest on long-term debt.............. 8,615 3,948
-------- --------
Total interest expense................ 107,752 80,135
-------- --------
Net interest income................. 133,221 112,064
Provision for loan losses............... 10,775 13,639
-------- --------
Net interest income after
provision for loan losses......... 122,446 98,425
-------- --------
NONINTEREST INCOME:
Trust income............................ 16,078 13,146
Retail deposit income................... 11,415 9,757
Mortgage banking income................. 8,441 2,286
Cash management income.................. 4,971 4,599
Credit card income...................... 5,506 5,071
Electronic banking income............... 3,859 3,579
Investment securities gains/(losses)-net 176 (2,121)
All other income........................ 10,870 9,114
-------- --------
Total noninterest income.............. 61,316 45,431
-------- --------
NONINTEREST EXPENSE:
Salaries................................ 36,582 30,524
Pension and other employee benefits..... 6,392 5,280
Equipment expense....................... 5,832 4,577
Occupancy expense - net................. 6,388 5,587
All other expense....................... 38,399 30,211
-------- --------
Total noninterest expense............. 93,593 76,179
-------- --------
INCOME BEFORE TAX....................... 90,169 67,677
Income tax.............................. 30,825 22,404
-------- --------
NET INCOME..............................$ 59,344 $ 45,273
-------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains/(losses) on
securities:
Unrealized holding gains/(losses)
arising during period........... (139) (7,350)
Less: Reclassification adjust-
ment for gains/(losses)
included in net income..... (114) 1,379
-------- --------
Other comprehensive income.............. (253) (5,971)
-------- --------
COMPREHENSIVE INCOME....................$ 59,091 $ 39,302
======== ========
PER SHARE:
Basic earnings per common share.........$ 0.65 $ 0.52
Diluted earnings per common share....... 0.63 0.51
Common stock cash dividends declared.... 0.23 0.20
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>
Series B Unrealized
Preferred Common Retained Treasury Gain/(Loss) Total
Stock Stock Surplus Earnings Stock on Securities Equity
-------- --------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997..... $ -- $ 452,407 $ 76,045 $ 400,838 $ (81,344) $ 7,126 $ 855,072
Net income.................. 45,273 45,273
Cash dividends declared
on common stock............ (17,107) (17,107)
Issuance of common stock
and treasury shares........ (24) 5,188 5,164
Purchase of treasury
stock...................... (55,562) (55,562)
Shares reserved to meet
deferred compensation
obligations................ 1,704 (521) 1,183
Amortization of stock
awards..................... 98 98
Change in net unrealized
gain/(loss) on available-
for-sale securities........ (5,971) (5,971)
-------- --------- --------- --------- ---------- ----------- ----------
Balance, March 31, 1997...... $ -- $ 452,407 $ 77,823 $ 429,004 $(132,239) $ 1,155 $ 828,150
======== ========= ========= ========= ========== =========== ==========
Balance, January 1, 1998..... $ -- $ 452,407 $ 84,015 $ 527,297 $(167,048) $ 9,342 $ 906,013
Net income.................. 59,344 59,344
Cash dividends declared
on common stock............ (22,006) (22,006)
Issuance of common stock
and treasury shares........ 2,232 9,141 9,471 20,844
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................ 1,912 (719) 1,193
Amortization of stock
awards..................... 142 142
Change in net unrealized
gain/(loss) on available-
for-sale securities........ (253) (253)
-------- --------- --------- --------- ---------- ----------- ----------
Balance, March 31, 1998...... $ -- $ 480,901 $ 354,225 $ 577,635 $ (9,076) $ 9,089 $1,412,774
======== ========= ========= ========= ========== =========== ==========
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>
Three Months Ended
March 31
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 59,344 $ 45,273
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 5,642 5,066
Intangible amortization............................... 10,798 4,489
Provision for loan losses............................. 10,719 13,639
Provision for deferred taxes.......................... 14,441 8,485
(Gain)/loss on sale of premises and equipment - net... -- (61)
(Gain)/loss on sale of securities - net............... (176) 2,121
(Gain)/loss on sale of mortgage loans................. (3,877) (1,008)
Proceeds from sale of mortgage loans ................. 196,747 56,041
Mortgage loans originated for sale on the secondary
market.............................................. (299,175) (47,188)
Net change in other assets............................ (50,634) (5,269)
Net change in other liabilities....................... 2,692 12,985
---------- ----------
Total adjustments................................... (112,823) 49,300
---------- ----------
Net cash provided by/(used in) operating activities.. (53,479) 94,573
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities... 8,468 5,233
Proceeds from maturities of available-for-sale securities. 100,945 83,006
Proceeds from sales of available-for-sale securities...... 311,673 66,869
Purchase of held-to-maturity securities................... -- (5,904)
Purchase of available-for-sale securities................. (214,888) (69,640)
Net change in loans....................................... (122,658) (250,566)
Proceeds from sales of loans.............................. 47,720 16,213
Proceeds from sales of premises and equipment............. -- 106
Purchase of premises and equipment........................ (7,534) (3,744)
Acquisition of Great Financial
Corporation (net of cash acquired)....................... (134,854) --
Net change due to acquisition of branch offices........... -- 83,711
---------- ----------
Net cash (used in) investing activities................. (11,128) (74,716)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.................................... 178,112 (29,379)
Net change in short-term borrowings....................... (13,745) 24,224
Principal payments on long-term debt...................... (305,042) --
Proceeds from issuance of long-term debt.................. 17,979 --
Proceeds from issuance of capital securities.............. -- --
Proceeds from issuance of common stock.................... 12,748 5,164
Purchase of treasury stock................................ (10,393) (55,562)
Shares reserved to meet deferred compensation obligations. 1,193 1,183
Dividends paid............................................ (17,084) (13,587)
---------- ----------
Net cash (used in) financing activities................. (136,232) (67,957)
---------- ----------
Net change in cash and cash equivalents................... (200,839) (48,100)
Cash and cash equivalents at beginning of year............ 815,920 559,001
---------- ----------
Cash and cash equivalents at end of year..................$ 615,081 $ 510,901
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for the three months ended March 31: 1998 1997
---------- ----------
Interest................................................$ 98,369 $ 75,744
Income taxes............................................ 101 263
Noncash transfer of loans to other real estate owned...... 1,711 296
The accompanying notes are an integral part of these statements.
</TABLE>
-8-
<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 March 31, 1998 and December 31,
1997. (Dollars are in thousands)
<TABLE>
<CAPTION>
March 31, 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 $ 83,222 $ -- $ 672 $ 82,550 $ 89,443 $ -- $ 747 $ 88,696
Obligations of state and
political subdivisions 62,784 2,044 722 64,106 65,106 2,048 854 66,300
Other debt securities -- -- -- -- -- -- -- --
---------- ------- ------- ---------- ---------- ------- ------- -----------
Total held-to-
maturity securities $ 146,006 $ 2,044 $ 1,394 $ 146,656 $ 154,549 $ 2,048 $ 1,601 $ 154,996
========== ======= ======= ========== ========== ======= ======= ==========
</TABLE>
-9-
<PAGE>
Note 2. (cont.)
- -------
<TABLE>
<CAPTION>
March 31, 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 $ 15,166 $ 246 $ 18 $ 15,394 $ 14,727 $ 205 $ 4 $ 14,928
Mortgage-backed
securities 1,907,207 16,357 2,705 1,920,859 899,115 15,369 124 914,360
Obligations of state
and political
subdivisions 8,656 73 -- 8,729 -- -- -- --
Other debt securities 2,260 30 4 2,286 1,935 9 16 1,928
Federal Reserve/FHLB
stock and other
equity securities 105,006 -- -- 105,006 77,093 1 691 76,403
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total available-for-
sale securities $2,038,295 $16,706 $ 2,727 $2,052,274 $ 992,870 $15,584 $ 835 $1,007,619
========== ======= ======= ========== ========== ======= ======= ==========
</TABLE>
As of March 31, 1998, the Corporation reported a net unrealized gain of
$14.0 million for available-for-sale securities. For the first three months of
1998, the after-tax net unrealized gain/(loss) reported as a separate component
of equity decreased from a net unrealized gain of $9.3 million to a net
unrealized gain of $9.1 million, decreasing shareholders' equity $253,000.
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 March 31, 1998. (Dollars in
thousands)
Amortized Fair
Held-to-Maturity Cost Value
- ---------------- ----------- -----------
One year or less $ 54,081 $ 54,041
After one year through five years 45,062 44,894
After five years through ten years 14,845 15,060
After ten years 32,018 32,661
----------- -----------
Total $ 146,006 $ 146,656
=========== ===========
Available-for-Sale
- ------------------
One year or less $ 435,168 $ 437,839
After one year through five years 903,205 909,614
After five years through ten years 460,331 464,046
After ten years 134,585 135,769
----------- -----------
Total $ 1,933,289 $ 1,947,268
=========== ===========
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 March 31, 1998 and December 31, 1997.
(Dollars are in thousands)
March 31, December 31,
1998 1997
---------- ----------
Commercial loans:
Corporate loans $2,078,723 $1,972,609
Asset-based lending 391,875 325,140
Commercial leasing 330,685 336,382
Industrial revenue bonds 26,157 27,481
---------- ----------
Total commercial loans 2,827,440 2,661,612
---------- ----------
Real estate loans:
Residential mortgage 1,667,535 1,216,543
Commercial mortgage 1,461,693 1,184,315
Construction and land development 469,417 372,355
---------- ----------
Total real estate loans 3,598,645 2,773,213
---------- ----------
Retail loans:
Installment 1,813,750 1,639,566
Credit cards 424,527 439,371
Retail leasing 1,002,267 930,504
---------- ----------
Total retail loans 3,240,544 3,009,441
---------- ----------
Total loans, net of unearned interest $9,666,629 $8,444,266
========== ==========
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 March 31, 1998 and December 31,
1997. (Dollars are in thousands)
March 31, 1998 December 31, 1997
--------------------- ---------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Impaired Loans:
Valuation allowance required $ 4,721 $ 979 $ 5,517 $ 1,112
No valuation allowance required 12,467 -- 11,190 --
--------- -------- --------- --------
Total impaired loans $ 17,188 $ 979 $ 16,707 $ 1,112
========= ======== ========= ========
The average recorded investment in impaired loans for the three months
ended March 31, 1998 was $17 million, compared to $29 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.
No interest income was recognized on impaired loans in the first three months
of 1998 or 1997.
-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)
Three Months Ended Year Ended
March 31, December 31,
-------------------- ------------
1998 1997 1997
--------- --------- ---------
Balance - beginning of period $ 132,055 $ 118,689 $ 118,689
Loans charged-off (13,812) (14,516) (55,831)
Recoveries on loans previously charged-off 3,807 4,217 15,583
--------- --------- ---------
Net charge-offs (10,005) (10,299) (40,248)
Provision charged to earnings 10,775 13,639 53,614
Allowances of banks purchased 18,368 -- --
--------- --------- ---------
Balance - end of period $ 151,193 $ 122,029 $ 132,055
========= ========= =========
Note 6. Deposits
- -----------------
The following table summarizes the composition of deposits of the
Corporation as of March 31, 1998 and December 31, 1997. (Dollars are in
thousands)
March 31, December 31,
1998 1997
----------- ----------
Noninterest-bearing deposits $ 1,944,618 $1,717,987
Interest-bearing deposits:
Savings 896,594 794,365
NOW accounts 125,734 119,573
Money market deposit accounts 2,863,396 2,327,703
Time deposits $100,000 and over - domestic 574,221 334,687
Foreign deposits $100,000 and over 32,157 30,143
All other deposits 3,938,878 2,873,117
----------- ----------
Total interest-bearing deposits 8,430,980 6,479,588
----------- ----------
Total deposits $10,375,598 $8,197,575
=========== ==========
Note 7. 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 $4,460,000 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 possible 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 March 31, 1998
and December 31, 1997 are shown in the following table. (Dollars are in
thousands)
March 31, December 31,
1998 1997
--------- ---------
Allowance for loan losses $ 52,258 $ 46,260
Deferred compensation 5,226 4,499
Deferred loan fees and costs 1,313 995
Intangible asset amortization 514 280
Other 4,929 3,166
--------- ---------
Total deferred tax asset 64,240 55,200
--------- ---------
Leased assets (132,651) (120,078)
Fixed asset depreciation (7,156) (6,364)
Pension liabilities (5,440) (6,410)
Unrealized gain on securities (4,888) (5,402)
FHLB stock dividends (7,340) (2,504)
Purchase accounting/intangible assets (912) (1,021)
Mortgage servicing rights (4,148) --
Other (5,396) (3,226)
--------- ---------
Total deferred tax liability (167,931) (145,005)
--------- ---------
Net deferred tax liability $(103,691) $ (89,805)
========= =========
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 ended
March 31, 1998 and 1997. (Dollars are in thousands)
Three Months
-----------------
1998 1997
------- --------
Amortization of intangible assets $ 6,939 $ 4,490
Outside processing services 3,816 3,380
State taxes 3,405 2,374
Marketing 3,695 2,244
Note 10. 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 these assets was 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 9.00
percent at March 31, 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 March 31, 1998 and December 31, 1997. (Dollars are in thousands)
March 31, Dec. 31,
Mortgage Servicing Assets: 1998 1997
-------- --------
Balance at beginning of year $ 9,286 $ 12,820
Amount capitalized/acquired 62,704 3,497
Amount sold (2,248) (5,548)
Amortization (2,318) (1,483)
-------- --------
Balance at end of period $ 67,424 $ 9,286
======== ========
There was no valuation allowance established related to mortgage servicing
rights at March 31, 1998 or December 31, 1997.
-14-
<PAGE>
Note 11. 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.
Three Months
------------------
1998 1997
------- -------
Net income $59,344 $45,273
Dividends on preferred stock -- --
------- -------
Net income available to common
shareholders $59,344 $45,273
======= =======
Weighted average shares:
Common shares 91,834 86,753
Convertible preferred shares -- --
Stock awards 60 42
Stock options 2,813 2,521
------- -------
Weighted average diluted common
shares 94,707 89,316
======= =======
Basic earnings per share
(net income available to common
shareholders divided by weighted
average of common shares) $ 0.65 $ 0.52
======= =======
Diluted earnings per share
(net income divided by weighted
average diluted common shares) $ 0.63 $ 0.51
======= =======
Note 12. 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 is summarized below.
Three Months
----------------
1998 1997
------ --------
Net unrealized holding gains(losses) before tax $ (598) $(11,332)
Tax (expense)/benefit 459 3,982
Reclassification adjustment for gains(losses)
included in net income (176) 2,121
Tax (expense)/benefit 62 (742)
------ --------
$ (253) $ (5,971)
====== ========
-15-
<PAGE>
Note 13. 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.
The following table presents an Unaudited Pro Forma Combined Summary of
Operations of the Corporation and Great Financial for the three months ended
March 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 are in thousands except per share data)
Three months
1997
------------
Net interest income $130,045
Net income 47,118
Basic earnings per common share 0.49
Diluted earnings per common share 0.48
On April 10, 1998, the Corporation announced that it had signed a
definitive merger agreement to acquire Trans Financial, Inc. ("Trans
Financial"), a $2.2 billion Bowling Green, Kentucky-based financial services
holding company. Under the terms of the agreement the Corporation will acquire
Trans Financial through a stock-for-stock fixed exchange of 0.9003 Star Banc
shares for each share of Trans Financial. The value of the transaction is
approximately $696 million and is expected to be completed late in the third
quarter of 1998. This transaction is structured as a tax-free exchange for
shareholders.
-16-
<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 March 31, 1998, was $59,344,000, a 31.1 percent increase over the first
quarter of 1997. Diluted earnings per share was $0.63 for the first quarter of
1998, compared to $0.51 for the first quarter of 1997, an increase of 23.5
percent. Earnings results for the first quarter of 1998 reflect increases in
net interest income and noninterest income, partially offset by an increase in
noninterest expenses. Included in the earnings results for the first quarter
was the effect of the acquisition of Great Financial Corporation ("GFC").
Included in the first quarter of 1997 was a $2.1 million loss on sale of $64.5
million in available-for-sale securities. Excluding the loss on sale of
securities in 1997, net income would have increased 27.2 percent in the first
quarter of 1998 compared to 1997. Also, diluted earnings per share would have
increased 21.2 percent.
Return on average assets was 1.90 percent for the first quarter of 1998,
compared to 1.83 percent for the same period in 1997. Return on average equity
declined slightly to 20.13 percent for the first quarter of 1998 compared to
21.71 percent in 1997.
On February 7, 1998, the Corporation completed the acquisition of Great
Financial Corporation 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 is a tax-free exchange for shareholders
receiving stock and has been accounted for as a purchase transaction. The GFC
acquisition added approximately $2.8 billion in assets and $2.0 billion in
deposits, in addition to 43 branch offices in Kentucky and two in Indiana.
The Corporation has also announced the signing of a definitive agreement to
purchase approximately $1.3 billion in deposits and 50 branch offices from
Bank One, N.A. and a definitive agreement to purchase Trans Financial Inc., a
$2.2 billion financial services holding company based in Bowling Green,
Kentucky. The purchase of the Bank One branches is expected to close in the
second quarter. The purchase of Trans Financial Inc. is a tax-free stock-for-
stock exchange and is expected to be accounted for as a pooling-of-interest.
Under the terms of this agreement the Corporation will exchange 0.9003 shares
of Star Banc common stock for each share of Trans Financial. The value of
the transaction is approximately $696 million and it is expected to be
completed in the third quarter of 1998.
Financial Condition
- -------------------
Total assets at March 31, 1998 amounted to $13.86 billion up $2.9 billion
from $10.96 billion at December 31, 1997. Total loans, net of unearned
interest, increased to $9.67 billion at March 31, 1998, compared to
$8.44 billion at December 31, 1997. These increases were due primarily to
the acquisition of GFC, which added $2.81 billion in total assets and
$1.87 billion in loans. Also in the first quarter of 1998, the Corporation
swapped $612 million in residential mortgages to investment securities.
Excluding the effect of GFC and the swaps, total loans declined due to the
transfer of approximately $190 million to held-for-sale loans. Outside of
the changes in residential mortgages the Corporation experienced loan growth
in several loan areas for the first three months of 1998, led by retail
leasing up $72 million or 7.7 percent, and commercial loans up $113 million or
4.2 percent.
Investment securities increased $1.04 billion to $2.20 billion at March 31,
1998 compared to $1.16 billion at December 31, 1997. This increase was due
primarily to the GFC acquisition and the residential mortgage swaps previously
discussed. Also included in the first three months of 1998, the Corporation
purchased $215 million in mortgage-backed securities. As of March 31, 1998,
the Corporation's investment securities portfolio included $2.04 billion in
-17-
<PAGE>
securities classified as available-for-sale and $155 million classified as
held-to-maturity. The securities added as a result of the GFC acquisition and
the residential mortgage swaps were all classified as available-for-sale. At
March 31, 1998, the Corporation reported a net unrealized gain of $14.0 million
on available-for-sale securities, with an offsetting increase to shareholders'
equity of $9.1 million (net of tax). For the first three months of 1998, the
after-tax net unrealized gain/(loss) reported as a separate component of equity
declined slightly from an unrealized gain of $9.3 million to an unrealized gain
of $9.1 million, decreasing equity $253,000.
Deposits increased $2.18 billion to $10.37 billion at March 31, 1998 from
$8.20 billion at December 31, 1997. The acquisition of GFC added $2.03 billion
in deposits, with $1.28 billion in certificates of deposit, $514 million in
savings, NOW and money market accounts and $228 million in noninterest bearing
deposits. Excluding GFC, total deposits increased $151 million in the first
three months on 1998, with money market deposit accounts up $192 million, and
small CDs up $20 million while savings and NOW accounts remained relatively
flat. Noninterest-bearing deposits declined slightly (excluding GFC) in
the first quarter primarily as a result of seasonal factors. Due to the
traditional increase in level of business activity during the fourth quarter of
each year, demand deposits increase significantly. This seasonal buildup in
demand deposits also results in an increase to cash and due from banks. As
business activity slows following the holiday season, demand deposits and cash
and due from banks decline.
Results of Operations
- ---------------------
Net interest income, the Corporation's principal source of earnings,
increased $21.2 million or 18.9 percent in the first quarter of 1998, compared
to the same period in 1997. The increase in 1998 was due primarily to
increased volumes from continued strong loan growth and the acquisition of GFC.
The Corporation has continued to recognize an improvement in mix of both
earning assets and liabilities as compared to the prior year. However, the
acquisition of GFC has partially offset those improvements with the increase in
lower yielding residential mortgages and mortgage-backed securities. Average
loans increased $1.74 billion or 22.6 percent, and investment securities
increased $209 million or 14.4 percent in the first quarter of 1998, compared
to the same period in 1997.
Net interest margin decreased 20 basis points to 4.73 percent in the first
three months of 1998, compared to 4.93 percent for the same period in 1997.
This decrease in net interest margin resulted from the Great Financial
acquisition as the majority of assets acquired were residential mortgages and
mortgage-backed securities with overall lower yields than the Corporation's
earning assets. In addition, the interest-bearing deposits and other funding
sources of GFC had higher costs than similar funds at Star Bank, which resulted
in a 29 basis point increase in the cost of supporting funds for the first
quarter of 1998, compared to the first quarter of 1997. As a result, the
acquisition of GFC compressed the Corporation's overall net interest margin.
The net interest margin is also expected to decrease further in the second
quarter of 1998 when the full effect of the GFC acquisition is realized. Table
1 provides detailed information on the average balances, interest
income/expense and rates earned or paid by major balance sheet category.
Net interest income after provision for loan losses was affected by a
decrease in the provision for loan losses of $2.9 million in the first quarter
of 1998, compared to 1997. As discussed further in the Asset Quality section,
the provision was down as a result of lower levels of charge-offs and a decline
in nonperforming loans.
Noninterest income continued to be a growing source of revenue, representing
31.4 percent of the Corporation's tax-equivalent net revenues in the first
three months of 1998, compared to 28.7 percent in the same period in 1997.
Noninterest income was $61.3 million for the first three months of 1998, an
increase of $15.9 million or 35.0 percent, from the $45.4 million reported for
-18-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
<CAPTION>
First Quarter, 1998 First Quarter, 1997
-------------------------------- ---------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Commercial loans....................$ 2,744,399 $ 59,694 8.81 % $ 2,390,741 $ 51,682 8.75 %
Real estate loans................... 3,546,679 76,388 8.63 2,613,403 55,365 8.49
Retail loans........................ 3,129,043 72,485 9.34 2,676,698 60,809 9.16
----------- --------- ----------- ---------
Total loans.................... 9,420,121 208,567 8.92 7,680,842 167,856 8.80
Loans held for sale................. 178,242 3,269 7.34 -- -- --
Taxable investment securities....... 1,591,304 27,271 6.86 1,397,220 23,620 6.76
Non-taxable investment securities... 68,800 1,398 8.13 54,256 1,189 8.84
Money market investments............ 96,462 1,336 5.62 26,634 365 5.57
----------- --------- ----------- ---------
Total interest-earning assets.. 11,354,929 $ 241,841 8.57 % 9,158,952 $ 193,030 8.48 %
========= ==== ========= ====
Cash and due from banks............. 503,001 444,257
Allowance for loan losses........... (143,601) (121,673)
Other assets........................ 976,694 561,896
----------- -----------
Total assets...................$12,691,023 $10,043,432
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.....................$ 1,021,757 $ 6,656 2.64 % $ 1,126,033 $ 7,226 2.60 %
Money market deposit accounts....... 2,568,016 21,019 3.32 1,860,652 13,012 2.84
Time deposits $100,000 and over..... 507,502 6,835 5.46 421,467 5,567 5.36
Time deposits under $100,000........ 3,524,574 47,646 5.48 2,924,511 38,802 5.38
Short-term borrowings............... 1,395,509 16,981 4.93 989,794 11,580 4.74
Long-term debt...................... 517,722 8,615 6.66 247,399 3,948 6.38
----------- --------- ----------- ---------
Total interest-bearing
liabilities.................. 9,535,080 $ 107,752 4.58 % 7,569,856 $ 80,135 4.29 %
========= ==== ========= ====
Noninterest-bearing deposits........ 1,710,588 1,432,812
Other liabilities................... 249,782 195,166
Shareholders' equity................ 1,195,573 845,598
----------- -----------
Total liabilities and
shareholders' equity.........$12,691,023 $10,043,432
=========== ===========
Net interest margin................. 4.73 % 4.93 %
Interest rate spread................ 3.99 4.19
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent
amounts are calculated utilizing marginal federal income tax rate of 35 percent. The total of
nonaccruing loans is included in average amounts outstanding.
</TABLE>
-19-
<PAGE>
the same period of 1997. Excluding gains/(losses) on sales of securities,
noninterest income increased $13.6 million or 28.6 percent in 1998, compared to
the same period in 1997. The acquisition of GFC and its significant mortgage
servicing operation contributed greatly to the increase in noninterest income
as mortgage banking income increased $6.2 million or 269 percent. The
Corporation also had strong growth in several other areas, led by trust income
which increased $2.9 million or 22.3 percent due to new business in all product
lines and improved market conditions since the first quarter of 1997. Retail
deposit income increased $1.7 million or 17.0 percent due to higher demand
deposit levels and increased transaction volumes, in addition to the
acquisition of GFC.
Noninterest expense totaled $93.6 million in the first quarter of 1998, a
22.9 percent increase from $76.2 million for the same period of 1997. The
increase in noninterest expenses in 1998 was primarily a result of the
acquisition of GFC. Increases related to the Great Financial acquisition
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, were also up in
the first quarter of 1998, compared to the same period in 1997. The
Corporation's noninterest expense ratio improved in the first quarter of 1998
to 47.90 percent, compared to 48.12 percent for the first quarter of 1997 and
48.58 for the fourth quarter of 1997. Although expenses grew significantly due
to the GFC acquisition, revenue growth continued at a higher level, resulting
in an improved expense ratio.
The Corporation's effective tax rate for the three months ended March 31,
1998 was 34.19 percent up from 33.1 percent for the three months ended March
31, 1997. This increase was due in part to higher levels of nondeductible
intangible amortization expense.
Recently Issued Accounting Standards
- ------------------------------------
For 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.
Effective January 1, 1998, the Corporation
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.
Asset Quality
- -------------
As of March 31, 1998, the allowance for loan losses was $151.2 million or
1.56 percent of loans, net of unearned interest. This compares to an
allowance of $132.1 million or 1.56 percent of loans, net of unearned
interest, at December 31, 1997. The allowance as a percentage of
nonperforming loans decreased 27 basis points to 502 percent at March 31,
1998 compared to 529 percent at December 31, 1997.
-20-
<PAGE>
Table 2 provides a summary of activity in the allowance for loan losses
account by type of loan. As shown in that table, net charge-offs totaled $10.0
million in the first quarter of 1998, a $294,000 decrease compared to the first
quarter of 1997. Annualized net charge-offs as a percentage of average
outstanding loans declined for the fourth consecutive quarter to 0.43 percent
for the first quarter of 1998, compared to 0.54 percent for the same period in
1997.
The amount of net charge-offs has declined slightly and the percentage of
charge-offs to average loans has trended 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 increased $1.1 million in the first quarter of 1998, compared to
the prior year, as net charge-offs on installment loans increased $686,000 in
1998 due to higher loan volumes, while credit card charge-offs remained flat
compared to the first quarter of 1997. In addition, net charge-offs on
commercial loans decreased $1.5 million in the first quarter of 1998, compared
to the same period in 1997. The acquisition of GFC had very little impact on
charge-off levels in the first quarter of 1998.
As shown in Tables 2 and 3, nonperforming assets levels decreased $1.4
million to $35.3 million at March 31, 1998, compared to $36.7 million at March
31, 1997. The decrease in the first quarter was due to significant declines in
commercial loans offset by increases in nonaccrual residential mortgages and
OREO related to GFC. Nonperforming assets increased $7.6 million in the first
quarter of 1998, due primarily to GFC. The percentage of nonperforming loans
to end of period loans decreased 14 basis points to 0.31 percent, compared to
0.45 at March 31, 1997 and was up slightly from December 31, 1997. Loans past
due 90 days or more and still accruing interest increased $3.8 million in the
first three months of 1998, and increased $7.8 million compared to March 31,
1997. The increase in loans past due 90 days or more since March 31, 1997 was
due to increases in residential mortgages related to GFC and retail loans in
both installment and credit card 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 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 March 31, 1998, the Corporation held in its
loan portfolio $138 million of 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 March 31, 1998 was adequate to absorb all
anticipated losses in the loan portfolio as of that date.
The recorded investment in impaired loans at March 31, 1998 was $17 million
with a related valuation allowance calculated under SFAS No. 114 of $1
million.
-21-
<PAGE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 2 SUMMARY OF LOAN LOSS EXPERIENCE
For the Periods Ended March 31
(Dollars in thousands)
First Quarter
-----------------------
1998 1997
----------- -----------
Average loans - net of unearned
interest..................... $ 9,420,121 $ 7,680,842
=========== ===========
Allowance for loan losses:
Balance - beginning of
period..................... $ 132,055 $ 118,689
Charge-offs:
Commercial................. (2,262) (4,297)
Real estate................ (291) (299)
Retail..................... (11,259) (9,920)
----------- -----------
Total charge-offs........ (13,812) (14,516)
----------- -----------
Recoveries:
Commercial................. 809 1,389
Real estate................ 135 229
Retail..................... 2,863 2,599
----------- -----------
Total recoveries......... 3,807 4,217
----------- -----------
Net charge-offs........ (10,005) (10,299)
Provision charged to
earnings................... 10,775 13,639
Allowances of banks purchased 18,368 --
----------- -----------
Balance - end of period...... $ 151,193 $ 122,029
=========== ===========
Ratio of net charge-offs to
average loans - net of
unearned interest............ 0.43% 0.54%
=========== ===========
-22-
<PAGE>
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 3 NONPERFORMING ASSETS
(Dollars in thousands)
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Loans on nonaccrual status....... $ 30,114 $ 24,952 $ 34,931
Loans which have been
renegotiated................... 10 11 15
------------ ------------ -------------
Total nonperforming loans...... 30,124 24,963 34,946
Other real estate owned.......... 5,196 2,734 1,773
------------ ------------ -------------
Total nonperforming assets..... $ 35,320 $ 27,697 $ 36,719
============ ============ =============
Percentage of nonperforming
loans to loans* ............... 0.31% 0.30% 0.45%
============ ============ =============
Percentage of nonperforming
assets to loans* and other
real estate owned.............. 0.37% 0.33% 0.47%
============ ============ =============
Loans past due 90 days
or more........................ $ 18,390 $ 14,575 $ 10,633
============ ============ =============
* Net of unearned interest.
</TABLE>
-23-
<TABLE>
STAR BANC CORPORATION AND SUBSIDIARIES
TABLE 4 COMPOSITION OF NONPERFORMING LOANS
(Dollars in thousands)
<CAPTION>
March 31, 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.................$12,954 $10 $12,964 0.52 % $1,515 $11,586 $11 $11,597 0.50 % $ 463
Commercial leasing........ 314 -- 314 0.09 -- 805 -- 805 0.24 --
------- --- ------- ------ ------- --- ------- -------
Total commercial loans.. 13,268 10 13,278 0.47 1,515 12,391 11 12,402 0.47 463
------- --- ------- ------ ------- --- ------- -------
Real estate loans:
Residential............... 8,572 -- 8,572 0.51 5,819 5,416 -- 5,416 0.45 3,872
Commercial mortgage....... 2,535 -- 2,535 0.17 1,131 3,587 -- 3,587 0.30 394
Construction/land
development............. 1,012 -- 1,012 0.22 819 -- -- -- -- 855
------- --- ------- ------ ------- --- ------- -------
Total real estate loans. 12,119 -- 12,119 0.34 7,769 9,003 -- 9,003 0.32 5,121
------- --- ------- ------ ------- --- ------- -------
Retail loans:
Other retail.............. 1,813 -- 1,813 0.10 2,538 956 -- 956 0.06 2,023
Credit cards.............. 2,328 -- 2,328 0.55 6,066 2,092 -- 2,092 0.48 6,593
Retail leasing............ 586 -- 586 0.06 502 510 -- 510 0.05 375
------- --- ------- ------ ------- --- ------- -------
Total retail loans...... 4,727 -- 4,727 0.15 9,106 3,558 -- 3,558 0.12 8,991
------- --- ------- ------ ------- --- ------- -------
Total loans.............$30,114 $10 $30,124 0.31 % $18,390 $24,952 $11 $24,963 0.30 % $14,575
======= === ======= ==== ======= ======= === ======= ==== =======
</TABLE>
-24-
<PAGE>
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 1996, the Bank
updated an offering circular in order to issue senior or subordinated bank
notes of up to $500 million with terms that can vary from 7 days to 30 years.
In December 1996, the Bank issued $100 million in subordinated notes under this
offering circular. In addition to these funding alternatives, the Corporation
maintains a presence in the national fed funds, repurchase agreements, and
eurodollar markets.
The Corporation issues commercial paper notes through a private placement
memorandum up to a maximum aggregate amount of $150 million, with maturities 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 March 31, 1998, $81 million in commercial paper was
outstanding. The Corporation's consolidated long-term debt, which consists of
subordinated notes issued by the Bank and medium term notes issued by the
Parent Company, increased $18 million in the first quarter of 1998 to $372
million at March 31, 1998. This increase was due to the issuance of medium
term notes.
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. Through March 31, 1998, the
Corporation has repurchased 5.7 million shares under the current buyback
program. The Corporation repurchased 188,000 shares in the first quarter of
1998 and has suspended the buyback plan pending the acquisition of
approximately 50 branches from Bank One, N.A., which is scheduled for the
second quarter of 1998.
Total shareholders' equity increased $507 million in the first three months
to $1.41 billion at March 31, 1998. This increase was the result of the $458
million in equity added for Great Financial, in addition to the retention of
first quarter earnings. As a result of the suspension of the buyback program
during the first quarter of 1998 resulted in a net increase in equity related
to 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 March 31, 1998 were 9.03 percent and 12.57 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 March 31, 1998 the Corporation's leverage ratio
was 8.08 percent compared to 8.01 percent at December 31, 1997. The increases
in the Corporation's tier 1 and total capital ratios in the first quarter of
1998 were due in part to the additional equity issued for the acquisition of
GFC.
As shown in the Condensed Consolidated Statements of Cash Flows, cash flows
from operating activities decreased $53 million for the three months ended
March 31, 1998 compared to an increase of $95 million for the same period in
1997. This decrease was attributable to the large increase in loans held-for-
sale, which resulted from the high volumes of residential mortgage
origination's in the first three months of 1998.
-25-
<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
February 6, 1998 related to the closing of the acquisition
of Great Financial Corporation.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR BANC CORPORATION
May 14, 1998 /s/ Jerry A. Grundhofer
- ----------------------- ------------------------------
Date Jerry A. Grundhofer
Chairman, President, and Chief
Executive Officer
May 14, 1998 /s/ David M. Moffett
- ----------------------- ------------------------------
Date David M. Moffett
Executive Vice President
and Chief Financial Officer
-26-
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
For the Periods Ended March 31
(Amounts in thousands, except per share data)
First Quarter
1998 1997
- -------------------------------------------------------
Net income........................ $59,344 $45,273
Dividends on preferred stock...... -- --
- -------------------------------------------------------
Net income available to common
shareholders.................... $59,344 $45,273
- -------------------------------------------------------
Weighted average shares:
Common shares..................... 91,834 86,753
Convertible preferred shares...... -- --
Stock awards...................... 60 42
Stock options..................... 2,813 2,521
- -------------------------------------------------------
Weighted average diluted common
shares........................... 94,707 89,316
- -------------------------------------------------------
Basic earnings per share.......... $ 0.65 $ 0.52
(net income available to common
shareholders divided by weighted
average of common shares)
- -------------------------------------------------------
Diluted earnings per share........ $ 0.63 $ 0.51
(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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 572,507
<INT-BEARING-DEPOSITS> 13,274
<FED-FUNDS-SOLD> 29,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,052,274
<INVESTMENTS-CARRYING> 146,006
<INVESTMENTS-MARKET> 2,198,930
<LOANS> 9,666,629
<ALLOWANCE> 151,193
<TOTAL-ASSETS> 13,856,003
<DEPOSITS> 10,375,598
<SHORT-TERM> 1,277,976
<LIABILITIES-OTHER> 269,254
<LONG-TERM> 520,401
0
0
<COMMON> 480,901
<OTHER-SE> 931,873
<TOTAL-LIABILITIES-AND-EQUITY> 13,856,003
<INTEREST-LOAN> 208,180
<INTEREST-INVEST> 28,188
<INTEREST-OTHER> 4,605
<INTEREST-TOTAL> 240,973
<INTEREST-DEPOSIT> 82,156
<INTEREST-EXPENSE> 107,752
<INTEREST-INCOME-NET> 133,221
<LOAN-LOSSES> 10,775
<SECURITIES-GAINS> 176
<EXPENSE-OTHER> 93,593
<INCOME-PRETAX> 90,169
<INCOME-PRE-EXTRAORDINARY> 59,344
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,344
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 4.73
<LOANS-NON> 30,114
<LOANS-PAST> 18,390
<LOANS-TROUBLED> 10
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 132,055
<CHARGE-OFFS> 13,812
<RECOVERIES> 3,807
<ALLOWANCE-CLOSE> 151,193
<ALLOWANCE-DOMESTIC> 151,193
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
