<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-2981
FIRSTAR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-0711710
(State of Incorporation) (I.R.S. EMPLOYER
Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Telephone Number (414) 765-4321
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 precedeing 12
months and (2) has been subject to such filing requirements for the
past 90 days.
As of October 30, 1998, 145,445,367 shares of common stock were outstanding.
<PAGE>
FIRSTAR CORPORATION
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Equity 3
Consolidated Statements of Cash Flows 4
Supplemental Footnotes 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Additional Financial Data 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(thousands of dollars) (unaudited) 1998 1997 1997
- ------------------------------------------------------ ------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,168,766 $ 1,254,289 $ 1,222,014
Interest-bearing deposits with banks 5,618 5,249 24,074
Federal funds sold and resale agreements 52,230 82,589 93,489
Trading securities 8,200 2,293 3,277
Securities held to maturity (market value $2,361,400
$2,505,360 and $2,452,347 on September 30, 1998
December 31, 1997 and September 30, 1997) 2,288,465 2,452,124 2,396,802
Securities available for sale 1,662,245 1,707,606 1,776,912
Loans:
Commercial and industrial 4,071,694 3,644,721 3,647,079
Real estate 3,116,605 2,951,968 2,990,175
Other 1,642,073 1,123,824 1,049,124
------------ ------------ -------------
Commercial loans 8,830,372 7,720,513 7,686,378
Credit card 750,236 736,484 688,219
Real estate - mortgage portfolio 1,708,251 2,150,398 2,274,837
Real estate - mortgages held for sale 395,159 234,008 224,956
Home equity 1,355,609 1,271,966 1,213,265
Other 1,367,586 1,455,417 1,446,162
------------ ------------ -------------
Consumer loans 5,576,841 5,848,273 5,847,439
------------ ------------ -------------
Total loans 14,407,213 13,568,786 13,533,817
Reserve for loan losses (231,457) (218,861) (213,362)
------------ ------------ -------------
Loans - net 14,175,756 13,349,925 13,320,455
Bank premises and equipment 386,157 368,083 365,268
Customer acceptance liability 9,266 7,360 11,451
Other assets 931,693 614,167 556,108
------------ ------------ -------------
Total assets $ 20,688,396 $ 19,843,685 $ 19,769,850
<PAGE> ============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 3,496,318 $ 3,607,659 $ 3,545,857
Interest-bearing demand 1,620,800 1,756,520 1,562,486
Money market accounts 3,455,564 2,947,683 2,766,660
Savings passbook 1,260,716 1,339,038 1,374,390
Certificates of deposit 4,726,773 5,063,754 5,364,626
------------ ------------ -------------
Total deposits 14,560,171 14,714,654 14,614,019
Short-term borrowed funds 3,164,443 2,121,412 2,509,864
Long-term debt 855,944 1,057,151 758,579
Bank acceptances outstanding 9,266 7,360 11,451
Other liabilities 270,817 250,007 236,808
------------ ------------ -------------
Total liabilities 18,860,641 18,150,584 18,130,721
Stockholders' equity:
Preferred stock 0 5,308 6,738
Common stock 182,207 181,102 181,102
Issued: September 30, 1998, 145,765,319 shares
Issued: December 31, 1997, 144,881,896 shares
Issued: September 30, 1997, 144,881,896 shares
Capital surplus 13,567 0 0
Retained earnings 1,617,921 1,484,199 1,436,873
Treasury stock (22,283) (132) (2,844)
Held: September 30, 1998, 476,900 shares
Held: December 31, 1997, 48,547 shares
Held: September 30, 1997, 226,745 shares
Accumulated other comprehensive income 36,343 22,624 17,260
------------ ------------ -------------
Total stockholders' equity 1,827,755 1,693,101 1,639,129
------------ ------------ -------------
Total liabilities and stockholders' equity $ 20,688,396 $ 19,843,685 $ 19,769,850
============ ============ =============
-1-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(thousands of dollars, except per share data) 1998 1997 1998 1997
- --------------------------------------------- ----------------------- -----------------------
(unaudited)
<S> <C> <C> <C> <C>
INTEREST REVENUE
Loans $ 294,457 $ 288,683 $ 864,754 $ 848,749
Securities 60,784 64,112 187,852 191,961
Interest-bearing deposits with banks 64 358 205 774
Federal funds sold and resale agreements 603 1,084 2,702 4,775
Trading securities 8 17 62 113
---------- ---------- ---------- ----------
Total interest revenue 355,916 354,254 1,055,575 1,046,372
INTEREST EXPENSE
Deposits 119,391 119,682 359,483 350,986
Short-term borrowed funds 36,562 33,506 95,681 96,463
Long-term debt 14,806 13,210 48,203 37,425
---------- ---------- ---------- ----------
Total interest expense 170,759 166,398 503,367 484,874
---------- ---------- ---------- ----------
NET INTEREST REVENUE 185,157 187,856 552,208 561,498
Provision for loan losses 9,937 11,290 36,187 30,539
---------- ---------- ---------- ----------
NET INTEREST REVENUE AFTER
LOAN LOSS PROVISION 175,220 176,566 516,021 530,959
OTHER OPERATING REVENUE
Trust and investment management fees 49,620 44,692 140,933 127,444
Service charges on deposit accounts 25,300 23,669 76,690 68,735
Mortgage banking revenue 21,980 13,719 66,251 32,495
Credit card revenue 14,934 12,820 41,920 37,569
Data processing fees 3,556 3,806 10,829 11,748
Leasing revenue 6,251 0 6,251 0
Securities gains 310 31 801 1,157
Other revenue 26,359 21,616 67,768 64,382
---------- ---------- ---------- ----------
Total other operating revenue 148,310 120,353 411,443 343,530
OTHER OPERATING EXPENSE
Salaries 93,954 82,989 270,254 245,187
Employee benefits 15,897 15,616 52,383 50,500
Equipment expense 17,620 16,613 53,356 49,652
Net occupancy expense 16,743 15,770 49,604 46,712
Other expense 60,017 52,221 163,875 149,240
---------- ---------- ---------- ----------
Total other operating expense 204,231 183,209 589,472 541,291
INCOME BEFORE INCOME TAXES 119,299 113,710 337,992 333,198
Provision for income taxes 37,808 38,423 106,934 113,408
---------- ---------- ---------- ----------
NET INCOME $ 81,491 $ 75,287 $ 231,058 $ 219,790
========== ========== ========== ==========
Net income applicable to common stock $ 81,491 $ 75,169 $ 230,975 $ 219,400
========== ========== ========== ==========
PER COMMON SHARE
Net income $ 0.56 $ 0.52 $ 1.59 $ 1.51
Net income assuming dilution 0.55 0.51 1.57 1.49
Dividends 0.23 0.21 0.67 0.61
-2-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
Preferred Common Capital Retained
Stock Stock Surplus Earnings
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 11,344 $ 188,532 $ 51,145 $ 1,437,891
Net income 219,790
Unrealized loss on securities
available for sale
Reclassification adjustment
for gains realized on net
income
Income taxes
Comprehensive income
Cash dividends:
Preferred stock, series D ($26.25 per share) (390)
Common stock ($.61 per share) (89,030)
Converted 9,212 shares of preferred stock
into 395,352 shares of common stock (4,606) (518) (2,649)
Issued 1,040,199 shares of common stock for
employee plans (5,184) (6,129)
Retired 5,944,300 shares of common stock (7,430) (45,443) (122,610)
Purchased 1,171,900 shares of treasury stock
-------------- ----------- ----------- -----------
Balance at September 30, 1997 $ 6,738 $ 181,102 $ 0 $ 1,217,083
============== =========== =========== ===========
</TABLE>
<TABLE> Accumulated
<CAPTION> Other
Comprehensive Treasury
Income Stock Total
-------------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 19,191 $ (4,056)$ 1,704,047
Net income 219,790
Unrealized loss on securities
available for sale (1,813) (1,813)
Reclassification adjustment
for gains realized in net
income (1,157) (1,157)
Income taxes 1,039 1,039
-----------
Comprehensive income 217,859
Cash dividends:
Preferred stock, series D ($26.25 per share) (390)
Common stock ($.61 per share) (89,030)
Converted 9,212 shares of preferred stock
into 395,352 shares of common stock 7,772 (1)
Issued 1,040,199 shares of common stock for
employee plans 27,606 16,293
Retired 5,944,300 shares of common stock 0 (175,483)
Purchased 1,171,900 shares of treasury stock (34,166) (34,166)
-------------- ----------- -----------
Balance at September 30, 1997 $ 17,260 $ (2,844)$ 1,639,129
============== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred Common Capital Retained
Stock Stock Surplus Earnings
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ 5,308 $ 181,102 $ $ 1,484,199
Net income 231,058
Unrealized gain on securities
available for sale
Reclassification adjustment
for gains realized in net
income
Income taxes
Comprehensive income
Cash dividends:
Preferred stock, series D ($8.75 per share) (83)
Common stock ($.67 per share) (97,278)
Converted 10,615 shares of preferred stock
into 453,190 shares of common stock (5,308) 537 4,187 492
Issued 628,435 shares of common stock for
employee and director plans 568 9,380 (467)
Purchased 626,555 shares of treasury stock
-------------- ----------- ----------- -----------
Balance at September 30, 1998 $ 0 $ 182,207 $ 13,567 $ 1,617,921
============== =========== =========== ===========
</TABLE>
<TABLE> Accumulated
<CAPTION> Other
Comprehensive Treasury
Income Stock Total
-------------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 22,624 $ (132)$ 1,693,101
Net income 231,058
Unrealized gain on securities
available for sale 22,280 22,280
Reclassification adjustment
for gains realized in net
income (801) (801)
Income taxes (7,760) (7,760)
-----------
Comprehensive income 244,777
Cash dividends:
Preferred stock, series D ($8.75 per share) (83)
Common stock ($.67 per share) (97,278)
Converted 10,615 shares of preferred stock
into 453,190 shares of common stock 64 (28)
Issued 628,435 shares of common stock for
employee and director plans 6,400 15,881
Purchased 626,555 shares of treasury stock (28,615) (28,615)
-------------- ----------- -----------
Balance at September 30, 1998 $ 36,343 $ (22,283)$ 1,827,755
============== =========== ===========
-3-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
(thousands of dollars) 1998 1997
- -------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 231,058 $ 219,790
Adjustments:
Provision for loan losses 36,187 30,539
Depreciation, amortization, and accretion 59,894 45,021
Net (increase) decrease in trading securities (5,907) 10,212
Net increase in loans held for resale (161,151) (80,551)
Loss (gain) on securities and other assets 1,151 (1,827)
Deferred income taxes 1,857 2,044
Increase in other assets (130,487) (43,632)
Increase (decrease) in other liabilities 7,172 (10,282)
Other, net 11,567 (6,788)
------------- --------------
Net cash provided by operating activities 51,341 164,526
Cash Flows from Investing Activities:
Net decrease in federal funds sold and resale agreements 30,359 99,476
Net increase in interest-bearing deposits with banks (369) (17,725)
Sale of securities available for sale 191,913 1,157
Maturities of securities available for sale 51,768 437,319
Maturities of securities held to maturity 319,971 267,671
Purchase of securities available for sale (214,690) (253,352)
Purchase of securities held to maturity (157,924) (418,056)
Net increase in loans (190,208) (284,116)
Purchase of leasing company (220,000) 0
Proceeds from sales of foreclosed assets 4,853 9,500
Purchases of bank premises and equipment (56,193) (51,593)
Proceeds from sales of bank premises and equipment 447 3,781
------------- --------------
Net cash used by investing activities (240,073) (205,938)
Cash Flows from Financing Activities:
Net decrease in deposits (154,483) (600,178)
Net increase in short-term borrowed funds 577,061 641,258
Proceeds from long-term debt 97,133 140,598
Repayment of long-term debt (298,340) (79,213)
Common/treasury stock repurchases (28,615) (209,649)
Common/treasury stock issued 7,814 10,936
Cash dividends (97,361) (89,420)
------------- --------------
Net cash provided (used) by financing activities 103,209 (185,668)
Net decrease in cash and due from banks (85,523) (227,080)
Cash and due from banks at beginning of period 1,254,289 1,449,094
------------- --------------
Cash and due from banks at end of period $ 1,168,766 $ 1,222,014
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 507,692 $ 492,012
Income taxes 77,864 88,993
Transfer to foreclosed assets from loans $ 6,745 $ 7,017
-4-
</TABLE>
<PAGE>
FIRSTAR CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FOOTNOTES (unaudited)
- -------------------------------------------------------
(thousands of dollars except as otherwise indicated)
1. The financial data presented herein are unaudited, however, in the opinion
of management, reflect all adjustments which are necessary for a fair
presentation of such information. Results for interim periods should not
be considered indicative of results for a full year. Certain amounts have
been reclassified in prior periods to conform to classifications used in
the September 30, 1998 financial statements. Reference should be made
to the financial statements contained in the registrant's
annual report on Form 10-K for the year ended December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establised
standards for reporting the components of comprehensive income
prominently within the financial statements. Comprehensive income
includes net income plus certain transactions that are reported
directly within stockholders' equity. Firstar adopted this statement
with the first quarter of 1998 financial statements. The adoption of
this statement did not have any impact on financial position or
results of operations of Firstar.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This statement requires the capitalization
of certain internal and external costs incurred in the development of
internal use computer software. Firstar adopted this statement with
the first quarter of 1998 financial statements and capitalized
$1.9 million of related expenses during the first nine months of 1998.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires the recognition of all derivatives
as either assets or liabilities on the balance sheet and the measurement
of those instruments at fair value. The statement is effective in
the first quarter of 2000. Firstar has not yet determined the
impact, if any, that this statement could have on its financial
position, or results of operations.
2. Mergers and Acquisitions:
In June, 1998, Firstar announced a definitive agreement to purchase
Cargill Leasing Corporation for a cash payment of $220 million.
Cargill has approximately $600 million of lease assets. The transaction
was completed July 31, 1998 and was accounted for as a purchase
transaction. Goodwill of$56 million was recorded with the transaction
which will be amortized over a 25 year period.
On June 30, 1998, Firstar Corporation and Star Banc Corporation signed
a definitive agreement to merge through an exchange of shares.
Under the terms of the agreement, Firstar shareholders will receive
.76 shares of common stock in the combined company for each share of
Firstar common stock. Shareholders of Star Banc will retain one
share of common stock in the combined company for each Star
Banc common share. The combined company will have total assets of
approximately $38 billion. On October 27, 1998, shareholders of
Star Banc and Firstar approved the merger of the two companies. The
transaction was also approved by the Federal Reserve Board on
October 28, 1998. The merger is expected to be completed on
November 20, 1998 and will be accounted for as a pooling of interests.
<PAGE>
A summary of unaudited pro forma financial information giving effect
to the merger with Star Banc Corporation is shown below. The
unaudited financial information is not indicative of the results that
would have been realized had the entities been a single company during
these periods, nor is it indicative of the actual results the combined
company will report in the future.
<TABLE>
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(millions of dollars, except per share)
<S> <C> <C> <C>
Total average assets $ 34,585 $ 30,272 $ 29,328
Net interest revenue 1,366 1,243 1,174
Other operating revenue 768 641 555
Other operating expense 1,225 1,162 1,086
Net income 519 415 381
Net income per share - diluted 2.35 1.93 1.74
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3. Securities - The amortized cost and approximate market values of securities are as follows:
September 30,1998
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity:
Mortgage backed obligations of federal agencies $ 949,929 $ 39,029 $ (25)$ 988,933
State and political subdivisions 1,332,514 34,381 (412) 1,366,483
Corporate debt 6,022 3 (41) 5,984
----------- ----------- ----------- -----------
Total $ 2,288,465 $ 73,413 $ (478)$ 2,361,400
=========== =========== =========== ===========
Securities available for sale:
U.S. Treasury and federal agencies $ 1,201,663 $ 53,154 $ (1)$ 1,254,816
Mortgage backed obligations of federal agencies 138,862 2,952 (2) 141,812
State and political subdivisions 126,142 1,561 (1) 127,702
Equity securities 81,908 0 0 81,908
Money market mutual funds 56,007 0 0 56,007
----------- ----------- ----------- -----------
Total $ 1,604,582 $ 57,667 $ (4)$ 1,662,245
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,1997
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity:
Mortgage backed obligations of federal agencies $ 1,139,317 $ 32,038 $ (779)$ 1,170,576
State and political subdivisions 1,306,555 23,129 (1,144) 1,328,540
Corporate debt 6,252 0 (8) 6,244
----------- ----------- ----------- -----------
Total $ 2,452,124 $ 55,167 $ (1,931)$ 2,505,360
=========== =========== =========== ===========
Securities available for sale:
U.S. Treasury and federal agencies $ 1,425,457 $ 36,175 $ (818)$ 1,460,814
Mortgage backed obligations of federal agencies 103,036 949 (149) 103,836
State and political subdivisions 6,146 36 (9) 6,173
Equity securities 98,010 0 0 98,010
Money market mutual funds 38,773 0 0 38,773
----------- ----------- ----------- -----------
Total $ 1,671,422 $ 37,160 $ (976)$ 1,707,606
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4. Nonperforming Assets and Past Due Loans are as follows:
September 30 December 31 September 30
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial $ 28,340 $ 26,739 $ 34,744
Commercial mortgage 19,327 20,291 21,674
Consumer 13,425 16,828 17,653
----------- ----------- -----------
61,092 63,858 74,071
Renegotiated loans:
Commercial mortgage 43 263 272
Foreclosed assets 8,370 6,244 8,644
----------- ----------- -----------
Total $ 69,505 $ 70,365 $ 82,987
=========== =========== ===========
Nonperforming assets as a percent of:
Loans and foreclosed assets .48 % .52 % .61 %
Total assets .34 .35 .42
Loans past due 90 days and still accruing
Commercial $ 27,583 $ 21,774 $ 46,646
Commercial mortgage 19,647 15,626 28,130
Consumer 17,235 20,228 21,073
----------- ----------- -----------
Total $ 64,465 $ 57,628 $ 95,849
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
5. Reserve for Loan Losses - An analysis of the reserve for loan losses is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - beginning of period $ 218,903 $ 213,763 $ 218,861 $ 213,138
Acquired reserve 12,671 0 12,671 0
Provision for loan losses 9,937 11,290 36,187 30,539
Loan recoveries 7,105 6,316 24,087 16,244
Loan charge-offs (17,159) (18,007) (60,349) (46,559)
----------- ----------- ----------- -----------
Balance - end of period $ 231,457 $ 213,362 $ 231,457 $ 213,362
=========== =========== =========== ===========
Net charge-offs to average loans .29 % .35 % .35 % .31 %
Reserve to period-end loans 1.61 1.58
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
6. Net Income Per Common Share - Basic and diluted earnings per share of Firstar was calculated
as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net income $ 81,491 $ 75,287 $ 231,058 $ 219,790
Less preferred dividends 0 118 83 390
----------- ----------- ----------- -----------
Net income applicable to common stock $ 81,491 $ 75,169 $ 230,975 $ 219,400
Average common shares outstanding 145,502 144,611 145,245 145,265
Net income per common share- basic $ 0.56 $ 0.52 $ 1.59 $ 1.51
Diluted:
Net income $ 81,491 $ 75,287 $ 231,058 $ 219,790
Average common shares outstanding 145,502 144,611 145,245 145,265
Options and stock plans 1,815 1,603 1,637 1,479
Preferred stock 0 578 236 639
----------- ----------- ----------- -----------
Average common shares outstanding- diluted 147,317 146,792 147,118 147,383
Net income per common share- diluted $ 0.55 $ 0.51 $ 1.57 $ 1.49
</TABLE>
<TABLE>
<CAPTION>
7. Mortgage Servicing Rights - The fair value of capitalized mortgage servicing
rights was $34.1 million on September 30, 1998. Firstar serviced $3.6 billion of
mortgage loans for other investors as of September 30, 1998. Changes in
capitalized mortgage servicing are summarized as follows:
Nine Months Ended
September 30
-----------
1998
-----------
<S> <C>
Balance - beginning of period 16,180
Servicing rights capitalized 53,754
Amortization of servicing rights (2,870)
Sales of servicing rights (40,371)
-----------
Balance - end of period 26,693
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
8. Stock Based Compensation Plans - The following table summarizes stock option
activity for the nine months ended September 30, 1998:
Weight-Avg
Number of Exercise
Shares Price
----------- -----------
<S> <C> <C>
Options outstanding at December 31, 1997 5,065,089 $ 19.04
Granted 1,394,650 38.90
Exercised (589,709) 13.25
Forfeited (92,800) 24.41
-----------
Options outstanding at September 30, 1998 5,777,230 21.85
===========
Options excercisable on September 30, 1998 were 2,411,202. All options will
become excercisable upon the merger with Star Banc Corporation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Information
The following discussion includes forward looking statements
concerning Firstar's business results. These forward-looking
statements, such as statements of plans, strategies, goals,
objectives, expectations, estimates and intentions, are based on
assumptions that involve risks and uncertainties and that are
subject to change based on various important factors (some of
which are beyond Firstar's control). The following factors,
among others, could cause actual results to differ materially
from any forward-looking statement: the strength of the U.S.
economy in general and the strength of the local economies in
the areas in which Firstar conducts operations; the effects of
and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of
the Federal Reserve System on both Firstar and its customers;
inflation, interest rate and market fluctuations; the timely
development of and acceptance of new products and services and
the perceived overall value of these products; the willingness
of customers to substitute competitors' products and services
for Firstar's products and services; the impact of changes in
financial services' laws and regulations; technological changes;
acquisitions; changes in consumer spending and saving habits;
and the success of Firstar at managing the risks involved in the
foregoing.
<PAGE>
Financial Discussion - Income Statement
Firstar Corporation's net income for the third quarter of 1998
was $81.5 million, or $.55 per common share, on a diluted basis,
up from the $75.3 million, or $.51 per common share, for the
same period last year. This represented a 8.2% increase in net
income and a 7.8% increase in earnings per share. Return on
common equity was 18.07% for the quarter, compared with 18.51%
for the same period last year, while return on average assets
was 1.61% compared to 1.54% during the third quarter of last
year.
Net income for the first nine months of 1998 was $231.1
million, or $1.57 per diluted common share, up from the $219.8
million, or $1.49 per diluted common share, for the same period
last year. This represented a 5.1% increase in net income and a
5.4% increase in earnings per share. Return on common equity
was 17.64% for the first nine months of the year, compared with
18.57% for the same period last year, while return on average
assets was 1.56% compared to 1.52% during the first nine months
of last year.
<PAGE>
Table 1 shows the components of net income and the net interest
margin.
</TABLE>
<TABLE>
<CAPTION>
Table 1. Condensed income statements - taxable equivalent basis
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- -------------------------------
1998 1997 Change 1998 1997 Change
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(millions of dollars) (millions of dollars)
Interest revenue $ 355.9 $ 354.3 $ 1.6 $ 1,055.6 $ 1,046.4 $ 9.2
Taxable-equivalent adjustment 10.1 9.1 1.0 28.8 26.6 2.2
---------- ---------- ---------- --------- --------- ---------
Interest revenue - taxable-equivalent 366.0 363.4 2.6 1,084.4 1,073.0 11.4
Interest expense 170.8 166.4 4.4 503.4 484.9 18.5
---------- ---------- ---------- --------- --------- ---------
Net interest revenue - taxable-equivalent 195.2 197.0 (1.8) 581.0 588.1 (7.1)
Provision for loan losses 9.9 11.3 (1.4) 36.2 30.5 5.7
Other operating revenue 148.3 120.3 28.0 411.5 343.5 68.0
Other operating expense 204.2 183.2 21.0 589.5 541.3 48.2
---------- ---------- ---------- --------- --------- ---------
Income before income taxes 129.4 122.8 6.6 366.8 359.8 7.0
Provision for income taxes 37.8 38.4 (0.6) 106.9 113.4 (6.5)
Taxable-equivalent adjustment 10.1 9.1 1.0 28.8 26.6 2.2
---------- ---------- ---------- --------- --------- ---------
Net income $ 81.5 $ 75.3 $ 6.2 $ 231.1 $ 219.8 $ 11.3
========== ========== ========== ========= ========= =========
Yield on earning assets 8.08 % 8.20 % (0.12)% 8.09 % 8.15 % (0.06)%
Cost of interest-bearing liabilities 4.59 4.61 (0.02) 4.63 4.55 0.08
---------- ---------- ---------- --------- --------- ---------
Interest spread 3.49 3.59 (0.10) 3.46 3.60 (0.14)
Impact of interest-free funds 0.83 0.86 (0.03) 0.87 0.87 0.00
---------- ---------- ---------- --------- --------- ---------
Net interest margin 4.32 % 4.45 % (0.13)% 4.33 % 4.47 % (0.14)%
========== ========== ========== ========= ========= =========
</TABLE>
<PAGE>
Net interest revenue during the first nine months of 1998, on
a taxable equivalent basis, was $581.0 million, a $7.1 million,
or 1.2%, decrease from the level experienced in the same period
last year. The net interest margin was 4.33% during the first
nine months of 1998 compared to 4.47% a year earlier. The
competition for loans and deposits along with the flat yield
curve have placed pressure on the margin and net interest
revenue.
Table 2 shows the components of interest revenue and expense
along with changes related to volumes and rates. Total interest
revenue on a taxable-equivalent basis increased by $11.4 million
to $1,084.4 million during the first nine months of 1998
compared to the same period last year. Loan income rose by
$15.8 million due to higher average commercial loan balances
partially offset by lower consumer loan balances and reduced
yields on both commercial and consumer loans. Securities
revenue decreased by $1.7 million with lower average balances
being partially offset by higher yields. Short-term investment
revenue was lower due to reduced balances.
Total interest expense was $503.4 million during the first
nine months of 1998, an increase of $18.5 million from the same
period last year. Interest rates on liabilities increased to
4.63% in 1998 from 4.55% in 1997. Interest expense on total
deposits increased $8.5 million in the first nine months of
1998 compared to the same period last year due to higher deposit
levels and a change in mix of deposits from lower cost savings
passbook to higher cost money market savings accounts and market
competitive certificates of deposit. Interest expense on
short-term borrowed funds decreased $782 thousand due to a shift
from short-term borrowing to long-term debt. Interest expense
on long-term debt increased $10.8 million due to additional
balances. This shift between short-term and long-term debt was
done to better match long-term assets and maintain the company's
interest rate risk profile within established guidelines.
<PAGE>
<TABLE>
<CAPTION>
Table 2. Analysis of interest revenue and expense
Nine Months Ended September 30
---------------------------------------------------------------
Interest Total Due to
------------------------ ------------------------
1998 1997 Change Volume Rate
----------- ----------- ----------- ----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits
with banks $ 205 $ 774 $ (569)$ (569)$ 0
Federal funds sold and
resale agreements 2,702 4,775 (2,073) (2,262) 189
Trading securities 62 115 (53) (53) 0
Securities 211,593 213,253 (1,660) (3,707) 2,047
Commercial loans 495,687 471,855 23,832 35,556 (11,724)
Consumer loans 374,111 382,175 (8,064) (6,901) (1,163)
----------- ----------- -----------
Total loans 869,798 854,030 15,768 29,862 (14,094)
----------- ----------- -----------
Total interest revenue 1,084,360 1,072,947 11,413 20,069 (8,656)
Interest-bearing demand 20,481 18,259 2,222 852 1,370
Money market accounts 108,516 86,815 21,701 15,025 6,676
Savings passbook 22,054 25,365 (3,311) (2,629) (682)
Certificates of deposit 208,432 220,547 (12,115) (13,977) 1,862
----------- ----------- -----------
Total deposits 359,483 350,986 8,497 2,196 6,301
Short-term borrowed funds 95,681 96,463 (782) (2,157) 1,375
Long-term debt 48,203 37,425 10,778 14,212 (3,434)
----------- ----------- -----------
Total interest expense 503,367 484,874 18,493 9,812 8,681
----------- ----------- -----------
Net interest revenue $ 580,993 $ 588,073 $ (7,080) 10,933 (18,013)
=========== =========== ===========
Calculations are computed on a taxable-equivalent basis using a tax rate of 35%. The change
attributable to both volume and rate has been allocated proportionately to the changes due
to volume and rate.
</TABLE>
<PAGE>
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in
interest rates, exchange rates and equity prices. Firstar's
market risk is composed primarily of interest rate risk.
Firstar's Asset/Liability Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position of the
Corporation and establishing policies to monitor and limit
exposure to interest rate risk. The guidelines established by
ALCO are reviewed by the Audit-Examining Committee.
Firstar's primary purpose is to manage exposure to risks
associated with interest rate movements and provide for
acceptable and predictable results. Firstar utilizes an
investment portfolio and to a lesser extent, off-balance sheet
instruments to manage the interest rate risk naturally created
through its business activities. The components of interest
rate risk which are actively measured and managed include:
repricing risk, basis risk, option risk and the risk of
non-parallel shifts in the yield curve.
An earnings simulation model forecasts earnings over each of
the next two years under a variety of scenarios that incorporate
changes in the shape of the yield curve, changes in interest
rate relationships, changes in the direction of rates, and
changes in the mix and levels of balance sheet accounts.
Management evaluates the effects on income of these various rate
scenarios against earnings in a base rate environment. The most
recent earnings simulation projects net income would increase by
approximately 5.6% of base rate net income if rates gradually
fall by 150 basis points over the next year. It projects a
decrease of approximately 4.2% if rates rise gradually by 150
basis points. The 5.6% increase under the gradually falling
rate enviroment was slightly in excess of the 5% policy
guidelines established by ALCO. However, given the direction of
interest rates, ALCO made the decision not to change this
position.
<PAGE>
The provision for loan losses increased to $36.2 million in
the first nine months of 1998, from $30.5 million in the same
period last year due to increased net charge-offs. Net loan
charge-offs for the first nine months of 1998 were $36.3 million
or .35% of average outstanding loans, compared with $30.3
million or .31% for the same period in 1997. The reserve for
loan losses represented 1.61% of total loans at September 30,
1998 and 1.58% of total loans at September 30,1997.
Net charge-offs on consumer loans were .69% in the third
quarter and .72% for the first nine months of 1998. This was an
increase from .59% in the comparable quarter of 1997 and from
.63% the first nine months of 1997. Increased credit card net
charge-offs were incurred during 1998. Net credit card
charge-offs were 3.91% for the first nine months of 1998,
compared to 3.54% for the same period one year ago. These
levels are well below industry averages for credit card net
charge-offs. Commercial loan net charge-offs were .02% in the
current quarter and .09% for the first nine months of 1998.
This compares to a commercial loan net charge-off level of .05%
for the first nine months of 1997.
Total nonperforming assets were $69.5 million, or .48% of total
loans and foreclosed assets on September 30, 1998. This
represents a reduction in nonperforming assets of $13.5 million
from one year ago and an increase of $3.5 million from June 30,
1998. The increase from June 30, 1998 was due to the
acquisition of a leasing company.
<PAGE>
<TABLE>
<CAPTION>
Table 3. Net loan charge-offs
Quarter ended Year to Date
---------------------- ----------------------
9-30-98 9-30-97 9-30-98 9-30-97
---------- ---------- ---------- ----------
(thousands of dollars)
<S> <C> <C> <C> <C>
Loan charge-offs
Commercial $ 1,460 $ 4,111 $ 15,521 $ 7,057
Commercial mortgage 1,402 520 2,143 1,011
Consumer 5,522 5,310 16,204 15,258
Consumer mortgage 197 169 596 354
Credit card 8,578 7,897 25,885 22,879
---------- ---------- ---------- ----------
Total charge-offs 17,159 18,007 60,349 46,559
Loan recoveries
Commercial 2,276 1,006 10,663 2,908
Commercial mortgage 258 599 1,387 2,104
Consumer 2,658 2,976 6,891 5,692
Consumer mortgage 3 10 195 62
Credit card 1,910 1,725 4,951 5,478
---------- ---------- ---------- ----------
Total recoveries 7,105 6,316 24,087 16,244
Net charge-offs
Commercial (816) 3,105 4,858 4,149
Commercial mortgage 1,144 (79) 756 (1,093)
Consumer 2,864 2,334 9,313 9,566
Consumer mortgage 194 159 401 292
Credit card 6,668 6,172 20,934 17,401
---------- ---------- ---------- ----------
Total net charge-offs $ 10,054 $ 11,691 $ 36,262 $ 30,315
========== ========== ========== ==========
Net charge-offs as a % of
Commercial (0.06)% 0.27 % 0.13 % 0.12 %
Commercial mortgage 0.15 (0.01) 0.03 (0.05)
Total commercial loans 0.02 0.16 0.09 0.05
Consumer 0.42 0.35 0.46 0.50
Consumer mortgage 0.04 0.03 0.02 0.02
Credit card 3.62 3.66 3.91 3.54
Total consumer loans 0.69 0.59 0.72 0.63
Total loans 0.29 0.35 0.35 0.31
</TABLE>
<PAGE>
Other operating revenue, excluding securities gains and
losses, increased by 19.9% over the first nine months of 1997 to
$410.6 million. Other operating revenue represents 41.4% of
total taxable equivalent revenue for the first nine months of
1998 compared to 36.8% for the same period one year ago. Table
4 shows the composition of other operating revenue.
<TABLE>
<CAPTION>
Table 4. Other operating revenue
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- ----------------------------------
1998 1997 Change 1997 1996 Change
---------- ---------- ---------- ---------- ---------- ----------
(thousands of dollars) (thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Trust and investment management fees $ 49,620 $ 44,692 11.0 % 140,933 $ 127,444 10.6 %
Service charges on deposit accounts 25,300 23,669 6.9 76,690 68,735 11.6
Mortgage origination 18,767 10,647 76.3 52,421 22,971 128.2
Mortgage servicing 3,213 3,072 4.6 13,830 9,524 45.2
---------- ---------- ---------- ----------
Mortgage banking revenue 21,980 13,719 60.2 66,251 32,495 103.9
Credit card service revenue 14,934 12,820 16.5 41,920 37,569 11.6
Data processing fees 3,556 3,806 (6.6) 10,829 11,748 (7.8)
Insurance revenue 3,559 2,479 43.6 10,570 8,332 26.9
Brokerage revenue 3,389 2,817 20.3 9,888 8,259 19.7
ATM fees 2,857 1,868 52.9 7,534 4,349 73.2
Merchant fees 2,442 6,165 (60.4) 6,388 16,680 (61.7)
Leasing revenue 6,251 0 6,251 0
International fees 1,818 1,721 5.6 4,999 4,566 9.5
Bank owned life insurance 2,248 49 4,699 359
Safe deposit fees 976 1,107 (11.8) 3,133 3,583 (12.6)
Foreign exchange gains 994 659 50.8 2,432 2,308 5.4
Trading securities gains 217 197 10.2 653 923 (29.3)
Other 7,859 4,554 72.6 17,472 15,023 16.3
---------- ---------- ---------- ----------
Subtotal 148,000 120,322 23.0 410,642 342,373 19.9
Securities gains 310 31 801 1,157
---------- ---------- ---------- ----------
Total $ 148,310 $ 120,353 23.2 % 411,443 $ 343,530 19.8 %
========== ========== ========== ==========
</TABLE>
<PAGE>
Trust and investment management fees are the single largest
source of fee revenue, contributing $140.9 million, or 34.3%, of
other operating revenue. This level represents a 10.6% growth
in revenue during the first nine months of 1998 compared to the
same period last year. Trust and investment assets under
management were $26.8 billion on September 30, 1998, compared
with $27.3 billion at June 30, 1998 and $25.1 billion a year
earlier. Additionally, assets held in custody accounts were
$88.6 billion on both September 30, 1998 and June 30, 1998
compared with $91.2 billion at September 30, 1997. The
increased volatility of equity markets and interest rates has
had a significant effect on trust and investment management fees
and future revenue levels could likewise be influenced by these
factors.
Revenue from service charges on deposit accounts are the
second largest source of fee revenue at $76.7 million for the
first nine months of 1998. This level represented a 11.6%
increase from the same period one year ago and was primarily the
result of increased commercial cash management revenues.
Revenue from mortgage loan originations activity for the first
nine months of this year increased 128.2%. The lower interest
rates currently available to borrowers has significantly
increased mortgage volumes. Mortgage loan closings were $3.0
billion in the first nine months of 1998, compared to $1.3
billion during the comparable period of 1997. Mortgage loan
servicing revenues increased by 45.2% from the year earlier
level due to $4.0 million in gains on the sale of servicing
rights this year. Excluding these gains, revenue from mortgage
servicing remained flat. The company sold mortgage servicing
rights as part of its risk management of the servicing
portfolio. Mortgage loans serviced for others were $3.6 billion
on September 30, 1998.
Credit card revenues, excluding merchant processing revenue,
totaled $41.9 million during the first nine months of 1998.
This level represented a 11.6% increase over the same period
last year. In the fourth quarter of 1997, Firstar formed a
joint venture with Nova Information Systems Inc. to provide
credit card processing services to merchants. Merchant
processing revenue decreased 61.7% over a year earlier due to
the transfer of this activity to the joint venture.
Leasing revenue includes rental income on operating leases and
residual value gains from the operations of a leasing company
acquired in the third quarter of 1998.
<PAGE>
The remaining sources of other operating revenue were derived
from a wide range of services and aggregated $72.2 million, an
increase of 21.4% over the first nine months of 1997.
Other operating expense rose by 8.9% over the first nine
months of 1997 to a level of $589.5 million. Personnel costs
increased by 9.1% from the same period last year. Nonpersonnel
expense increased by 8.6%. The detail of other operating
expense is shown in Table 5.
Personnel costs increased by 9.1%, reflecting higher
commissions paid to mortgage banking personnel due to the
increased sales volume, normal salary increases for all
employees, and increased contract programming costs due in part
to the Year 2000 project. Employee benefit expense has
increased due to higher pension costs and payroll taxes.
Full-time equivalent personnel headcount was 8,044 on September
30, 1998, compared with 7,901 one year earlier.
Equipment expense increased by $3.7 million, or 7.5%,
primarily as a result of equipment upgrades and higher
maintenance charges. Net occupancy expense rose by $2.9 million
or 6.2%. As of the end of 1997, all deferred gains from the sale
of a building in 1988 had been amortized. This amortization
reduced occupancy expense in the first nine months of 1997 by
$5.1 million. Information processing expense rose by 12.5% due
to increased volumes in the mutual funds processing area and the
outsourcing of payroll processing to a third party provider.
Amortization of intangibles rose by $2.2 million or 17.1%, due
to the amortization of the goodwill associated with the leasing
company acquisition in the third quarter and higher mortgage
servicing rights. Processing losses increased $1.2 million or
16.6%. Leasing expense is associated with the recently acquired
leasing company. All other operating expenses totaled $117.9
million, an increase of $6.0 or 5.4%, this included a $4.5
million lawsuit settlement in the third quarter of 1998.
<PAGE>
<TABLE>
<CAPTION>
Table 5. Other operating expense
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- ----------------------------------
1998 1997 Change 1998 1997 Change
---------- ---------- ---------- ---------- ---------- ----------
(thousands of dollars) (thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Salaries $ 93,954 $ 82,989 13.2 % $ 270,254 $ 245,187 10.2 %
Employee benefits 15,897 15,616 1.8 52,383 50,500 3.7
---------- ---------- ---------- ----------
Total personnel expense 109,851 98,605 11.4 322,637 295,687 9.1
Equipment expense 17,620 16,613 6.1 53,356 49,652 7.5
Net occupancy expense 16,743 15,770 6.2 49,604 46,712 6.2
Professional fees 8,801 6,970 26.3 23,177 22,117 4.8
Business development 5,885 6,977 (15.7) 21,301 21,673 (1.7)
Information processing expense 6,779 6,398 6.0 19,354 17,203 12.5
Amortization of intangibles 5,450 4,375 24.6 15,219 12,999 17.1
Stationery and supplies 4,665 5,466 (14.7) 14,549 16,372 (11.1)
Delivery 4,741 5,192 (8.7) 14,128 14,834 (4.8)
Processing and other losses 3,320 3,662 (9.3) 8,331 7,148 16.6
Employee education/recruiting 2,000 2,511 (20.4) 6,892 6,486 6.3
Wire communication 2,192 2,495 (12.1) 6,644 7,510 (11.5)
Bank processing fees 2,246 1,987 13.0 6,630 5,170 28.2
Leasing expense 3,107 0 3,107 0
Credit card assessment fees 926 1,455 (36.4) 2,607 4,264 (38.9)
Insurance 709 559 26.8 1,667 933 78.7
Net foreclosed assets expense(income) 226 (86) 651 (145)
Other 8,970 4,260 110.6 19,618 12,676 54.8
---------- ---------- ---------- ----------
Total nonpersonnel expense 94,380 84,604 11.6 266,835 245,604 8.6
---------- ---------- ---------- ----------
Total other operating expense $ 204,231 $ 183,209 11.5 % $ 589,472 $ 541,291 8.9 %
========== ========== ========== ==========
</TABLE>
<PAGE>
Income tax expense was $106.9 million in the first nine months
of 1998 compared to $113.4 million in the same period last year.
The effective tax rate was 31.6 % in 1998 compared to 34.0% in
1997. The implementation of various tax planning strategies has
reduced the effective tax rate.
Year 2000 Project
Firstar is implementing programs to address the Year 2000
computer issues. These Year 2000 computer issues arose because
many computer applications will not properly recognize the date
change from December 31, 1999 to January 1, 2000, potentially
creating erroneous data, miscalculations and other operational
problems. Firstar established its Year 2000 project in 1996 to
analyze and plan for the Year 2000 transition. This project
includes analyzing the impact of the Year 2000 on Firstars'
mainframe and computer hardware and software; on non-information
technology such as vaults, security systems, and individually
developed applications; and on its customers and other third
parties with which Firstar conducts business.
The project plan for Firstar's core business applications has
four broad phases: Assessment/Planning, Code Renovation,
Regression Testing and Year 2000 Testing. The phases follow the
Year 2000 recommendation of the Federal Banking regulators who
are also conducting special examinations of F.D.I.C. insured
banks to determine the adequacy of Year 2000 preparation. The
assessment/planning phase, code renovation phase, and regression
testing are completed for all mission critical applications.
Year 2000 testing of the new code is 85% completed and will be
essentially 100% complete by December 31, 1998. Firstar has not
identified any systems or products which will not be made Year
2000 ready.
Non-information technology systems are following a similar
planning and testing procedure. Planning has been completed for
all applications and code renovation is 90% complete. Over 60%
of these applications are currently Year 2000 ready.
Firstar also has Year 2000 business risk from its customers,
vendors, counterparties, government agencies and other parties
with which it conducts business. Firstar has identified these
relationships where the loss exposure exceeds $2.5 million.
These third parties are being contacted by Firstar to determine
their efforts in resolving their Year 2000 issues. With respect
to loan customers, Firstar is including Year 2000 compliance as
part of its credit risk analysis.
<PAGE>
Firstar expects that it will be fully Year 2000 compliant for
all applications within its control. The successful Year 2000
efforts of third parties cannot be assumed. Their failure to
implement the needed Year 2000 corrections could result in
business disruption and added cost to Firstar. Where
appropriate, Firstar will develop contingency plans for all
critical applications.
Firstar expects that the total cost of its Year 2000 readiness
program will approximate $20 million. Approximately $12 million
has been expensed during 1997 and through the first nine months
of 1998. No material information technology projects have been
deferred as a result of these Year 2000 projects.
Financial Discussion - Balance Sheet
Total assets on September 30, 1998 were $20.7 billion, up $845
million from December 31, 1997 and up $919 million from a year
earlier. Earning assets totaled $18.4 billion, up $605 million
from December 31, 1997 and $596 million from a year earlier.
Average loans totaled $13.7 billion during the first nine
months of 1998, an increase of $469 million, or 3.5% from a year
earlier.
Commercial loans averaged $8.1 billion during the first nine
month of 1998, up 7.7% from a year earlier. Excluding the
effect of the loans added through the purchase of a leasing
company in the third quarter of this year, commercial loans
increased 6.3% from one year ago.
Consumer loans, excluding residential mortgages, averaged $3.4
billion, an increase of $189 million, or 5.8% over the first
nine months of 1997. Good growth has occurred in home equity
loans and credit card loans, which are up 11.7% and 8.8%
respectively, from the same period one year ago. Reductions in
direct installment debt and other areas of consumer lending have
been seen as customers are converting and consolidating their
debt to home equity or secondary market mortgage products.
<PAGE>
Residential mortgage loans, exclusive of loans held for sale,
declined by 21.6% on average from the first nine months of 1997.
The reduction was attributable to the normal loan amortization
and prepayments partially offset by the placement in the
portfolio of some shorter term variable rate mortgages. Lower
interest rates experienced in the last half of 1997 and
continuing into the first nine months of 1998 along with a flat
yield curve, have increased the prepayment rate on portfolio
mortgages during this same time period. Firstar's primary
strategy in this area has been to originate and sell mortgages
into the secondary market thereby reducing the amount of
portfolio mortgages held on the balance sheet.
Total securities, including both those designated as available
for sale and those held to maturity averaged $4.1 billion during
the first nine months of 1998, compared with $4.2 billion from a
year earlier. Firstar's strategy in this area is to reduce the
size of the investment portfolio and redeploy the funds into
loans.
Funding sources, consisting of deposits and borrowed funds,
averaged $17.8 billion during the first nine months of 1998.
Total deposits averaged $14.4 billion, an increase of 1.1% from
a year ago. The change in the mix of deposits is reflected in
the 10.6% reduction in average passbook deposit levels and the
4.5% reduction of certificates of deposit. Money market deposit
accounts have increased by 16.4% during the same period as
consumers have moved money from passbook savings and
certificates of deposit. Increased competition for consumer
deposits and continued consumer sensitivity to interest rates
and other uses of funds, such as investments in equity markets,
have limited Firstar's deposit growth.
Borrowed funds averaged $3.4 billion during the first nine
months of 1998, up $217 million from a year earlier. Firstar
Bank Milwaukee, N.A., a wholly owned subsidiary of the Company,
issued $250 million of long-term senior bank notes in December
1997. On September 1, 1998, Firstar redeemed all of its
outstanding $100 million 7.15% subordinated notes due September
1, 2000.
Stockholders' equity totaled $1,828 million at September 30,
1998, a increase of $135 million from December 31, 1997.
Firstar's capital management plan strives to match longer term
capital needs with maintaining sound capital levels. Firstar's
tier 1 leverage ratio was 8.66% at September 30, 1998. On June
30, 1998, the Board of Directors rescinded the January 16, 1997
authorization to repurchase up to 12 million shares of Firstar
common stock for retirement.
The board of directors declared a quarterly dividend to common
stockholders of $.23 per share. The dividend is payable
November 15 to shareholders of record on October 26.
<PAGE>
<TABLE>
<CAPTION>
Table 6. Capital components and ratios
September 30 December 31 September 30
1998 1997 1997
------------ ------------ ------------
(thousands of dollars)
<S> <C> <C> <C>
Risk-based capital:
Stockholders' equity $ 1,827,755 $ 1,693,101 $ 1,639,129
Trust capital securities 150,000 150,000 150,000
Unrealized gains on securities available for sale (36,343) (22,624) (17,260)
Minority interest in subsidiaries 3,503 2,913 2,798
Less disallowed intangibles (227,086) (188,466) (191,507)
------------ ------------ ------------
Total Tier I capital 1,717,829 1,634,924 1,583,160
Allowable reserve for loan losses 209,622 200,438 185,789
Allowable long-term debt 0 40,000 40,000
------------ ------------ ------------
Total Tier II capital 209,622 240,438 225,789
------------ ------------ ------------
Total capital $ 1,927,451 $ 1,875,362 $ 1,808,949
============ ============ ============
Risk-adjusted assets $ 16,747,901 $ 16,016,627 $ 14,835,573
Tier I capital to risk-adjusted assets 10.26 % 10.21 % 10.67 %
Total capital to risk-adjusted assets 11.51 11.71 12.19
Tier I leverage ratio 8.66 8.50 8.28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
ADDITIONAL FINANCIAL DATA (unaudited)
- -----------------------------------------------------------------------------------------
Selected Financial Data
(thousands of dollars, except per share)
Quarter ended Nine Months ended
September 30 September 30
---------------------- ------------------------
1998 1997 1998 1997
---------------------- ------------------------
<S> <C> <C> <C> <C>
Earnings and Dividends
Net income $ 81,491 $ 75,287 $ 231,058 $ 219,790
Per common share:
Net income 0.56 0.52 1.59 1.51
Net income assuming dilution 0.55 0.51 1.57 1.49
Dividends 0.23 0.21 0.67 0.61
Stockholders' equity 12.58 11.28
Performance Ratios
Return on average assets 1.61 % 1.54 % 1.56 % 1.52 %
Return on average common equity 18.07 18.51 17.64 18.57
Dividend payout ratio 41.07 40.38 42.14 40.40
Equity to assets 8.83 8.29
Net loan charge-offs as a percentage
of average loans 0.29 0.35 0.35 0.31
Nonperforming assets as a
percentage of loans and foreclosed
assets 0.48 0.61
Net interest margin 4.32 4.45 4.33 4.47
Efficiency ratio 59.50 57.74 59.44 58.18
Fee revenue as a percentage
of revenue 43.12 37.92 41.41 36.80
Statistical Data
Full-time equivalent staff (at quarter end) 8,044 7,901
Average common shares
outstanding (000's) 145,502 144,611 145,245 145,265
Average common shares
outstanding- assuming dilution (000's) 147,317 146,792 147,118 147,383
Actual common shares
outstanding at quarter end (000's) 145,288 144,655
Stock Price Information
High $ 53.875 $ 38.000 $ 53.875 $ 38.000
Low 38.250 30.625 32.750 25.563
Close 50.625 36.250 50.625 36.250
-17-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRSTAR CORPORATION AND SUBSIDIARIES
ADDITIONAL FINANCIAL DATA (Unaudited)
--------------------------------------------------------------------------------------------------------
Consolidated Average Balance Sheets, Net Interest Revenue and Rate Analysis
(Thousands of Dollars)
Quarter ended September 30
------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits
with banks $ 4,495 $ 64 5.65 % $ 22,039 $ 358 6.44 %
Federal funds sold and
resale agreements 42,297 603 5.66 76,183 1,084 5.65
Trading securities 1,181 8 2.69 1,166 17 5.78
Securities:
Taxable 2,569,168 43,652 6.77 2,913,070 49,163 6.72
Nontaxable 1,453,094 25,483 7.01 1,242,398 22,279 7.17
----------- ---------- ----------- ----------
Total securities 4,022,262 69,135 6.85 4,155,468 71,442 6.86
Loans:
Commercial 8,358,972 172,935 8.21 7,542,064 161,098 8.48
Residential mortgage portfolio 1,752,906 32,524 7.42 2,332,315 44,585 7.65
Residential mortgage-held for sa 363,527 6,441 7.09 178,296 3,293 7.39
Consumer 3,462,404 84,279 9.66 3,305,305 81,477 9.78
----------- ---------- ----------- ----------
Total loans 13,937,809 296,179 8.44 13,357,980 290,453 8.64
----------- ---------- ----------- ----------
Interest earning assets 18,008,044 365,989 8.08 17,612,836 363,354 8.20
Reserve for loan losses (225,343) (212,240)
Cash and due from banks 1,036,434 987,953
Other assets 1,248,277 968,282
----------- -----------
Total assets $ 20,067,412 $ 19,356,831
=========== ===========
<PAGE>
Liabilities and
Stockholders' Equity
Interest-bearing demand $ 1,642,601 $ 6,506 1.57 % $ 1,599,625 $ 6,493 1.61 %
Money market accounts 3,361,948 38,450 4.54 2,767,882 30,317 4.35
Savings passbook 1,287,634 7,143 2.20 1,416,480 8,078 2.26
Certificates of deposit 4,877,949 67,292 5.47 5,306,137 74,794 5.59
Short-term borrowed funds 2,676,022 36,562 5.42 2,495,752 33,506 5.33
Long-term debt 923,313 14,806 6.41 755,803 13,210 6.99
----------- ---------- ----------- ----------
Interest-bearing liabilities 14,769,467 170,759 4.59 14,341,679 166,398 4.61
Demand deposits 3,244,151 3,127,312
Other liabilities 264,768 269,855
Stockholders' equity 1,789,026 1,617,985
----------- -----------
Total liabilities and
stockholders' equity $ 20,067,412 $ 19,356,831
=========== ===========
Net interest
revenue/margin $ 195,230 4.32 % $ 196,956 4.45 %
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------------- ----------------------------------
1998 1997
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits
with banks $ 4,391 $ 205 6.24 % $ 15,895 $ 774 6.51 %
Federal funds sold and
resale agreements 64,629 2,702 5.59 118,911 4,775 5.37
Trading securities 2,403 62 3.45 2,514 115 6.12
Securities:
Taxable 2,743,359 139,123 6.77 2,989,068 149,019 6.66
Nontaxable 1,368,642 72,470 7.06 1,195,214 64,234 7.17
----------- ---------- ----------- ----------
Total securities 4,112,001 211,593 6.87 4,184,282 213,253 6.80
Loans:
Commercial 8,045,728 495,687 8.24 7,472,054 471,855 8.44
Residential mortgage portfolio 1,892,793 106,230 7.48 2,413,627 138,357 7.64
Residential mortgage-held for sa 361,566 19,060 7.03 134,850 7,413 7.33
Consumer 3,428,964 248,821 9.70 3,239,630 236,405 9.76
----------- ---------- ----------- ----------
Total loans 13,729,051 869,798 8.47 13,260,161 854,030 8.61
----------- ---------- ----------- ----------
Interest earning assets 17,912,475 1,084,360 8.09 17,581,763 1,072,947 8.15
Reserve for loan losses (219,862) (212,559)
Cash and due from banks 1,049,612 991,823
Other assets 1,082,137 931,803
----------- -----------
Total assets $ 19,824,362 $ 19,292,830
=========== ===========
<PAGE>
Liabilities and
Stockholders' Equity
Interest-bearing demand $ 1,660,455 $ 20,481 1.65 % $ 1,588,389 $ 18,259 1.54 %
Money market accounts 3,202,847 108,516 4.53 2,751,338 86,815 4.22
Savings passbook 1,312,539 22,054 2.25 1,468,081 25,365 2.31
Certificates of deposit 5,001,134 208,432 5.57 5,300,002 220,547 5.56
Short-term borrowed funds 2,385,757 95,681 5.36 2,439,833 96,463 5.29
Other debt 978,036 48,203 6.57 707,361 37,425 7.06
----------- ---------- ----------- ----------
Interest-bearing liabilities 14,540,768 503,367 4.63 14,255,004 484,874 4.55
Demand deposits 3,265,007 3,174,327
Other liabilities 264,823 276,514
Stockholders' equity 1,753,764 1,586,985
----------- -----------
Total liabilities and
stockholders' equity $ 19,824,362 $ 19,292,830
=========== ===========
Net interest
revenue/margin $ 580,993 4.33 % $ 588,073 4.47 %
========== ==========
Interest and rates are calculated on a taxable equivalent basis, using a tax rate of 35%. The rate ca
include the effect of certain loans on which income is recongized only as cash payments are received or
at less than the original contract rate.
-18-
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Special Meeting of Shareholders of Firstar Corporation
was held on October 27, 1998. The shareholders voted to
approve the merger of Firstar Corporation and Star Banc
Corporation. The vote was as follows:
For 110,879,215
Against 1,452,525
Abstain 32,977,062
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits to Part 1 of Form 10-Q
27. Financial Data Schedule
(b) A Form 8-K and 8-KA both
dated June 30, 1998 were filed
on July 1, 1998 and July 2, 1998,
respectively. These filings
reported the announcement of
a definitive agreement to merge
Firstar Corporation and Star
Banc Corporation.
A Form 8-KA dated June 30,
1998 and filed on September 25,
1998 reported an amendment
to the previously filed agreement
and plan of reorganization
between Firstar Corporation
and Star Banc 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.
FIRSTAR CORPORATION
/s/ Jeffrey B. Weeden
------------------
Jeffrey B. Weeden
Senior Vice President-Finance and
Chief Financial Officer
(Principal Accounting Officer)
November 13, 1998
-19-
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<INT-BEARING-DEPOSITS> 5,618
<FED-FUNDS-SOLD> 52,230
<TRADING-ASSETS> 8,200
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<LOANS> 14,407,213
<ALLOWANCE> 231,457
<TOTAL-ASSETS> 20,688,396
<DEPOSITS> 14,560,171
<SHORT-TERM> 3,164,443
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<LONG-TERM> 855,944
<COMMON> 182,207
0
0
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<INTEREST-TOTAL> 1,055,575
<INTEREST-DEPOSIT> 359,483
<INTEREST-EXPENSE> 503,367
<INTEREST-INCOME-NET> 552,208
<LOAN-LOSSES> 36,187
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<EXPENSE-OTHER> 589,472
<INCOME-PRETAX> 337,992
<INCOME-PRE-EXTRAORDINARY> 231,058
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<TABLE> <S> <C>
<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,222,014
<INT-BEARING-DEPOSITS> 24,074
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<LONG-TERM> 758,579
<COMMON> 181,102
0
6,738
<OTHER-SE> 1,451,289
<TOTAL-LIABILITIES-AND-EQUITY> 19,769,850
<INTEREST-LOAN> 848,749
<INTEREST-INVEST> 191,961
<INTEREST-OTHER> 5,662
<INTEREST-TOTAL> 1,046,372
<INTEREST-DEPOSIT> 350,986
<INTEREST-EXPENSE> 484,874
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