1
FIRSTAR SERVICE GUARANTEED
FIRSTAR CORPORATION ANNUAL REPORT 1999
Bank Without Boundaries
2
CONTENTS
EARNINGS GROWTH STRATEGIES
GATEFOLD THE FIRSTAR-MERCANTILE COMBINATION
2 GRAPHS OF SELECTED FINANCIAL RESULTS
3 FINANCIAL HIGHLIGHTS
4 LETTER TO SHAREHOLDERS
5 CORPORATE INITIATIVES
6 STRATEGIES AND LINES OF BUSINESS
15 CONSOLIDATED SIX-YEAR SELECTED FINANCIAL DATA
SOME BANKS PROMISE
FINANCIAL SECTION
16 MANAGEMENT'S DISCUSSION AND ANALYSIS
33 RESPONSIBILITY FOR FINANCIAL STATEMENTS
OF FIRSTAR CORPORATION
33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
34 CONSOLIDATED FINANCIAL STATEMENTS
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
57 OFFICE OF THE CEO AND MANAGEMENT COMMITTEE
58 CORPORATE DIRECTORS
59 CORPORATE INFORMATION
3
THE MERGER OF FIRSTAR CORPORATION
AND MERCANTILE BANCORPORATION
INC. WAS COMPLETED ON MONDAY
SEPTEMBER 20, 1999. THE COMBINED
COMPANY IS NOW CALLED FIRSTAR
CORPORATION, AND ITS COMMON
STOCK IS TRADED ON THE NEW YORK
STOCK EXCHANGE UNDER THE TICKER
SYMBOL "FSR."
TRUST AND INVESTMENTS
4
[FIRSTAR LOGO]
Firstar
Firstar CONSUMER BANKING [PHOTO]
1853
Farmers and Millers Bank 1928
opens in Milwaukee with First Wisconsin merges
$50,000 in capital. with Second Ward
Savings Bank founded by 1974
August Uilein, CEO of First Wisconsin builds
Schlitz Brewery. 1951 tallest office building in
The First National Bank the state (42 floors).
of Cincinnati opens first Now known as Firstar
branches. Center.
1989
First Wisconsin changes
name to Firstar
Corporation. First 1998
National Cincinnati First and Star merge to
Corporation create the 21st largest
reincorporated as Star banking company in the
Banc Corporation. nation.
1863
The First National Bank
of Cincinnati founded on
July 13, National Charter
No. 24 with $41 million 1919
in capital. Farmers and First National Bank of
Millers Bank is first bank Milwaukee and 1973 1988
in Wisconsin to apply for Wisconsin National Bank Holding company, First All subsidiary banks of
national charter. combine. Name changes National Cincinnati First National Cincinnati
Reorganizes as First to First Wisconsin Corporation, forms. Corporation renamed
National Bank of National Bank of Star Bank.
Milwaukee. Milwaukee.
1995 1996
24 Hour Banking System Five Star Service
launched. Guarantee introduced.
[MERCANTILE LOGO]
1994
Mercantile enters Iowa,
merging with Metro
1987 Bancorporation Inc.
Mercantile Mercantile acquires its
1929 first bank outside 1995
Mercantile ancestor, Missouri, First National Mercantile expands into
Mississippi Valley Trust Bank and Trust Company Arkansas, merging with
Company, loans $15,000 in Alton, Illinois. TCB Bancshares.
1855 to help finance Charles
State Savings Institution Lindbergh's historic
opens with operating trans-Atlantic flight.
capital of $8,500 and
one $800-a-year teller.
1997
Mercantile grows by
nearly $11 billion as it
acquires two St. Louis 1998
Banks, Roosevelt Bank Mercantile added to the
and Mark Twain Bank. S&P 500.
1971 1993
Mercantile Mercantile enters Kansas
Bancorporation forms through two mergers,
1902 and expands through Mid-American Corp. and
Mercantile Trust acquisition in Springfield, Johnson County
1899 Company moves to new Missouri. Bancshares. Mercantile
Mercantile Trust offices at 8th and Locust stock listed on New York
Company founded by streets in St. Louis. Stock Exchange under
Festus J. Wade. symbol MTL.
1996 1998
Mercantile expands Mercantile enters
presence in Iowa Kentucky, its sixth state,
through merger with through a merger with
Hawkeye CBT Corporation.
Bancorporation.
1998
With seven acquisitions,
Mercantile adds more
than $4 billion in assets.
5
[PHOTO]
CORPORATE PROFILE
Firstar Corporation, a multi-state and related financial services to subsidiaries, including its wholly owned
bank holding company, individuals, business, financial consumer finance company, Firstar Finance,
incorporated in Wisconsin, is the institutions, non-profit organizations Inc. The corporation's FIRMCO subsidiary
largest publicly held company and government entities in its primary provides investment vehicles and investment
headquartered in Wisconsin. market areas. Firstar currently operates management services.
Through its subsidiary full-service more than 1200 banking offices in 13 Firstar Corporation is the 14th largest
banks, Firstar offers a states. In addition, Firstar offers other banking company in the U.S. and the second
comprehensive line-up of banking financial services through its non-bank largest in the Midwest.
[PHOTO] [PHOTO] [PHOTO]
St. Louis Milwaukee Cincinnati
In 1999 Firstar and
Mercantile Combine [MAP] Firstar
Mercantile
Both
Arkansas Illinois Indiana Iowa Kansas Kentucky Minnesota Missouri Ohio Tennessee Wisconsin Arizona Florida
COMMERCIAL BANKING [PHOTO] [PHOTO]
6
EXPECTATIONS OF THE MERGER
[PHOTO] [PHOTO] - Enhance return to shareholders
- Provide greater value and increased levels of
service to our customers
- Successfully grow our profitable lines of business
through product enhancements, competitive pricing
and outstanding customer service
- Capitalize on tremendous potential for operating
efficiencies
- Improve operating performance in all key areas
- Continue to recognize contributions and achievements
of all our employees
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Our earnings growth strategies remain
the same as they have been since 1993
because they have been successful for
Firstar.
EARNINGS GROWTH STRATEGIES
- Profitable Growth of Business Lines
- Balance Sheet Management
- Capital Management
- Cost Management
- Mergers and Acquisitions
[PHOTO] [PHOTO] [PHOTO]
7
DILUTED EARNINGS COMMON DIVIDENDS PER
NET INCOME* PER COMMON SHARE* SHARE
(In millions of dollars) (In dollars) (In dollars)
726.6 800.8 860.6 1,055.3 1,253.3 .77 .86 .92 1.07 1.25 .18 .21 .27 .33 .46
95 96 97 98 99 95 96 97 98 99 95 96 97 98 99
AVERAGE EQUITY TO AVERAGE RETURN ON AVERAGE RETURN ON AVERAGE ASSETS*
ASSETS COMMON EQUITY* (In percents)
(In percents) (In percents)
8.61 8.69 8.37 8.91 9.12 16.22 16.92 16.94 16.66 18.76 1.39 1.47 1.42 1.48 1.71
95 96 97 98 99 95 96 97 98 99 95 96 97 98 99
NET INTEREST MARGIN EFFICIENCY RATIO* MARKET CAPITALIZATION
(In percents) (In percents) (In billions of dollars)
4.48 4.53 4.37 4.04 4.09 58.70 56.13 56.24 55.01 48.18 6.3 11.1 20.9 27.6 20.6
95 96 97 98 99 95 96 97 98 99 95 96 97 98 99
AVERAGE SHAREHOLDERS' AVERAGE TOTAL ASSETS DIVIDEND PAYOUT RATIO*
EQUITY (In billions of dollars) (In percents)
(In billions of dollars)
4.50 4.74 5.08 6.33 6.68 52.24 54.57 60.72 71.10 73.22 23.37 24.24 29.35 30.84 37.00
95 96 97 98 99 95 96 97 98 99 95 96 97 98 99
*Excluding merger-related charges and nonrecurring items; see Financial
Highlights on facing page.
2 FIRSTAR CORPORATION
8
FINANCIAL HIGHLIGHTS
% %
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1999 CHANGE 1998 CHANGE 1997
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net income $ 875,318 8.7% $ 805,450 5.9% $ 760,716
Net interest income, fully taxable equivalent 2,697,442 3.9 2,595,581 7.0 2,426,427
Noninterest income 1,402,571 2.7 1,365,351 24.1 1,100,215
Net revenue 4,100,013 3.5 3,960,932 12.3 3,526,642
Noninterest expense 2,445,849 (3.3) 2,529,816 20.2 2,104,746
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE
Basic earnings per common share $ 0.89 7.2% $ 0.83 0.0% $ 0.83
Diluted earnings per common share 0.87 7.4 0.81 (1.2) 0.82
Common dividends declared (a) 0.4625 39.4 0.33 22.2 0.27
Book value per common share 6.47 (3.4) 6.70 13.0 5.93
Period-end market value (a) 21.13 (31.8) 31.00 62.0 19.13
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Total assets $73,222,590 3.0% $71,096,191 17.1% $60,722,443
Earning assets 65,885,030 2.7 64,171,012 15.6 55,497,657
Loans 49,259,525 5.5 46,673,396 11.7 41,800,976
Deposits 51,821,202 0.4 51,611,906 12.2 45,985,827
Total shareholders' equity 6,680,687 5.5 6,334,542 24.6 5,084,200
- ---------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
Common shares issued and outstanding (000's) 975,546 (1.0) 985,373 6.2 928,027
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS
Return on average assets 1.20% 1.13% 1.25%
Return on average common equity 13.10 12.72 14.98
Average total shareholders' equity to average total
assets 9.12 8.91 8.37
Regulatory capital ratios:
Tier 1 risk-based capital 8.10 9.25 9.51
Total risk-based capital 10.79 11.62 12.20
Leverage ratio -- average assets 7.61 7.35 7.37
Net interest margin 4.09 4.04 4.37
Noninterest income as a percent of net revenue 34.21 34.47 31.20
Efficiency ratio 59.65 63.87 59.68
Net profit margin 21.35 20.33 21.57
- ---------------------------------------------------------------------------------------------------------------------------
EXCLUDING MERGER-RELATED CHARGES AND NONRECURRING ITEMS (B)
Net income $ 1,253,269 18.8% $ 1,055,307 22.6% $ 860,593
Noninterest expense 1,975,386 (8.2) 2,152,524 8.2 1,983,353
Operating income (c) 2,124,627 20.7 1,760,357 14.5 1,543,289
Diluted earnings per common share 1.25 16.8 1.07 16.3 0.92
Return on average assets 1.71% 1.48% 1.42%
Return on average common equity 18.76 16.66 16.94
Efficiency ratio 48.18 55.01 56.24
Net profit margin 30.57 26.97 24.40
Net charge-offs $ 169,749 $ 139,585 $ 155,461
Net charge-offs to average loans 0.34 0.30 0.37
- ---------------------------------------------------------------------------------------------------------------------------
(a) Per share amounts based on historical Star Banc Corporation amounts where
applicable.
(b) Amounts and ratios are calculated excluding the following nonrecurring
items:
Merger-related charges recorded in 1997 to 1999.
Restructuring charges in 1998.
(c) Income before provision for loan losses and income taxes.
BANK WITHOUT BOUNDARIES 3
9
Financial Highlights
FELLOW SHAREHOLDERS
OUR RECENT MERGERS HAVE BEEN FOR ALL THE RIGHT REASONS; TRANSITION AND
INTEGRATION HAVE GONE QUICKLY AND SMOOTHLY. THE NEW FIRSTAR IS DELIVERING WITH
PROVEN GROWTH STRATEGIES, SUPERIOR EXECUTION AND SUSTAINABLE RECORD EARNINGS.
The year 1999 was another year of growth for your corporation. Firstar expanded
its powerful franchise in the Midwest, completing another major strategic
acquisition. Our merger with Mercantile Bancorporation Inc., headquartered in
St. Louis, was completed in September 1999. It already is delivering the strong
revenue trend, cost savings, standardized credit standards and increased
earnings that we projected it would.
We are pleased to tell you that the Mercantile merger is on track. Firstar has
developed a highly successful system for bringing new banks into our
corporation, for transporting the Firstar sales and service culture to new
employees in every line of business in new markets and for converting operating
systems skillfully and efficiently.
All of our employees are expected to take responsibility and accountability for
their business and run it like they own it. You can read more about how Firstar
exports our winning formula on pages six through nine of this report.
Earnings and earnings per share have increased to new levels, delivering on our
promise that any acquisition will be accretive to earnings immediately and in
the future. Quarterly stock dividends have been increased for the 28th
consecutive year. Our efficiency ratio is at an all time low, reflecting our
commitment to manage costs while still investing in the people, products and
systems that make this organization successful. We have increased revenue across
all lines of business, and superior managers occupy all key positions in the
company. These are the elements of our business that are in control of
management, and our results indicate that we are managing them well.
Quite candidly, there was some uncertainty in the market about whether Firstar
might be moving too fast after our Star-Firstar merger in taking on another
merger which would double our size for the second time in a year. We could have
told them not to worry.
What we cannot control, of course, is the price of our stock, which can be
influenced by external forces in the market that have nothing to do with our
outstanding financial results. We can only continue to outperform the industry,
deliver on our promises, and work to make Firstar the Best Bank in America!
Our new Firstar footprint is a compact, highly manageable franchise; we know our
business, we know the markets, and we know we can generate additional,
profitable business in all of our markets utilizing Firstar's proven earnings
growth strategies, supported by our exclusive guaranteed service.
Each year in our letter to you, our shareholders, we tell you that increasing
the value of your investment in Firstar is the top priority of Firstar
management. We make that same commitment to you this year. It is the reason we
come to work each day.
Sincerely,
/s/ Jerry A. Grundhofer /s/ Thomas H. Jacobsen
Jerry A. Grundhofer Thomas H. Jacobsen
President and Chief Executive Officer Chairman
4 FIRSTAR CORPORATION
10
CORPORATE INITIATIVES
Firstar's proven earnings growth strategies have propelled it from a $7 billion
three-state, average-performing banking company just six years ago to the $73
billion top-performing super regional it is today with a franchise throughout
the Midwest.
You will read in other sections of this report about our strategy to grow our
profitable lines of business, which are basic banking and related businesses.
They are businesses we understand and are able to grow through our effective
sales and service culture, our exclusive guaranteed service and a persistent
focus on accountability and results.
Our remaining growth strategies are just as important - and enduring.
STRATEGIC MERGERS AND ACQUISITIONS
In 1999, buoyed by the immediate and unmistakable success of the 1998 merger
between Star Banc and Firstar, we completed another major merger with Mercantile
Bancorporation Inc. As is true in all of Firstar's acquisitions, the Mercantile
transaction was immediately accretive to earnings. Additionally, it provided a
sizable extension of our geographic footprint in which to export into new
markets those best practices which have made Firstar successful. The Mercantile
merger presents little or no risk as far as our ability to execute a successful
integration. The transaction brought with it a large deposit base and an
established franchise which Firstar is leveraging for increased growth and
profitability.
SOUND BALANCE SHEET MANAGEMENT AND CAPITAL MANAGEMENT
Firstar manages to optimize the balance sheet, contributing to top-line growth
by leveraging our large deposit base. Lower yielding assets such as mortgages
and investment securities are sold or allowed to run down and are removed from
the balance sheet and replaced with higher yielding loans, in particular,
consumer, middle market and small business loans. We anticipate continued strong
loan growth and expanding net margin, particularly in our indirect lending
businesses. The result is increased earning asset yields and a parallel
reduction in our cost of funds.
Firstar continues its aggressive capital management strategy. Creation of
capital on the balance sheet provides flexibility to increase dividends,
repurchase shares and support loan growth.
RATIONAL COST MANAGEMENT
With one of the lowest efficiency ratios in the industry, Firstar is recognized
for its passion for productivity and its focus on cost management. This focus,
however, is concurrent with our ready investment in operations, technology,
expertise and lines of business to increase revenue faster than expenses. It is
a simple strategy that few companies have the discipline to execute consistently
and manage meticulously.
FIRSTAR PERFORMANCE AWARDS AND RECOGNITION
Jerry A. Grundhofer named "Banker of the Year" by American Banker, the leading
national daily publication of the financial services industry.
[AMERICAN BANKER LOGO]
Firstar named one of "Favorite Stocks" by Goldman Sachs U.S. Investment Research
based on expected earnings growth.
[GOLDMAN SACHS LOGO]
Firstar named to Lehman Brothers "10 Uncommon Values" stock picks, based on the
company's fundamental value and future prospects.
[LEHMAN BROTHERS LOGO]
Firstar ranked 13th nationally among US banks in market capitalization at
12/31/99.
THE 100 BEST STOCKS TO OWN IN AMERICA
Firstar named #2 stock in America in "The 100 Best Stocks to Own in America" by
Gene Walden, published by Dearborn, a Kaplan Professional Company.
Firstar ranked number one bank, based on projected 2001 performance measures by
the U.S. Equity Research Division of Warburg Dillon Read.
WARBURG DILLON READ
Firstar ranked as number two in the world in shareholder performance by The
Economist magazine, March 6, 1999 edition.
[THE ECONOMIST LOGO]
Increasing Earnings Through Acquisitions
TRANS OHIO - 1994 BANK ONE BRANCHES - 1998
HOUSEHOLD BANK - 1995 TRANS FINANCIAL, INC. - 1998
NATIONAL CITY BANK BRANCHES - 1996 FIRSTAR - 1998
AMERIFIRST BANK BRANCHES - 1997 MERCANTILE - 1999
GREAT FINANCIAL CORPORATION - 1998
11
Firstar's Momentum Expands
[PHOTO]
Alice Fowler
Hopkinsville, KY
Retail Banking
Ambassador
"Ambassadors "live" in our new markets and work side-by-side with our new
colleagues. We do lots of coaching and training in Firstar's strategies,
customer service philosophy, procedures and "can do" attitude."
How does a highly successful organization ensure that its proven strategies and
practices are carried out as the company grows and expands? Firstar has answered
that question as its franchise doubled in size in 1998 and again in 1999
following two large and important acquisitions which were geographic extensions
of the Firstar footprint.
EXPORTING CONSUMER BANKING STRATEGY TO NEW MARKETS
[PHOTO]
Jeff Whitrock
Stevens Point, WI
Retail Banking
"It was great to have Ambassadors come here in the early stages of the merger.
They helped us tremendously in learning how to "become" a new Firstar
organization."
FIRSTAR IS A LEADER IN MEETING THE NEEDS OF OUR COMMUNITIES. FIRSTAR COMMITTED
BILLIONS OF DOLLARS TO OUR COMMUNITY DEVELOPMENT IN A FORMAL OUTREACH WHICH
INCLUDES COMMUNITY LEADING AND OTHER COMMITMENT PROGRAMS TARGETING
LOW-TO-MODERATE-INCOME AREAS.
During an expansion, our new employees are not aware of what it takes to operate
like Firstar, and our new customers have not yet experienced Firstar products
and services, convenience or the outstanding, guaranteed service that sets
Firstar apart from other banks. On these four pages, we show you how Firstar
continues to increase revenue, serve our customers and operate efficiently even
as we continue to grow.
AMBASSADOR PROGRAMS
Current Firstar employees travel to and stay with the new bank's business
departments and every branch office as "Ambassadors." At the point of conversion
and after, Ambassadors help see the new branches through the early days of
account openings, questions and new procedures. Ambassadors act as trainers,
coaches and mentors; they model Firstar's best practices.
The Ambassador Program works because it is hands-on, first-hand, in-person
support, information and behavior that demonstrates to our new employees,
customers and communities that Firstar is something pretty special.
MEET THE CEO EMPLOYEE MEETINGS
Firstar's Chief Executive Officer, Jerry Grundhofer, goes on the road to every
Firstar market to ensure that every employee knows the goals, strategies, lines
of business and priorities of Firstar. At these all-employee events, employees
also learn what is expected of them, how Firstar measures success and how
important each person's performance is to the continued success of the
corporation. No dry lectures, these "Meet the CEO" events include AV
presentations, prizes, food, and spirited question and answer sessions.
The result is an energized employee base with a clear understanding of what
being part of Firstar really means - straight from the CEO.
"IT WAS IMPRESSIVE THAT THE CEO HIMSELF CAME OUT TO MEET WITH EVERY EMPLOYEE TO
TELL US ABOUT FIRSTAR STRATEGIES AND GOALS AND HOW IMPORTANT WE ARE IN MAKING
THEM HAPPEN."
[PHOTO]
Paul Johnson
Kansas City, MO
Processing
6 FIRSTAR CORPORATION
12
THROUGHOUT THE MIDWEST [PHOTO]
[PHOTO]
Community Banking
Through our Community Banking line of business, Firstar customers in smaller
urban and non-urban markets enjoy both the broad resources of a large regional
bank and the local autonomy and personal attention of a hometown bank. Firstar's
Community Banks and bankers are involved in the life and activities of their
towns and neighborhoods and deliver the full range of Firstar's Consumer,
Commercial, Trust and Investment products and services to their customers.
Community Banking markets have grown substantially as Firstar has grown.
[PHOTO]
Card Services
Firstar provides a complete line of credit and debit card products to consumers
and businesses and corporations. This comprehensive business includes card
issuance for over three million cardholders, processing for nearly 44,000
merchants, correspondent services for financial institutions and custom
incentive products for corporate employee reward programs. In 1999, Firstar Card
Services exceeded industry growth rates for usage and volume, opening record
numbers of new accounts and adding record numbers of new correspondents. Outlook
for this business is excellent as the explosive growth of E-commerce drives
increased card transactions.
NEWS MARKETS
[PHOTO]
Denise McCoy
Van Wert, OH
Retail Banking
"THE BUDDY BRANCH SYSTEM REALLY FOSTERS A SENSE OF CAMARADERIE AND SUPPORT
BETWEEN "OLD" FIRSTAR BRANCHES AND NEW ONES AND HELPS THE NEW BRANCHES BECOME
COMFORTABLE DOING THINGS THE FIRSTAR WAY. EVERYONE IMMEDIATELY FEELS LIKE WE'RE
ALL ON THE SAME TEAM."
[PHOTO]
BUDDY BRANCHES
As the planning for a merger begins, existing Firstar branches are designated as
a Buddy Branch for a similar new market branch office. Through this Buddy
system, our new branches know there is always somewhere to turn for answers,
advice and ideas from a source who will understand their situation and has
experienced the same challenges.
INCENTIVES TIED TO COMBINED SUCCESS
From the moment a merger is announced, Firstar encourages and rewards
cooperation among the employees from both organizations. It is critical to the
success of Firstar that employees feel like contributing members of the combined
organization from the very beginning - so that everybody feels like they are all
on the same winning team. At Firstar, there is no `us vs. them' - everyone is
`us.'
To foster this spirit, after conversion, branch districts from existing Firstar
markets are coupled with districts from the new markets in sales competitions.
And together, their results are combined for purposes of reward and recognition
during the competition. If together their results are among the highest, both
districts are rewarded with the same compensation. We have found that the
experience of working together in pursuit of shared goals breaks down any
barriers to teamwork and support between the new and old markets.
Small Business Banking
BUSINESS BANKING OFFICERS PARTNER WITH BRANCH OFFICES TO PROVIDE SPECIALIZED
FINANCIAL SERVICES FOR BUSINESSES WITH ANNUAL SALES UP TO $5 MILLION. THE GROWTH
POTENTIAL IN FIRSTAR'S COMBINED MARKETS IS VIRTUALLY LIMITLESS. WITH MORE THAN
135 BBOS AND TWO BUSINESS LENDING EXPRESS CENTERS, FIRSTAR HAS BECOME AN
INDUSTRY-LEADING PROVIDER OF BOTH TRADITIONAL BUSINESS BANKING SERVICES, AS WELL
AS INNOVATIVE PRODUCTS AND DELIVERY SYSTEMS FOR SMALLER BUSINESSES, INCLUDING A
PC BANKING APPLICATION CALLED BUS.E, A SMALL BUSINESS SWEEP ACCOUNT AND A
GROUND-BREAKING LINE OF CREDIT.
BANK WITHOUT BOUNDARIES 7
13
FIRSTAR FINANCE
FIRSTAR FINANCE IS OUR CONSUMER FINANCE COMPANY SUBSIDIARY WHICH PROVIDES
FINANCING FOR REAL ESTATE, HOME IMPROVEMENT, AUTO AND INSTALLMENT LOANS AND A
SPECIAL MEMORIAL LOAN FUNERAL FINANCING PROGRAM. NOW OPERATING IN 26 STATES,
OUTSTANDINGS FOR 1999 EXCEEDED $600 MILLION, A NEARLY 60 PERCENT INCREASE OVER
THE PREVIOUS YEAR. FIRSTAR CONTINUES TO EXPAND THIS BUSINESS AS A VALUED SERVICE
FOR CUSTOMERS FOR WHOM TRADITIONAL BANK FINANCING IS NOT THE RIGHT OPTION.
MORTAGE BANKING
HELPING TO SUPPORT THE AMERICAN DREAM OF HOME OWNERSHIP, FIRSTAR'S MORTGAGE
BANKING SERVICE IS AMONG THE TOP 20 MORTGAGE COMPANIES IN THE U.S. WITH 1999
CLOSED LOAN VOLUME EXCEEDING $9 BILLION. DURING 1999, WE COMBINED THE OPERATIONS
OF TWO LARGE MORTGAGE BUSINESSES, CREATING A POWERFUL LINE OF BUSINESS OPERATING
IN 14 STATES WITH A LOAN SERVICING PORTFOLIO OF $28.4 BILLION AND MORE THAN
400,000 LOANS FOR FIRST MORTGAGES FOR PURCHASE AND REFINANCING. FIRSTAR IS ALSO
A WHOLESALE BUYER OF FIRST MORTGAGES FROM BROKERS AND SMALLER FINANCIAL
INSTITUTIONS.
PAY FOR PERFORMANCE
[PHOTO]
Amy Chan
Edgewater, IL
Retail Banking
Circle of Service Excellence
"OUTSTANDING CUSTOMER SERVICE IS THE KEY DIFFERENCE BETWEEN FIRSTAR AND OTHER
BANKS, SO I WAS TRULY HONORED WHEN I WON THE CIRCLE OF SERVICE EXCELLENCE AWARD
THIS YEAR."
[PHOTO]
Adrian Pasquale
Cleveland, OH
Business Banking
Pinnacle Award Winner
[CIRCLE OF SERVICE EXCELLENCE LOGO]
SALES AND SERVICE DRIVEN
MEASURABLE RESULTS
At Firstar, customer service, cost control, revenue enhancement, and ultimately
shareholder value are priorities. Our Pay for Performance compensation program
creates an environment in which our employees can be rewarded financially and
intellectually for what they achieve in contributing to the achievement of those
goals and to the earnings of the corporation. Firstar employees are compensated
for measurable results - for what they produce and how they perform.
Every employee in the organization is part of an incentive plan, based on
earnings per share, sales production, customer service and revenue generation.
Because employees are compensated for measurable results, each has the
obligation to take ownership of our business and must be willing to be held
accountable for results. So, when the corporation achieves its goals and
employees achieve their individual performance goals, everybody in the company
wins - the shareholders, the customers and every employee.
Moreover, there is an elite award for customer service quality. Those employees
voted into the Circle of Service Excellence are not only prominently recognized,
they are granted Firstar stock options.
WIDE RANGE OF INCENTIVE PROGRAMS
It is not just senior executives who belong to incentive programs at Firstar.
Nor it is just calling officers or branch managers.
Firstar has four separate corporate incentive plans and more than 30
departmental specialized incentive plans which cover Consumer Banking,
Commercial Banking, Trust and Investments, Finance Company, FIRMCO and
operations and support departments.
In Consumer Banking alone, there are customized plans for every employee from
tellers to district and regional managers.
In addition, branch employees compete for special reward and recognition through
specific branch awards programs. Each quarter, the top 20 percent of branch
managers earn Pinnacle status. Platform employees can achieve Galaxy or Summit
standing. Tellers know the satisfaction of winning the STARS awards. These are
not symbolic awards; real compensation accompanies the recognition. The top
Pinnacle winners for the year 1999 were presented with all- expense paid trips
for two to anywhere in the world.
[PHOTO]
Braulio Rodriguez
Milwaukee, WI
Retail Banking
Galaxy Award Winner
[PHOTO]
Maureen Robertson
Amelia, OH
Retail Banking
Pinnacle Award Winner
[PHOTO]
E-COMMERCE
FIRSTAR CONTINUES ITS DEVELOPMENT OF LEADING EDGE ONLINE BANKING SERVICES,
COMMUNICATIONS, VIBRANT CHANNELS FOR PRODUCT DELIVERY AND ITS FULL-FUNCTION,
INTERACTIVE WEB SITE AT HTTP://WWW.FIRSTAR.COM. THIS TECHNOLOGY SUPPORTS
BUSINESS DEVELOPMENT ACROSS ALL LINES OF BUSINESS. FIRSTAR WEB TRAFFIC DOUBLED
DURING 1999, AND WE NOW SERVICE MORE THAN 100,000 ONLINE BANKING CUSTOMERS,
RANKED 6TH IN THE INDUSTRY. WE LAUNCHED INTERNET COMMERCIAL BANKING IN 1999 AND
WILL INTRODUCE THE SMALL BUSINESS PORTAL AND ONLINE SERVICES IN 2000.
14
[PHOTO]
Tom Zirbs
Dayton, OH
Retail Banking
"TO BUILD TEAMWORK AND INSTILL FIRSTAR'S SALES CULTURE, SALES PROMOTIONS PAIR UP
AN OLD AND A NEW BRANCH. THE RESULTS ARE COMBINED, SO WE WORK HARD TO MAKE SURE
WE'RE BOTH SUCCESSFUL."
INSURANCE SERVICES
FIRSTAR INSURANCE SERVICES SUPPORTS CONSUMER BANKING BY PROVIDING INSURANCE
SOLUTIONS TO ACHIEVE THE FINANCIAL GOALS OF THE CUSTOMER AND DELIVER ON THE
FIRSTAR PROMISE OF COMPLETE FINANCIAL SERVICES. AS MORE AND MORE CUSTOMERS GREET
THE ABILITY TO BUY INSURANCE FROM A BANK THEY KNOW AND TRUST, THIS BUSINESS WILL
CONTINUE TO GROW SUBSTANTIALLY. FIRSTAR'S BROAD CUSTOMER RELATIONSHIPS IN
CONSUMER, COMMERCIAL AND TRUST AND INVESTMENTS CREATE A STRONG REFERRAL SOURCE
FOR FIRSTAR INSURANCE PRODUCTS WHICH ENHANCE THE RELATIONSHIPS.
TIMELY CONVERSIONS
THE INTEGRATION
At Firstar, when we are dealing with an acquisition or a merger, we begin the
integration process immediately and the systems conversions as quickly as
possible.
Combined meetings with key managers from both organizations begin the week after
the merger is announced and continue weekly throughout the conversion and
beyond.
The scope of the integration process is enormous in any merger, and Firstar is
meticulous in its attention to detail and demanding in its expectation of
accountability for every detail. An average integration task list enumerates
more than 8,000 tasks. Someone is in charge of every one, and progress reports
are given weekly or more often.
THE BENEFITS OF TIMELY CONVERSIONS
We believe that the reasons for and the benefits of timely conversions are quite
clear.
First, we must and do get a dynamic culture transformation quickly - and
Firstar's sales culture and cost management culture are a key part of our
success to date. Firstar's approach to both is exported to every line of
business - Consumer, Commercial and Trust and Investments.
Our culture of accountability and ownership of the business is another Firstar
fundamental. Our managers know they are expected to run their part of the
business like they own it.
CONSISTENT PRODUCTS AND SERVICES
In addition, with timely integration we can achieve an impactful introduction of
new products and services into our new markets, as well as the distribution
dynamics of our 24 hour Banking System.
Timely integration accelerates the merger synergies and accelerates strong
revenue trends. And we are able to stabilize and standardize credit standards
right up front.
"FIRSTAR DOESN'T DRAG ITS FEET ON CONVERSIONS-THAT WAY WE CAN OFFER OUR
CUSTOMERS THE SAME PRODUCTS AND SERVICES ON THE SAME SYSTEMS AS SOON AS
POSSIBLE. IT MAKES US FEEL LIKE PART OF THE SAME FAMILY RIGHT FROM THE START."
[PHOTO]
Terry Peterson
Grantsburg, WI
Retail Banking
The sooner and smoother the conversion, the sooner we are able to export the
success of Firstar's proven sales culture and best practices.
If a name change is involved, Firstar sales and marketing materials arrive
immediately. New branch and building signs go up overnight. An intense
advertising and promotional plan supports the change. The new bank 'becomes'
Firstar through this dynamic and dramatic approach.
BRANCH-BASED INVESTMENT SERVICES
FIRSTAR CUSTOMERS ENJOY THE CONVENIENCE OF INVESTMENT SPECIALISTS LOCATED IN
BRANCH OFFICES. AN EXTENSIVE FAMILY OF MUTUAL FUNDS AND SECURITIES PRODUCTS CAN
HELP INDIVIDUALS AND FAMILIES INVEST FOR THE FUTURE. IN ADDITION, LICENSED
AGENTS LOCATED IN BRANCHES SELL FIXED AND VARIABLE RATE ANNUITIES AND OTHER
SELECT INSURANCE PRODUCTS.
BANK WITHOUT BOUNDARIES 9
15
[PHOTOS]
COMMERCIAL BANKING
[PHOTO]
COMMERCIAL BANKING
The new Firstar franchise is a wholesale banking powerhouse, combining the
commercial banking strengths of Firstar and Mercantile across its Upper Midwest
footprint. Firstar's focus is on middle market and large corporate banking with
a growing national lending business as well. Almost a third of the corporation's
earnings come from Commercial Banking.
Firstar's commercial banking relationship managers operate with authority to
make decisions for their clients without unwieldy management layers and take on
full accountability for the credit quality of their underwriting activities.
The foundation of Firstar's commercial banking success is the commitment to
full-service value to the client, responsiveness, expertise in our clients'
industries and knowledge of the markets in which our clients do business.
To offer the most responsive and complete service, Firstar operates centralized
Customer Service Centers in Cincinnati, St. Louis and Milwaukee for commercial
clients who benefit from a comprehensive resource point.
GLOBAL SERVICES
The year 1999 was another year of growth, new products and services, record
revenues and recognition in the industry. Firstar's Global Services division was
a finalist for the 1999 Kentucky World Trade Success Award.
Behind superior service, a knowledgeable staff and experienced international
finance representatives with Ex-Im Bank certification, Global Services expanded
into new markets opened by the expansion of the Firstar franchise in 1998 and
1999. The International Corporate Banking
LARGE CORPORATE BANKING
[PHOTO]
IN THE COMBINATION WITH MERCANTILE, FIRSTAR'S LARGE CORPORATE BANKING
CAPABILITIES EXPANDED, OFFERING THE SOPHISTICATED FINANCIAL SERVICES AND
SPECIALIZED INDUSTRY EXPERTISE, SUCH AS CORRESPONDENT BANKING, HEALTH-CARE,
RETAIL, AGRI-BUSINESS, COMMUNICATIONS AND BROKER-DEALERS, REQUIRED BY NATIONAL
AND INTERNATIONAL CORPORATIONS. FIRSTAR'S STRENGTHS IN THIS BUSINESS ARE THE
BREADTH AND DEPTH OF ITS RELATIONSHIPS, KNOWLEDGE OF THE INDUSTRY AND FIRSTAR'S
STRONG PHYSICAL PRESENCE IN MAJOR METROPOLITAN AREAS THROUGHOUT THE MIDWEST,
HOME TO MANY FORTUNE 1000 COMPANIES.
IN 1999, FIRSTAR EXPANDED ITS SYNDICATIONS CAPABILITY, INTRODUCED NEW DERIVATIVE
PRODUCTS, AND LAUNCHED IMAGE-BASED LOCK BOX CAPABILITY.
FIRSTAR IS ALSO ONE OF THE NATION'S LEADING SUPPLIERS OF PAPER-BASED AND
ELECTRONIC PAYMENT SERVICES FOR FEDERAL AND STATE GOVERNMENTS.
10 FIRSTAR CORPORATION
16
[PHOTOS]
MIDDLE MARKET BANKING
FIRSTAR'S MIDDLE MARKET BANKING GROUP IS SKILLED AT UNDERSTANDING THE SOMETIMES
COMPLEX FINANCIAL SERVICE NEEDS OF THEIR CLIENTS AND CAN OFFER THEM NOT ONLY THE
FUNDING WHICH MAY BE THE CORE OF THE RELATIONSHIP, BUT ALSO ACCESS TO A WIDE
ARRAY OF ANCILLARY PRODUCTS AND SERVICES, SUCH AS INVESTMENT, INTERNATIONAL
TRADE SERVICES, TREASURY MANAGEMENT AND OTHER PRODUCTS FROM OUR LINE. THE
RELATIONSHIP MANAGER IS THE PRIMARY POINT OF CONTACT WHO BUILDS THE AFFILIATION
AND ACTS AS THE CLIENT'S LIAISON WITH THE REST OF THE BANK.
Division expanded its reach serving the growing number of foreign companies
doing business in the Midwest.
Firstar now provides the most advanced Letter of Credit processing system in the
industry, and the enhancement in import trade technology places Firstar in a
position as a national leader in services to importers of all sizes.
Firstar's expansive reach of more than 1,500 banks networked throughout the
world and its competitive trade processing products delivered through three main
trade operations centers enable its Global Services division to compete
nationally.
TREASURY MANAGEMENT
Capitalizing on experience, technology and accessibility, Firstar's Treasury
Management division maximizes the profits of its business clients through the
most effective management of their cash flow.
Providing collection and concentration services, disbursement services and
information and balance management services, Firstar also provides outstanding
customer service.
Firstar is first in introducing invoice imaging with full sort and search
capability over the internet, so wholesale lock box clients receive same day
check and invoice information to facilitate more precise posting, allocation,
investment and management of receivables.
Firstar's ONLINE BANKER(TM) direct inquiry and transaction service integrates
both balance and transaction information, combining the power of JAVA(TM) with
internet access.
SPECIALIZED LENDING
STRUCTURED CAPITAL - ASSET BASED LENDING
FIRSTAR'S STRUCTURED CAPITAL DIVISION PROVIDES LEVERAGED CASH FLOW AND
ASSET-BASED LENDING PRODUCTS, PRIMARILY FOR MANUFACTURERS, DISTRIBUTORS, SELECT
RETAIL AND SERVICE-RELATED COMPANIES. FINANCING IS PRIMARILY FOR LEVERAGED
ACQUISITIONS AND RECAPITALIZATION, GROWTH AND SELECTIVE TURNAROUND. IN 1999,
OVER $1.5 BILLION IN SENIOR SECURED CREDIT FACILITIES WAS EXTENDED TO A VARIETY
OF BUSINESSES IN OUR PRIMARY MARKET AREA EAST OF THE ROCKIES.
OUTLOOK FOR THIS BUSINESS CONTINUES TO BE STRONG, GIVEN THE DIVISION'S
HISTORICAL GROWTH TREND, COUPLED WITH ITS NOW EXPANDED GEOGRAPHIC MARKETS,
SEASONED PROFESSIONAL LENDERS AND NEW SYNDICATION CAPABILITIES.
COMMERCIAL REAL ESTATE
COMMERCIAL REAL ESTATE PROVIDES COMMERCIAL AND RESIDENTIAL REAL ESTATE
DEVELOPERS CONSTRUCTION, MINI-PERMANENT AND LONGER TERM FINANCING STRUCTURES FOR
INCOME PRODUCING AND INVESTOR OWNED PROPERTIES. THIS IS FIRSTAR'S LARGEST
SECURED LENDING BUSINESS.
IN 1999, THIS DIVISION PRODUCED APPROXIMATELY $1.5 BILLION IN LOAN FUNDINGS,
ANOTHER RECORD YEAR. CREDIT QUALITY REMAINS OUTSTANDING, AS FIRSTAR LENDS
PRIMARILY TO WELL ESTABLISHED BORROWERS GENERALLY IN OUR TARGET MARKETS.
THE GROWTH OF THE FIRSTAR FRANCHISE OVER THE PAST TWO YEARS POSITIONS THIS
BUSINESS IDEALLY TO BE THE PREMIER COMMERCIAL REAL ESTATE LENDER IN ITS MIDWEST
FOOTPRINT.
EQUIPMENT LEASE AND FINANCING
PROVIDING SECURED EQUIPMENT AND LEASE FINANCING TO A WIDE RANGE OF CLIENT
GROUPS, THIS DIVISION SUCCESSFULLY COMBINED AND INTEGRATED THREE LEASING GROUPS
IN 1999 AND LAUNCHED THREE NEW PRODUCT LINES. THE RESULT WAS A RECORD YEAR. NEW
BUSINESS VOLUME EXCEEDED $750 MILLION, AND AT YEAR END, THE TOTAL PORTFOLIO
APPROXIMATED $1.9 BILLION IN ASSETS, BECOMING THE 12TH LARGEST DOMESTIC
BANK-OWNED LEASING GROUP IN THE COUNTRY, WITH OFFICES IN 14 STATES.
FIRSTAR'S EQUIPMENT LEASING GROUP PROVIDES SPECIALIZED PRODUCT FINANCING,
INCLUDING BUSINESS AIRCRAFT, CONSTRUCTION EQUIPMENT, TRUCKS, MOTOR COACHES,
REFUSE, TECHNOLOGY AND GENERAL EQUIPMENT. AN INDIRECT FUNDING GROUP FINANCES
SMALL TICKET LESSORS.
17
[PHOTOS]
TRUST & INVESTMENTS
Firstar offers comprehensive Trust and Investment Services to a vast number of
companies and individuals. While the majority of our clients can be found
throughout the Midwest, Firstar is truly a national provider of trust services
as well.
Firstar Trust and Investment Services generated over $427 million in noninterest
income, or about 30 percent of the corporation's total noninterest income in
1999. Firstar Custody, Mutual Fund Services and Capital Management all grew in
excess of 30 percent.
Recognition also goes to our Retirement Services area. The 1999 Defined
Contribution Services Survey, conducted by Plan Sponsor Magazine, lists Firstar
among the `best of the best' for retirement services. Finally, a major highlight
in 1999 was our Corporate Trust area, which earned a #1 rating for quality
service from an independent rating service.
PERSONAL TRUST
Firstar's Personal Trust division offers traditional trust and investment
management services to a client base often spanning three or four generations.
Personal Trust officers are located in 76 offices, encompassing 13 states.
Traditional products include portfolio management, estate planning and
administration, charitable trusts, guardianship and tax planning. Specialized
products include offshore accounts, asset allocation services and unique
services for professional athletes provided by our Pro Sports division.
Outstanding personal service and professional expertise are the hallmarks of
this division.
INSTITUTIONAL TRUST
With its focus on managing pension plans, 401(k) retirement plans, endowments
and foundations, this division of Trust provides skilled services, wide choices
of investment options and convenient delivery and access.
Its clients rely on Firstar to make their plans run smoothly, perform as
expected and keep abreast of all administrative requirements. Services include
daily valuation, internet access and fund selections from both proprietary funds
and national funds.
CORPORATE TRUST/STOCK TRANSFER
Firstar has acted as Bond Trustee for municipal and corporate bond issues for
more than 70 years. Our
PROFESSIONAL SPORTS DIVISION
FIRSTAR'S PROFESSIONAL SPORTS DIVISION FOCUSES ON DELIVERING SOLUTIONS TO THE
VERY SPECIALIZED FINANCIAL NEEDS OF THE PROFESSIONAL ATHLETE. OUR ALL-STAR
CLIENT ROSTER INCLUDES MANY TOP PLAYERS FROM THE NFL, MLB AND THE NBA, AS WELL
AS PROMISING YOUNG PLAYERS JUST STARTING OUT. FIRSTAR IS COMMITTED TO PROVIDING
SOUND FINANCIAL ADVICE AND SERVICES TO THESE ATHLETES INCLUDING SETTING UP
CHARITABLE FOUNDATIONS, INVESTMENTS, INCOME AND ROYALTY COLLECTION, RELOCATION
SERVICES AND MORE.
[PHOTO]
12 FIRSTAR CORPORATION
18
[PHOTOS]
services encompass the full range of bond services, including bond registrar
and paying agent.
Our specialized business includes structured finance (student loans), mortgage
document custody and stock transfer services for corporate clients.
MUTUAL FUND SERVICES/CUSTODY SERVICES
The services of this specialized division include administration, accounting,
transfer agent and custody services to 173 families of funds, second in the
nation, as well as to dozens of Registered Investment Advisers. We also service
741 funds, placing us eighth nationally. Clients can choose full turnkey or
specialized custody services, customized to fit their particular needs.
PRIVATE BANKING
Private Bankers develop strong relationships with each client, working on a
one-to-one basis to orchestrate a customized plan to meet each client's unique
needs and financial goals.
Private Banking creates solutions which reflect the often complex requirements
of our clients' financial dealings. Each Private Banker is the client's personal
and confidential link to Firstar's full range of investment, credit, deposit,
international, trust and asset management products.
BROKERAGE
Firstar Investment Services offers full service brokerage products as well as
mutual funds, annuities and many other comprehensive investment products, as
well as discount brokerage with full internet access and trading capabilities.
INVESTMENT MANAGEMENT
FIRSTAR DELIVERS INVESTMENT MANAGEMENT SERVICES TO OUR CLIENTS AND CUSTOMERS
THROUGH THREE INVESTMENT MANAGEMENT UNITS: FIRSTAR CAPITAL MANAGEMENT, A
DIVISION OF TRUST; FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC
(FIRMCO); AND MISSISSIPPI VALLEY ADVISERS (MVA), THE INVESTMENT ADVISER OF THE
FORMER MERCANTILE BANCORPORATION.
THE FIRSTAR CAPITAL MANAGEMENT DIVISION HAS $14.5 BILLION IN ASSETS UNDER
MANAGEMENT AND SPECIALIZES IN BOTH VALUE AND GROWTH STOCKS, AS WELL AS
SPECIALIZED INCOME-ORIENTED INVESTMENT PRODUCTS. CAPITAL MANAGEMENT CONTINUED TO
EARN NATIONAL RECOGNITION IN 1999 AS THE STELLAR RELATIVE VALUE FUND WAS CHOSEN
AS `SELECT' BY STANDARD & POOR'S. IN ADDITION, THE NEW STELLAR SCIENCE AND
TECHNOLOGY FUND WAS AMONG THE BEST PERFORMING PROPRIETARY FUNDS OF 1999 WITH A
RETURN OF 80.9 PERCENT IN FOUR MONTHS FROM INCEPTION TO 12/31/99.
FIRMCO IS AN INVESTMENT ADVISER WITH $25.5 BILLION IN ASSETS UNDER MANAGEMENT.
FIRMCO DISTRIBUTES FIXED-INCOME, EQUITY AND MONEY MARKET PRODUCTS AND SERVICES
THROUGH AFFILIATED TRUST ORGANIZATIONS, THE FIRSTAR FAMILY OF MUTUAL FUNDS AND
THE NATIONAL MARKET. IN 1999, FIRMCO INTRODUCED TWO NEW MUTUAL FUNDS: THE CORE
INTERNATIONAL EQUITY FUND AND THE MIDCAP INDEX FUND, BRINGING THE TOTAL NUMBER
OF MUTUAL FUNDS TO 20, WITH ASSETS OF $7.3 BILLION. OF SPECIAL NOTE IS THE
FIRSTAR MICROCAP FUND WHICH, IN ADDITION TO EARNING `SELECT' FUND STATUS FROM
STANDARD & POOR'S, RETURNED 136.23 PERCENT FOR THE YEAR (RETAIL CLASS). FOR
1999, THE MICROCAP FUND RANKED SEVENTH IN THE SMALL CAP UNIVERSE (LIPPER) AND
60TH AMONG ALL MUTUAL FUNDS IN THE NATION (CBS MARKETWATCH.COM).
MVA MANAGES 18 PROPRIETARY MUTUAL FUNDS WITH ASSETS OF $9.8 BILLION AT YEAR-END
1999 AND PARTICULAR STRENGTH IN FIXED INCOME AND EQUITY PRODUCTS. THE
PROFESSIONAL STAFF AVERAGES 20 YEARS EXPERIENCE IN INVESTMENT MANAGEMENT.
IN THE YEAR 2000, FIRMCO, MVA AND FIRSTAR CAPITAL MANAGEMENT WILL MERGE UNDER
THE FIRMCO NAME, BRINGING ASSETS UNDER MANAGEMENT TO NEARLY $50 BILLION AND
PROVIDING THE DIVERSITY OF FOUR FUND FAMILIES, OFFERING 51 MUTUAL FUNDS. THIS
COMBINATION WILL STRENGTHEN FIRMCO'S POSITION AS A MONEY MANAGEMENT FORCE. THE
MERGER WILL RESULT IN A FULL COMPLEMENT OF PRODUCTS AND SERVICES FOR EXISTING
CLIENTS AND GIVE FIRMCO A STRONGER FOOTHOLD ON THE NATIONAL FRONT.
19
[PHOTOS]
Firstar Distribution Channels = Convenience and Customer Service
www.firstar.com
FIRSTAR
Bank Without Boundaries
Branch Super ATM Firstar Online Video Internet
Banking Express Banking Banking Banking
DISTRIBUTION CHANNELS
Even as technology transforms the delivery options of our banking customers,
branches remain a vital link between Firstar and our customers' accounts with us
and, as such, branches remain a key element of our distribution system.
Some of our branches are traditional brick and mortar branches, but a growing
percentage are non-traditional branches which benefit both Firstar and the
customers who use them.
Firstar has increased the size and scope of its branch network, while
simultaneously being among the industry leaders in providing alternative
channels of access.
Our exclusive 24 Hour Banking System incorporates six integrated platforms which
give our customers their choice of how they want to bank with Firstar.
We continue to field a growing network of the industry's most fully functional
ATMs, which now number over 2,200. Our Voice Banking and Firstar Express
customer service centers process approximately 49 million calls a year and are
full-service resources to customers in all lines of business concerning their
accounts - whether the customer chooses our automated feature or prefers to talk
in-person to a representative - and both options are operational 24 hours a day,
seven days a week.
COST EFFECTIVE DISTRIBUTION SYSTEM
TRADITIONAL BRANCHES 1,065
NON-TRADITIONAL BRANCHES
IN-STORE BRANCHES 119
CORPORATE ON-SITE BRANCHES 8
RETIREMENT CENTERS 10
VIDEO BANKING CENTERS 2
CONVENIENCE "C" STORE BRANCHES 2
ATMs 2,203
FIRSTAR EXPRESS CALLS 49 MILLION
ONLINE BANKING/INTERNET BANKING 117,000
Firstar's Compact Franchise Footprint Serves More than 5 Million Customers
[MAP]
FIRSTAR
MERCANTILE
BOTH
- - MISSOURI - TENNESSEE - 13 STATES
- - WISCONSIN - IOWA - $73 BILLION IN ASSETS
- - OHIO - KANSAS - 1200 BRANCHES / 2200 ATMs
- - ILLINOIS - ARKANSAS - GUARANTEED SERVICE
- - INDIANA - FLORIDA - LEADING EDGE PRODUCTS, SERVICES AND
- - KENTUCKY - ARIZONA DELIVERY SYSTEMS IN COMMERCIAL,
- - MINNESOTA CONSUMER AND TRUST AND INVESTMENTS
- UNPARALLELED CONVENIENCE AND ACCESS
- MIDWEST ROOTS AND COMMITMENT TO
QUALITY
- MARKET AND INDUSTRY EXPERTISE
Our network of In-store branches now numbers 119 and includes Firstar branches
in many of the leading retail establishments in the Midwest.
But there is no question that online internet banking is the channel that is
growing and expanding the most rapidly. Just a year or so ago, most banks' web
sites functioned primarily as a 'brochure on the screen'. But today, Firstar's
online banking system is an award winning, interactive system which provides
full service across all accounts and across all business lines, building strong
customer relationships and reinforcing the Firstar brand and quality, wherever
the customer is located.
20
FIRSTAR CORPORATION SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Interest income $ 5,021,712 $ 5,052,188 $ 4,513,660 $ 4,051,634 $ 3,921,523 $ 3,307,680
Interest expense 2,378,566 2,516,567 2,145,872 1,845,561 1,827,174 1,285,659
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,643,146 2,535,621 2,367,788 2,206,073 2,094,349 2,022,021
Taxable equivalent adjustment (a) 54,296 59,960 58,639 57,646 58,715 60,550
- -------------------------------------------------------------------------------------------------------------------------------
Taxable equivalent net interest
income 2,697,442 2,595,581 2,426,427 2,263,719 2,153,064 2,082,571
Noninterest income 1,402,571 1,365,351 1,100,215 980,123 887,890 796,621
- -------------------------------------------------------------------------------------------------------------------------------
Net revenue 4,100,013 3,960,932 3,526,642 3,243,842 3,040,954 2,879,192
Noninterest expense 2,445,849 2,529,816 2,104,746 1,952,976 1,808,255 1,755,357
Provision for loan losses 187,301 164,790 204,127 176,100 112,069 103,569
Net income 875,318 805,450 760,716 699,871 698,986 626,260
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE
Basic earnings per common share $ 0.89 $ 0.83 $ 0.83 $ 0.76 $ 0.75 $ 0.68
Diluted earnings per common share 0.87 0.81 0.82 0.75 0.74 0.67
Common dividends declared (b) 0.4625 0.33 0.27 0.21 0.18 0.16
Year-end market value (b) 21.13 31.00 19.13 10.21 6.61 4.04
Weighted average common shares
(000's) 987,488 970,420 913,042 913,897 925,669 914,479
Weighted average diluted common
shares (000's) 1,002,754 989,085 932,407 929,008 942,517 934,580
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $49,259,525 $46,673,396 $41,800,976 $37,191,126 $35,349,528 $31,673,292
Loans held for sale 1,426,936 1,162,187 383,909 376,723 86,095 42,913
Investment securities 14,651,145 15,694,707 12,665,828 11,997,743 12,027,403 11,779,196
Short-term investments 547,424 640,722 646,944 405,141 550,689 644,424
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 65,885,030 64,171,012 55,497,657 49,970,733 48,013,715 44,139,825
Total assets 73,222,590 71,096,191 60,722,443 54,565,374 52,242,526 48,062,798
Noninterest-bearing deposits 9,795,639 9,514,139 8,303,720 7,911,441 7,096,383 7,023,347
Interest-bearing deposits 42,025,563 42,097,767 37,682,107 34,623,470 33,293,091 31,035,520
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 51,821,202 51,611,906 45,985,827 42,534,911 40,389,474 38,058,867
Short-term borrowings 7,819,562 7,369,227 6,477,480 5,025,361 5,207,545 4,181,502
Long-term debt 5,736,056 4,787,551 2,315,536 1,533,070 1,416,811 1,080,810
Shareholders' equity 6,680,687 6,334,542 5,084,200 4,739,612 4,496,663 4,090,938
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS
Return on average assets 1.20% 1.13% 1.25% 1.28% 1.34% 1.30%
Return on average common equity 13.10 12.72 14.98 14.79 15.60 15.39
Net interest margin 4.09 4.04 4.37 4.53 4.48 4.72
Efficiency ratio 59.65 63.87 59.68 60.21 59.46 60.97
Dividend payout ratio 53.16 40.74 32.93 28.00 24.32 23.88
Average shareholders' equity to
average total assets 9.12 8.91 8.37 8.69 8.61 8.51
- -------------------------------------------------------------------------------------------------------------------------------
EXCLUDING MERGER RELATED CHARGES
AND OTHER NONRECURRING ITEMS (C)
Net income $ 1,253,269 $ 1,055,307 $ 860,593 $ 800,761 $ 726,619 $ 642,960
Noninterest expense 1,975,386 2,152,524 1,983,353 1,820,731 1,785,104 1,742,693
Operating income (d) 2,124,627 1,760,357 1,543,289 1,426,225 1,255,850 1,136,499
Diluted earnings per common share 1.25 1.07 0.92 0.86 0.77 0.69
Return on average assets 1.71% 1.48% 1.42% 1.47% 1.39% 1.34%
Return on average common equity 18.76 16.66 16.94 16.92 16.22 15.81
Efficiency ratio 48.18 55.01 56.24 56.13 58.70 60.53
- -------------------------------------------------------------------------------------------------------------------------------
5 YEAR
COMPOUND
GROWTH
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) RATE
- -------------------------------------------- -----------
RESULTS OF OPERATIONS
Interest income 8.7%
Interest expense 13.1
- --------------------------------------------
Net interest income 5.5
Taxable equivalent adjustment (a) (2.2)
- --------------------------------------------
Taxable equivalent net interest
income 5.3
Noninterest income 12.0
- --------------------------------------------
Net revenue 7.3
Noninterest expense 6.9
Provision for loan losses 12.6
Net income 6.9
- --------------------------------------------
PER SHARE
Basic earnings per common share 5.3%
Diluted earnings per common share 5.4
Common dividends declared (b) 24.2
Year-end market value (b) 39.2
Weighted average common shares
(000's) 1.5
Weighted average diluted common
shares (000's) 1.4
- --------------------------------------------
AVERAGE BALANCES
Loans 9.2%
Loans held for sale 101.5
Investment securities 4.5
Short-term investments (3.2)
- --------------------------------------------
Total interest-earning assets 8.3
Total assets 8.8
Noninterest-bearing deposits 6.9
Interest-bearing deposits 6.3
- --------------------------------------------
Total deposits 6.4
Short-term borrowings 13.3
Long-term debt 39.6
Shareholders' equity 10.3
- --------------------------------------------
RATIOS
Return on average assets
Return on average common equity
Net interest margin
Efficiency ratio
Dividend payout ratio
Average shareholders' equity to
average total assets
- --------------------------------------------
EXCLUDING MERGER RELATED CHARGES
AND OTHER NONRECURRING ITEMS (C)
Net income 14.3%
Noninterest expense 2.5
Operating income (d) 13.3
Diluted earnings per common share 12.7
Return on average assets
Return on average common equity
Efficiency ratio
- --------------------------------------------
(a) Taxable equivalent adjustment was calculated utilizing a marginal federal
income tax rate of 35 percent.
(b) Per share amounts based on historical Star Banc Corporation amounts where
applicable.
(c) Amounts and ratios are calculated excluding the following nonrecurring
items:
Merger-related charges recorded in 1994 and 1996 to 1999.
Restructuring charges in 1995, 1996, and 1998.
One-time SAIF assessment in 1996.
(d) Income before loan loss provision and income taxes.
BANK WITHOUT BOUNDARIES 15
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
On September 20, 1999 Firstar Corporation and Mercantile Bancorporation Inc.
("Mercantile") (collectively "Firstar") merged through an exchange of shares.
The merger was a tax-free stock exchange and was accounted for as a
pooling-of-interests. The combined company is a $73 billion regional bank
holding company, headquartered in Milwaukee, Wisconsin, with nearly 1,200 branch
offices in eleven Midwest states and Arizona, in addition to trust operations in
Florida. Under the terms of the share exchange, Mercantile shareholders received
2.091 shares of common stock of Firstar for each share of Mercantile stock held.
All prior period financial information has been restated to include the
historical results of Mercantile.
Firstar reported net income before merger-related charges and other nonrecurring
items at record levels for 1999 with an increase of 18.8 percent to $1.25
billion compared to $1.06 billion in 1998 and $861 million in 1997. Excluding
merger-related charges and other nonrecurring items, diluted earnings per share
increased 16.8 percent to $1.25, compared to $1.07 in 1998 and $.92 in 1997.
Including merger-related charges, net income was $875.3 million in 1999 compared
to $805.4 million for 1998 and $760.7 million for 1997. Basic earnings per share
increased 7.2 percent to $.89 in 1999, compared to $.83 in 1998 and $.83 in
1997. Diluted earnings per share was $.87 in 1999, compared to $.81 in 1998 and
$.82 in 1997.
Firstar recorded merger and/or restructuring charges in each of the last three
years. Table 1 reconciles net income to net income excluding these charges.
Further explanations of these charges are included under the noninterest
expense, noninterest income and credit quality sections of this discussion along
with Note 3 to the Consolidated Financial Statements.
TABLE 1 -- NET INCOME EXCLUDING MERGER AND RESTRUCTURING CHARGES
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 875,318 $ 805,450 $760,716
Merger charges 292,730 332,162 121,393
Restructuring charges 45,130
Investment securities losses 177,733
Loan loss provision 7,500 37,900 20,340
Gain on sale of branches (48,051)
Applicable income taxes (100,012) (117,284) (41,856)
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 377,951 249,857 99,877
- ---------------------------------------------------------------------------------------------------------------------------------
Net income excluding merger and restructuring charges $1,253,269 $1,055,307 $860,593
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings results for 1999 reflected a 3.5 percent increase in taxable equivalent
net revenues and an 8.2 percent reduction in operating expenses. Excluding gains
on sales of securities and a merger related gain in 1998, noninterest income
increased $87.0 million or 6.7 percent in 1999. Table 2 provides a summary of
significant items affecting the change in diluted earnings per share. Excluding
merger-related charges and nonrecurring items, Firstar's return on average
assets and return on average common equity were 1.71 percent and 18.76 percent,
respectively, in 1999. This favorably compares to a return on average assets of
1.48 percent in 1998 and 1.42 percent in 1997 and a return on average common
equity of 16.66 percent in 1998 and 16.94 percent in 1997.
Total assets at December 31, 1999, were $72.8 billion compared to $74.3 billion
a year earlier. Total loans were $50.6 billion at the end of 1999, an increase
of 5.4 percent as compared to $48.0 billion at the end of 1998. Loan growth was
led by increases of 12.5 percent in commercial loans and 20.3 percent in retail
loans for 1999 offset by a managed decline of 7.4 percent in real estate loans.
Deposits totaled $51.9 billion at December 31, 1999 compared to $54.3 billion at
December 31, 1998.
MERGERS AND ACQUISITIONS
The merger of Firstar and Mercantile as discussed above was the only 1999
merger transaction. Note 2 to the Consolidated Financial Statements details the
basic financial terms, size and accounting method used for the acquisitions
during the past three years, the most significant of which are discussed below.
The merger of Firstar and Star Banc that was completed in the fourth quarter of
1998 and the merger of Firstar and Trans Financial, Inc. that was completed in
the third quarter of 1998 were accounted for as poolings-of-interests and all
historical financial information has been restated for those transactions.
Affecting comparability of financial information is the acquisition by Firstar
of Cargill Leasing Corporation in the third quarter of 1998 with leasing assets
of $613 million and
[BAR GRAPH]
1995 1996 1997 1996 1999
DILUTED EPS* (IN DOLLARS) 0.77 0.86 0.92 1.07 1.25
*Excluding merger-related charges and nonrecurring items.
16 FIRSTAR CORPORATION
22
Mercantile's third quarter 1997 acquisition of Roosevelt Financial Group
("Roosevelt"), a $7.3 billion asset thrift holding company . Those acquisitions
were accounted for as purchases; therefore, the results of operations of the
acquired entities have been included in financial results only since the
acquisition dates. In addition, in the third quarter of 1998 Mercantile
completed four acquisitions, all accounted for as poolings-of-interests. Of
those transactions, Firstar's historical financial statements have been restated
to reflect the acquisition of CBT Corporation ($1.0 billion of assets) and
Firstbank of Illinois ($2.3 billion). The historical financial statements were
not restated for the acquisitions of First Financial Bancorporation ($558
million) and Financial Services Corporation ($514 million) since they were not
considered material transactions. Additionally, in 1999 Mercantile sold seven
branches with $127 million in deposits.
BUSINESS SEGMENTS
In January 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement requires disclosure on
a business segment basis of a description of products and services, interest
income and expense, profit and loss and assets as measured by Firstar management
in assessing performance of its business segments. Line of business results and
related disclosures are shown in Note 25 to the Consolidated Financial
Statements.
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the difference between total interest income and total
interest expense, is Firstar's principal source of earnings and its gross profit
from lending, deposit gathering, investing and borrowing. The amount of net
interest income is determined by many variables including the volume, yield and
mix of earning assets and interest bearing liabilities, the level of
nonperforming assets, the level of non-interest bearing liabilities, the general
level of interest rates and the slope of the yield curve. The difference between
rates earned on interest-earning assets (with an adjustment made to tax-exempt
income to provide comparability with taxable income) and the cost of supporting
funds is measured by the net interest margin.
Taxable equivalent net interest income increased $102 million or 3.9 percent in
1999, following a 7.0 percent increase in 1998. The increase in 1999 was due to
higher average earning asset balances, an improved mix of earning assets from
continued growth of commercial and retail loans, along with a higher net
interest margin. This was partially offset by reduced levels of lower yielding
assets and a less favorable liability mix due in part to the increased funding
demand of the stock buyback program. The increase in 1998 was due to increased
volumes from continued strong loan growth and the higher earning assets added
from acquisitions. This increase was partially offset by negative earning asset
mix changes and compression of interest spreads, which reduced the 1998 net
interest margin. The impact of acquisitions occurring during the past three
years had a significant effect on average earning asset levels and the mix of
earning assets and liabilities.
The net interest margin was 4.09 percent in 1999, 4.04 percent in 1998 and 4.37
percent in 1997. The increase in net interest margin in 1999 was due to an
improvement in the mix of earning assets as loan growth was partially funded by
sales and maturities of lower yielding investment securities and residential
mortgage loans. Interest rates in the first half of 1999 were relatively stable
and the net interest margin for the first six months generally remained constant
with 1998 levels. As rates increased in the third quarter of 1999 the margin
became slightly compressed when the increase in the yield on earning assets was
more than offset by the increase in the cost of interest bearing liabilities.
Additionally, lower levels of demand deposits and a less favorable funding mix
lowered the margin. In the fourth quarter of 1999 the margin improved primarily
due to the Mercantile balance sheet restructuring which reduced low margin
assets and allowed funding sources to be used
[BAR GRAPH]
1995 1996 1997 1998 1999
NET INTEREST MARGIN (IN PERCENTS) 4.48 4.53 4.37 4.04 4.09
TABLE 2 -- ANALYSIS OF DILUTED EARNINGS PER COMMON SHARE
DOLLAR CHANGE B/(W)
-------------------
1999 VS. 1998 VS.
1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
Interest income $ 5.01 $ 5.11 $ 4.84 $(0.10) $ 0.27
Interest expense (2.37) (2.54) (2.30) 0.17 (0.24)
- ------------------------------------------------------------------------------------------------------------
Net interest income 2.64 2.57 2.54 0.07 0.03
Provision for loan losses (0.19) (0.17) (0.22) (0.02) 0.05
Noninterest income 1.40 1.38 1.18 0.02 0.20
Noninterest expense (1.97) (2.18) (2.12) 0.21 (0.06)
Merger and restructuring charges (0.47) (0.38) (0.13) (0.09) (0.25)
Income taxes (0.54) (0.41) (0.43) (0.13) 0.02
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.87 $ 0.81 $ 0.82 $ 0.06 $(0.01)
- ------------------------------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 17
23
TABLE 3 -- AVERAGE BALANCE SHEETS AND AVERAGE RATES
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
DAILY AVERAGE DAILY AVERAGE
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) AVERAGE INTEREST RATE AVERAGE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
ASSETS
Commercial loans $16,374,636 $1,272,489 7.77% $14,632,305 $ 1,201,949 8.21%
Real estate loans 20,684,226 1,624,613 7.85 21,302,546 1,719,131 8.07
Retail loans 12,200,663 1,083,368 8.88 10,738,545 1,020,562 9.50
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 49,259,525 3,980,470 8.08 46,673,396 3,941,642 8.45
Loans held for sale 1,426,936 102,685 7.20 1,162,187 84,844 7.30
Taxable investment securities 12,808,623 829,020 6.47 13,796,694 907,013 6.57
Non-taxable investment securities 1,842,522 135,498 7.35 1,898,013 141,664 7.46
Trading securities 100,405 6,415 6.39 138,042 8,948 6.48
Money market investments 447,019 21,920 4.90 502,680 28,037 5.58
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 65,885,030 5,076,008 7.70 64,171,012 5,112,148 7.97
Cash and due from banks 3,316,441 3,092,840
Allowance for loan losses (711,351) (691,498)
Other assets 4,732,470 4,523,837
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $73,222,590 $71,096,191
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings and NOW deposits $10,591,769 $ 192,460 1.82% $10,547,788 $ 222,188 2.11%
Money market deposit accounts 10,393,170 413,709 3.98 9,135,567 387,190 4.24
Time deposits $100,000 and over 4,319,661 229,031 5.30 4,140,601 228,374 5.52
Time deposits under $100,000 16,720,963 843,639 5.05 18,273,811 1,005,922 5.50
Short-term borrowings 7,819,562 368,252 4.71 7,369,227 381,985 5.18
Long-term debt 5,736,056 331,475 5.78 4,787,551 290,908 6.08
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 55,581,181 2,378,566 4.28 54,254,545 2,516,567 4.64
Noninterest-bearing deposits 9,795,639 9,514,139
Other liabilities 1,165,083 992,965
Shareholders' equity 6,680,687 6,334,542
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $73,222,590 $71,096,191
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest revenue/margin $2,697,442 4.09% $ 2,595,581 4.04%
Interest rate spread 3.42 3.33
- ---------------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------ ----------------------------------
DAILY AVERAGE
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) AVERAGE INTEREST RATE
- ------------------------------------------------------ ----------------------------------
- ------------------------------------------------------
ASSETS
Commercial loans $12,813,511 $1,095,874 8.55%
Real estate loans 18,889,684 1,565,413 8.29
Retail loans 10,097,781 998,769 9.89
- ------------------------------------------------------
Total loans 41,800,976 3,660,056 8.76
Loans held for sale 383,909 27,633 7.20
Taxable investment securities 10,871,132 711,320 6.54
Non-taxable investment securities 1,794,696 134,032 7.47
Trading securities 107,135 7,263 6.78
Money market investments 539,809 31,995 5.93
- ------------------------------------------------------
Total interest-earning assets 55,497,657 4,572,299 8.24
Cash and due from banks 2,661,887
Allowance for loan losses (629,347)
Other assets 3,192,246
- ------------------------------------------------------
Total assets $60,722,443
- ------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings and NOW deposits $ 9,801,780 $ 206,991 2.11%
Money market deposit accounts 7,426,073 307,132 4.14
Time deposits $100,000 and over 3,871,621 216,611 5.59
Time deposits under $100,000 16,582,633 916,621 5.53
Short-term borrowings 6,477,480 342,655 5.29
Long-term debt 2,315,536 155,862 6.73
- ------------------------------------------------------
Total interest-bearing liabilities 46,475,123 2,145,872 4.62
Noninterest-bearing deposits 8,303,720
Other liabilities 859,400
Shareholders' equity 5,084,200
- ------------------------------------------------------
Total liabilities and shareholders' equity $60,722,443
- ------------------------------------------------------
Net interest revenue/margin $2,426,427 4.37%
Interest rate spread 3.62
- ------------------------------------------------------
Note: Interest and average rate are presented on taxable equivalent basis.
Taxable equivalent amounts are calculated utilizing the marginal federal income
tax rate of 35 percent. The yield on available-for-sale securities is computed
based on historical cost balances. Nonaccrual loans are included in the average
balances.
to support higher yielding commercial and retail loan growth. For the full year,
the yield on earning assets declined by 27 basis points from 1998 to 1999. The
yield on commercial loans and retail loans decreased by 44 basis points and 62
basis points, respectively. The cost of interest bearing liabilities declined by
36 basis points during this same period.
The decrease in net interest margin in 1998 reflects the general decline in
rates on earning assets, as a result of the prime rate decreases in 1998 and
corresponding overall decline in loan rates. Yields on commercial loans and
retail loans decreased 34 basis points and 39 basis points, respectively, in
1998. Earning asset rates in total were down 27 basis points due to the
increases in the volume of lower yielding residential mortgages and
mortgage-backed securities, many of which were added from the Roosevelt, Great
Financial and Bank One transactions. Also contributing to the decline in net
interest margin was a 2 basis point increase in costs of supporting funds,
related to a 10 basis point increase in money market deposit accounts and higher
levels of long-term debt. Competitive pricing of both loans and deposits,
accelerated mortgage asset prepayments and refinancings, the continued movement
of retail deposits from savings and transaction accounts to mutual funds, and a
greater dependence on wholesale funding also accounted for the lower margins in
1998.
In order to reduce exposure to adverse changes in interest rates, Firstar enters
into interest rate swaps and floors. The notional amount of these interest rate
contracts was $1.2 billion at December 31, 1999, compared with $1.4 billion at
December 31, 1998. Interest rate swaps increased net interest income in each of
the past three years, but with no material effect on net interest margin.
Table 3 provides detailed information as to average balances, interest income
and expense, and rates earned and paid by major balance sheet category for the
years 1997 through 1999. Table 4 provides an analysis of the changes in net
interest income attributable to changes in volume of interest-earning assets or
interest-bearing liabilities and to changes in rates earned and paid. The
discussions on liquidity, interest rate sensitivity, deposits, investment
securities and loans further detail the changes in net interest income and the
net interest margin.
18 FIRSTAR CORPORATION
24
INTEREST RATE SENSITIVITY AND MARKET RISK
Firstar's major market risk exposure is changing interest rates. To minimize
the volatility of net interest income and exposure to economic loss, Firstar
manages its exposure to adverse changes in interest rates through asset and
liability management activities within guidelines established by its
Asset/Liability Policy Committee ("ALPC"). The ALPC has the responsibility for
approving and ensuring compliance with asset/liability management policies of
Firstar, including interest rate risk exposure, off-balance-sheet activity and
the investment portfolio position.
In order to manage interest rate risk, Firstar may utilize interest rate swap
agreements and interest rate options such as caps and floors. These interest
rate contracts are treated as hedges, and accordingly, the income and expense
related to these transactions is recognized on the hedged instrument as an
adjustment to interest income or expense. Additional information on Firstar's
interest rate swap contracts is presented in Note 20 to the Consolidated
Financial Statements.
One of the primary tools used to measure interest rate risk and the effect of
interest rate changes on net interest income and net interest margin is
simulation analysis. Through these simulations, management estimates the impact
on net interest income of a 300 basis point upward or downward gradual change of
market interest rates over a one year time period. Asset/liability policy
guidelines indicate that a 300 basis point up or down change in interest rates
cannot result in more than a 7.5 percent change in net interest income, as
compared to a base case, without approval by the Board of Directors and a
strategy in place to reduce interest rate risk below the maximum level. In
simulations as of December 31, 1999, the 300 basis point upward change resulted
in a decrease of $22 million in net interest income compared to the base case,
while the 300 basis point downward change resulted in an increase of $8 million
in net interest income. Both of these changes were less than one percent of net
interest income in the base case. At December 31, 1999 Firstar was well within
policy guidelines.
Net interest income is also affected by the relationship between different
interest rates. For example, a 50 basis point wider spread between the prime
rate and the federal funds rate is projected to cause a 3 basis point increase
in net interest margin and a less than one percent increase in net interest
income over a one year period. These simulations include assumptions about how
the balance sheet is likely to change with loan and deposit growth. Assumptions
are made to project rates for new loans and deposits based on historical
analysis and management's outlook. Mortgage loan prepayment assumptions are
developed from industry median estimates of prepayment speeds. The results of
these simulations can be significantly influenced by assumptions utilized for
managed rate deposits.
Firstar also manages its interest rate sensitivity position to maintain a
balance between the amounts of interest-earning assets and interest-bearing
liabilities which are expected to mature or reprice at any point in time. The
interest rate sensitivity ("Gap"), Table 5, demonstrates the repricing
characteristics of Firstar's interest-earning assets, liabilities and interest
rate swap positions as of December 31, 1999. Table 5 shows Firstar in a
liability sensitive position through the one year repricing period in the amount
of $4.8 billion or 6.6 percent of total assets. Generally, a liability sensitive
position indicates that falling interest rates would positively impact net
interest margin, while rising interest rates would negatively affect net
interest margin.
TABLE 4 -- VOLUME/RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS) CHANGE FROM 1998 TO 1999
- ----------------------------------------------------------------------------------------------
Increase (decrease) in: Volume Rate Total
- ----------------------------------------------------------------------------------------------
Interest income:
Commercial loans $138,861 $ (68,321) $ 70,540
Real estate loans (36,923) (57,595) (94,518)
Retail loans 123,093 (60,287) 62,806
- ----------------------------------------------------------------------------------------------
Total loans 225,031 (186,203) 38,828
Loans held for sale 19,239 (1,398) 17,841
Investment securities (69,684) (14,475) (84,159)
Money market investments (5,377) (3,273) (8,650)
- ----------------------------------------------------------------------------------------------
Total 169,209 (205,349) (36,140)
- ----------------------------------------------------------------------------------------------
Interest expense:
Savings and NOW deposits (420) (29,308) (29,728)
Money market deposit accounts 53,301 (26,782) 26,519
Time deposits $100,000 and over 9,876 (9,219) 657
Time deposits under $100,000 (85,480) (76,803) (162,283)
Short-term borrowings 23,579 (37,312) (13,733)
Long-term debt 57,629 (17,062) 40,567
- ----------------------------------------------------------------------------------------------
Total 58,485 (196,486) (138,001)
- ----------------------------------------------------------------------------------------------
Net variance $110,724 $ (8,863) $ 101,861
- ----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) CHANGE FROM 1997 TO 1998
- -----------------------------------------
Increase (decrease) in: Volume Rate Total
- -----------------------------------------
Interest income:
Commercial loans $155,507 $ (49,432) $106,075
Real estate loans 200,026 (46,308) 153,718
Retail loans 63,372 (41,579) 21,793
- -----------------------------------------
Total loans 418,905 (137,319) 281,586
Loans held for sale 56,036 1,175 57,211
Investment securities 202,026 1,299 203,325
Money market investments (378) (1,899) (2,277)
- -----------------------------------------
Total 676,589 (136,744) 539,845
- -----------------------------------------
Interest expense:
Savings and NOW deposits 15,741 (544) 15,197
Money market deposit accounts 70,773 9,285 80,058
Time deposits $100,000 and over 15,036 (3,273) 11,763
Time deposits under $100,000 93,522 (4,221) 89,301
Short-term borrowings 47,173 (7,843) 39,330
Long-term debt 166,367 (31,321) 135,046
- -----------------------------------------
Total 408,612 (37,917) 370,695
- -----------------------------------------
Net variance $267,977 $ (98,827) $169,150
- -----------------------------------------
Note: Interest on non-taxable loans and securities is computed on a
fully-taxable equivalent basis. Taxable equivalent amounts are calculated
utilizing the marginal federal income tax rate of 35 percent. The change
in interest due to both volume and rate has been allocated completely to
changes in rate.
BANK WITHOUT BOUNDARIES 19
25
Although the periodic gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity at a
specific point in time. Gap analysis does not take into consideration that
assets and liabilities with similar repricing characteristics may not reprice at
the same time or to the same degree and does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
Firstar also utilizes market value of equity as a measurement tool in managing
interest rate sensitivity. The market value of equity measures the degree to
which the market values of Firstar's assets and liabilities will change given a
change in interest rates. Asset/liability policy guidelines indicate that a 200
basis point upward or downward change in interest rates cannot result in more
than a 15 percent change in equity as compared to the base case. At December 31,
1999, Firstar was well within this guideline.
Firstar also enters into forward commitments to hedge residential real estate
loans which have interest rate risk. At December 31, 1999 Firstar had committed
to deliver $589 million in residential real estate loans during 2000. None of
these forward commitments extend beyond one year.
Firstar enters into foreign exchange forward contracts primarily to accommodate
the business needs of its customers. Foreign exchange-based forward contracts
provide for the delayed delivery of a purchase of foreign currency. The foreign
exchange risk associated with these contracts is mitigated by entering into
offsetting foreign exchange contracts. Firstar holds some foreign exchange spot
contracts for proprietary trading purposes, however the average amount of these
contracts was immaterial for the last three years. Additional disclosure related
to derivatives is shown in Note 20 to the Consolidated Financial Statements.
NONINTEREST INCOME
Noninterest income is a significant source of revenue for Firstar,
representing 34.2 percent of taxable equivalent net revenue in 1999, compared
with 34.4 percent in 1998 and 31.2 percent in 1997. Noninterest income,
excluding securities transactions and the 1998 gain on the sale of bank
branches, increased 6.7 percent to $1.39 billion in 1999, compared to $1.30
billion in 1998. This compares to 18.6 percent growth in 1998. The increase in
1999 was led by trust fees which grew by $52.1 million or 13.9%, cash management
income which improved by $24.6 million or 20.9% and credit card income which
grew by $19.0 million or 20.3%. Growth also occurred in several other areas with
securitization revenues, retail deposit fees, international fees and bank owned
life insurance income all growing. These gains were partially offset by lower
mortgage banking revenue, which declined by $50.9 million, or 25.1 percent.
Trust income, which is Firstar's largest source of fee income, increased 13.9
percent to $427.3 million in 1999, following an 11.0 percent increase in 1998.
In both 1999 and 1998, Firstar realized significant increases in revenue levels
as a result of new business in each trust area and the strong performance of the
financial markets. Continued growth was seen in Firstar's mutual fund services
area which provides transfer agent, fund accounting and fund administration to
approximately 350 mutual funds with over 1.5 million accounts. Also increasing
1999 trust revenue was the transfer of Firstar's Stellar Funds to in-house
processing, which produced $5.8 million of new revenue in the year. An alignment
of
TABLE 5 -- INTEREST RATE SENSITIVITY (GAP ANALYSIS)
AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) TOTAL 0-30 DAYS 31-90 DAYS 91-180 DAYS 181-365 DAYS
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans $ 50,626,008 $ 12,905,925 $ 3,885,785 $ 3,662,293 $ 5,431,917
Loans held for sale 624,680 624,680
Investment securities 13,113,867 1,325,115 1,115,255 541,187 1,076,498
Money market investments 896,910 896,322 588
- -----------------------------------------------------------------------------------------------------------------------------
Total 65,261,465 15,752,042 5,001,628 4,203,480 6,508,415
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Savings, NOW and MMDA 20,593,937 3,061,625 5,918,440 704,064 1,408,128
Other interest-bearing deposits 20,992,481 2,083,742 3,890,738 5,255,530 3,892,585
Short-term borrowings 8,302,019 7,610,072 323,439 65,062 42,166
Long-term debt 5,038,383 621,576 790,850 44,261 70,406
- -----------------------------------------------------------------------------------------------------------------------------
Total 54,926,820 13,377,015 10,923,467 6,068,917 5,413,285
Interest rate swap positions 126,000 (85,000) (600,000) 40,000
- -----------------------------------------------------------------------------------------------------------------------------
Total gap $ 10,334,645 2,501,027 (6,006,839) (2,465,437) 1,135,130
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 2,501,027 $ (3,505,812) $ (5,971,249) $ (4,836,119)
- -----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) 1-5 YEARS OVER 5 YEARS
- ---------------------------------------------- -----------------------------
INTEREST-EARNING ASSETS
Loans $ 19,644,658 $ 5,095,430
Loans held for sale
Investment securities 5,900,270 3,155,542
Money market investments
- ----------------------------------------------
Total 25,544,928 8,250,972
- ----------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Savings, NOW and MMDA 9,501,680
Other interest-bearing deposits 5,741,630 128,256
Short-term borrowings 261,280
Long-term debt 1,948,917 1,562,373
- ----------------------------------------------
Total 17,453,507 1,690,629
Interest rate swap positions (131,000) 650,000
- ----------------------------------------------
Total gap 7,960,421 7,210,343
- ----------------------------------------------
Cumulative gap $ 3,124,302 $ 10,334,645
- ----------------------------------------------
Note: Savings, NOW and money market deposit accounts (MMDA) are subject to
immediate withdrawal. However, for the purpose of the above analysis these
accounts are reported based on an historical analysis of Firstar Bank
accounts.
20 FIRSTAR CORPORATION
26
accrual procedures in certain trust areas also contributed one-time revenue
increases of $7.5 million in the fourth quarter of 1999.
Managed trust assets increased 13.2 percent to $75.7 billion at the end of 1999,
compared to $66.9 billion at the end of 1998. Custody trust assets increased by
29.3 percent to $174.8 billion at December 31, 1999 compared to $135.3 billion a
year earlier. Custody assets include nearly $100 billion of mutual funds for
which Firstar provides accounting and/or custody services. Firstar's proprietary
mutual funds represent $16.7 billion of the total custody assets and increased
by 13.4 percent during 1999.
Retail deposit fees grew by 2.0% in 1999 following growth of 8.9% in 1998.
Higher transaction volume accounted for the increase even though there had been
some erosion of the Mercantile customer base during the first three quarters of
1999.
Mortgage banking income declined $50.9 million, or 25.1 percent, to $151.7
million in 1999, following a 116.9 percent increase in 1998. Mortgage
origination activity declined by $30.6 million, or 23.5 percent, in 1999 as
increased interest rates reduced new originations and refinancing businesses.
Loan servicing income declined by $5.8 million, or 12.9 percent, with the sale
of servicing rights during the past two years. Gains on the sale of servicing
rights declined by $14.4 million, or 52.2 percent in 1999. Servicing rights
sales are managed taking into consideration prepayment risk of the serviced
portfolio among other factors. The increase in 1998 over 1997 was primarily due
to the significant mortgage banking business acquired in the Great Financial and
Roosevelt acquisitions and generally higher origination volumes and refinancing
activity due to the lower level of interest rates.
Mortgages serviced for others decreased to $19.5 billion at December 31, 1999,
from $26.3 billion at December 31, 1998. Total capitalized mortgage servicing
rights were $212.3 million at December 31, 1999. There were no impairment write
downs of the mortgage servicing rights at December 31, 1999.
Cash management income increased $24.6 million or 20.9 percent following a 22.4
percent increase in 1998. This growth was attributable to new business
development, an expanded product line and higher customer transaction volumes.
Credit card fees increased $19.0 million, or 20.3 percent in 1999 following a
decline of $5.7 million, or 5.7 percent in 1998. An expanded customer base and
increased card usage partially offset by lower merchant revenues due to the
additional sales of the merchant processing business in the second and third
quarters of 1999, account for the 1999 revenue growth. The decline in 1998 is
due to lower merchant revenue as a result of the transfer of merchant processing
income to the joint venture formed with NOVA Information Systems Inc. in the
fourth quarter of 1997. Excluding merchant processing revenue, credit card
income increased 25.6 percent in 1999 and 14.2 percent in 1998.
ATM income increased by $1.7 million, or 4.7 percent, in 1999, following a 24.9
percent increase in 1998. Firstar continues to add new automated teller machines
as a result of acquisitions and new installations with bank owned ATMs
increasing to 2,200 at December 31, 1999, compared to 1,500 ATMs at December 31,
1998.
Securitization revenue increased by 101.6 percent, to $38.7 million, in 1999.
The establishment of two off-balance sheet conduits which hold high grade
commercial loans and investment securities totaling
TABLE 6 -- NONINTEREST INCOME
% INCREASE/ % INCREASE/
(DECREASE) (DECREASE)
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1999/1998 1998/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Trust income $ 427,346 $ 375,258 $ 338,123 13.9% 11.0%
Mortgage banking:
Origination activity 99,503 130,149 58,752 (23.5) 121.5
Loan servicing, net 38,990 44,750 29,072 (12.9) 53.9
Gain on sale of servicing 13,243 27,691 5,575 (52.2) 396.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage banking 151,736 202,590 93,399 (25.1) 116.9
Retail deposit fees 181,348 177,762 163,283 2.0 8.9
Cash management income 142,037 117,466 95,952 20.9 22.4
Credit card income 112,672 93,670 99,377 20.3 (5.7)
ATM income 38,602 36,865 29,523 4.7 24.9
Brokerage revenue 41,153 44,862 36,381 (8.3) 23.3
International income 37,475 32,843 29,922 14.1 9.8
Bank owned life insurance 25,585 15,759 5,848 62.4 169.5
Insurance commissions 28,019 26,152 18,694 7.1 39.9
Securitization revenue 38,749 19,224 18,404 101.6 4.5
Gain on sale of merchant processing 6,200 2,658 25,121 133.3 (89.4)
All other income 156,887 155,661 142,455 0.8 9.3
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,387,809 1,300,770 1,096,482 6.7 18.6
Gain on sale of branches 48,051
Investment securities gains - net 14,762 16,530 3,733 (10.7) 342.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $1,402,571 $1,365,351 $1,100,215 2.7% 24.1%
- ----------------------------------------------------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 21
27
$8.1 billion in assets has produced related revenue sources in the form of
on-going management fees and referral fees. Additionally, Mercantile previously
securitized $400 million of credit card receivables on which servicing fees are
generated. The credit card securitization is scheduled to be liquidated by the
end of 2000 with the return of these assets to Firstar's balance sheet.
All other revenue, excluding the gains on the sale of credit card merchant
processing, increased by 5.0 percent to $289.1 million in 1999 following a 18.0
percent increase in 1998. Higher income from international fees, insurance
activities, and miscellaneous fees, and increases in the value of bank owned
life insurance were partially offset by lower gains from the disposal of leased
assets, lower data processing income and lower brokerage commissions due to the
continued outsourcing of this activity. Securities gains in 1999 were at
approximately the same level as 1998 which was up $13.0 million from 1997. The
level of securities gains is a function of portfolio repositioning, how actively
the portfolio is managed, and the general level of interest rates. The $48.1
million gain on the sale of branches in 1998 relates to the regulatory agency
required divestiture of two Missouri banks in conjunction with merger activity
in that year. Table 6 provides a summary of changes in noninterest income for
the past three years.
NONINTEREST EXPENSE
Total noninterest expense was $2.45 billion in 1999, an $84 million, or 3.3
percent, decrease from 1998. The 1998 level of $2.53 billion was up 20.2 percent
over 1997. All three years included significant merger-related and restructuring
costs. When those are excluded, operating expenses declined by $177.1 million,
or 8.2 percent, in 1999 and were up by $169.2 million, or 8.5 percent, in 1998.
Firstar's noninterest expense ratio improved to 48.18 percent in 1999, compared
to 55.01 percent in 1998 and 56.24 percent in 1997 when all merger-related and
restructuring costs are excluded. The general decline in expenses in 1999 is due
to synergies realized in the Star/Firstar merger and the ten other 1998
acquisitions. The increase in noninterest expense in 1998 was due primarily to
the 1998 Great Financial, Cargill and Bank One branch acquisitions, and the full
year impact of the operating expenses of Roosevelt which was acquired on July 1,
1997 by Mercantile, in addition to new retail facilities, higher incentive
levels and additional costs related to Year 2000 system changes. Although 1998
expenses grew significantly due to the acquisitions, significant cost savings
and efficiencies are reflected in the 1999 results and ratios as noted above,
and continued improvements are expected in 2000.
Salary expense decreased 9.6 percent in 1999 to a level of $862.1 million,
following a 10.8 percent increase in 1998. The 1999 decrease in salary expense
resulted from staff reductions in support and back room operations as a result
of the merger of Star and Firstar, as well as declines in Mercantile from prior
acquisition synergies, branch sales, a higher employee turnover rate and
Mercantile's previously announced restructuring program. In addition, salary
expenses were reduced through the consistent capitalization of loan origination
costs, reduced temporary staffing costs and the outsourcing of the brokerage
business. Lower incentive pay on decreased residential mortgage loan
originations further reduced salary expenses. Partially offsetting these
declines were increased incentive compensation expense with the expansion of
incentive plans to all employees. Salaries increased in 1998 due to staff added
as a result of the acquisitions, higher mortgage banking commissions, higher
staff levels in retail banking related to new facilities, and expansion at
Firstar Finance Inc. Higher temporary help and incentive costs based on the
TABLE 7 -- NONINTEREST EXPENSE
% INCREASE/ % INCREASE/
(DECREASE) (DECREASE)
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1999/1998 1998/1997
- ------------------------------------------------------------------------------------------------------------------------------
Salaries $ 862,092 $ 953,309 $ 860,020 (9.6)% 10.8%
Pension and other employee benefits 137,550 172,990 176,175 (20.5) (1.8)
Equipment expense 147,821 160,737 146,910 (8.0) 9.4
Occupancy expense - net 167,788 169,467 153,045 (1.0) 10.7
Amortization of intangible assets 120,831 114,983 75,462 5.1 52.4
Outside services 113,569 100,546 82,714 13.0 21.6
Postage and courier 70,261 65,479 61,908 7.3 5.8
Marketing expense 40,712 46,720 43,828 (12.9) 6.6
Professional services 28,740 41,096 43,330 (30.1) (5.2)
Travel and entertainment 25,464 26,595 27,146 (4.3) (2.0)
Stationery and supplies 38,568 44,117 40,395 (12.6) 9.2
Communication expense 48,054 44,452 36,697 8.1 21.1
Loss on the sale of credit card loans 50,000
All other expense 173,936 212,033 185,723 (18.0) 14.2
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,975,386 2,152,524 1,983,353 (8.2) 8.5
Merger and restructuring expenses 470,463 377,292 121,393 24.7 210.8
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,445,849 $2,529,816 $2,104,746 (3.3)% 20.2%
- ------------------------------------------------------------------------------------------------------------------------------
22 FIRSTAR CORPORATION
28
increase in staff levels and higher profit levels also contributed to the
increase in salaries.
The decline in 1999 employee benefit expense was due to the lower headcount and
salary levels, a large cash contribution into the pension plan to maximize
allowable IRS funding and the merger of the Star and Firstar employee benefit
plans. The additional funding of the pension plan reduced pension expense by $8
million in 1999. Additionally, a curtailment gain related to the severance of
employees further reduced pension expense by $4.3 million in the fourth quarter
of 1999. Employee benefit costs declined slightly in 1998 even though salary
costs rose due to combining benefit plans and reconfiguring plan benefits.
Equipment expenses in 1999 declined by $12.9 million, or 8.0 percent due largely
to savings resulting from the Star and Firstar merger as well as Mercantile's
slowdown in capital spending. Equipment expense increased 9.4 percent in 1998
due to higher levels of depreciation, technology upgrades, and maintenance and
repair expenses related to the additional offices added in the acquisitions.
Occupancy expense decreased 1.0 percent to $167.8 million in 1999. Occupancy
expense increased by 10.7 percent in 1998 due primarily to acquisition activity.
Intangible amortization increased 5.1 percent in 1999 over 1998 due to the full
year impact of the 1998 acquisitions. The 52.4 percent increase in 1998 over
1997 is explained largely by a full year of the Roosevelt goodwill amortization
in 1998.
Outside service costs increased $13.0 million or 13.0 percent in 1999 following
growth of $17.8 million, or 21.6 percent in 1998. Higher transaction volumes and
Firstar's decisions to outsource certain functions explain this rise in costs in
1999.
In the third quarter of 1997, Mercantile announced the sale of its former
co-branded credit card loans. The sale resulted in a pre-tax charge of $50
million, which represented the discount on the loan balances, a
write-off of an intangible asset associated with the cards, investment banking
fees and accruals for severance and other expenses.
All other operating expenses were reduced by $54.8 million, or 11.4 percent, in
1999. Close attention paid to expense levels and the realization of merger
synergies reduced these expenses in 1999. Many of these same expenses increased
in 1998 due to the impact of the 1998 and 1997 acquisitions. Table 7 provides a
summary of changes in noninterest expense for the last three years.
Firstar has incurred merger and/or restructuring charges in each of the last
three years in conjunction with acquisitions and internal programs to increase
operational efficiency. In 1999 Firstar recorded $470.5 million of
merger-related charges associated with the 1999 merger with Mercantile and other
prior year mergers of both Firstar and Mercantile. The 1998 merger/restructuring
charge totaled $377.3 million and included expenses associated with the
Star/Firstar merger and several other smaller acquisitions and restructuring
charges in connection with Mercantile's corporate wide reorganization. The 1997
merger charge totaled $121.4 million and related to three acquisitions completed
that year.
Expenses for the Mercantile merger totaled $409.5 million in 1999. Included in
the merger-related charge was $177.7 million in securities losses related to the
Mercantile balance sheet restructuring. Severance and related employee costs of
$131.0 million were accrued as a result of plans to consolidate various back
office operations. Other costs incurred or accrued in 1999 related to this
merger included a $35.0 million contribution to a charitable foundation, $19.5
million of system conversion costs and $46.3 million of other merger-related
charges such as legal, investment banking and registration fees.
In 1998 Star Banc Corporation merged with Firstar and recorded merger related
charges of $211.0 million. Severance and related employee costs of $80.0 million
were accrued as a result of plans to consolidate various back office operations.
Other costs incurred or accrued in 1998 related to this merger included a $20.0
million contribution to a charitable foundation, asset write-downs of $28.3
million, $26.9 million of system conversion costs, $16.1 million of lease
termination costs and $39.7 million of other merger-related charges such as
legal, investment banking and registration fees. During 1999, additional merger
expenses totaling $115.7 million were incurred primarily related to system
conversion projects. The accrual for Star/Firstar merger related expenses was
also reduced by $19.9 million in 1999 representing excess severance accruals.
Mercantile recorded a restructuring accrual of $45.1 million in 1998 relating to
a centralization, branch closing and consolidation of operations effort.
Severance related costs of $40 million were accrued. Costs associated with the
closing of 26 branches totaled $5.1 million. During 1999, $22.3 million of
remaining accruals were reversed and as of December 31, 1999, substantially all
expenses had been paid.
Other merger-related charges were incurred in both 1998 and 1997 for several
other smaller acquisitions. Note 3 to the Consolidated Financial Statements
details the activity in the various merger and restructuring accrual accounts.
V99]TEXT TO COME
TEXT TO COME
[BAR GRAPH]
1995 1996 1997 1998 1999
EFFICIENCY RATIO* (IN PERCENTS) 58.70 56.13 56.24 55.01 48.16
*Excluding merger-related charges and nonrecurring items.
BANK WITHOUT BOUNDARIES 23
29
INCOME TAXES
Firstar records a provision for income taxes currently payable and for
income taxes payable in the future that arise due to timing differences in the
recognition of certain items for financial statement and income tax purposes.
For the year ended December 31, 1999, Firstar recorded income tax expense of
$537.2 million compared with $400.9 million in 1998 and $398.4 million in 1997.
The effective tax rate for 1999 was 38.0 percent compared with 33.2 percent in
1998 and 34.4 percent in 1997. Income tax benefits relating to merger charges
totaled $100 million in 1999, $117.3 million in 1998 and $41.9 million in 1997.
Excluding the expenses and related tax benefits recorded in conjunction with
acquisitions, Firstar's adjusted effective tax rate was 33.7 percent in 1999
compared with 32.9 percent and 33.8 percent in 1998 and 1997, respectively.
The effective tax rates were influenced by the level of tax-exempt income; the
receipt of state tax refunds from prior years and the implementation of various
tax planning strategies; nondeductible goodwill amortization; nondeductible
merger related costs; the level of investments in bank owned life insurance; and
the restructuring of affiliated member entities.
YEAR 2000
Firstar successfully completed its Year 2000 project including all
assessment, remediation and testing of all internal systems by December 31,1999.
Subsequent to that date, no adverse developments have occurred which would
affect Firstar's business, financial condition or results of operations. All
internal systems have functioned as planned in 2000, and no third party vendors
or counterparties have failed to provide the required levels of service. Firstar
will continue to monitor both its systems and its transactions with third
parties during the year and address any problems as needed.
The costs of the Year 2000 project were expensed as incurred. The total cost of
this project through the end of 1999 was approximately $58 million of which $13
million was expensed in 1999, $32 million in 1998 and $13 million in 1997.
Nominal additional costs will be incurred in 2000 related to the shutting down
of the project and completing documentation.
- ---------------------------------------------------------------
BALANCE SHEET
LOANS
Loans increased $2.6 billion, or 5.4 percent, to $50.6 billion at December
31, 1999, compared to $48.0 billion at December 31, 1998. This follows an
increase of $3.5 billion, or 7.9 percent, during 1998. Excluding residential
real estate loans, total loans increased $4.7 billion, or 12.6 percent, since
December 31, 1998. Since year-end 1998, retail loans, which include such areas
as installment lending, auto leasing and credit card services have increased
$2.3 billion or 20.3 percent. Commercial loans increased by $1.5 billion, or
10.3 percent, from year-end 1998. Commercial leasing rose by nearly 35 percent
from a year ago and reflects the expanded marketing efforts of the leasing
subsidiary acquired in 1998. Commercial and construction real estate loans
increased $490 million, or 4.6 percent, since year-end 1998. In the third
quarter of 1998, Firstar established a loan conduit, Stellar Funding Group, Inc.
At December 31, 1999, $1.8 billion of short term, high quality, low yielding
commercial loans had been funded in the conduit. This represents an increase of
$738 million over the December 31, 1998 level. Excluding the impact of these
transferred loans, commercial loans would have increased $3.2 billion, or 11.7
percent, since December 31, 1998. These increases are the direct result of
successful marketing efforts, cross selling and the strength of the economy. The
growth is broad-based in both the Firstar and Mercantile markets. Residential
real estate loans have declined since December 31, 1998 reflecting management's
decision to sell most single-family residential real estate loan originations
into the secondary market as well as the impact of loan sales related to the
Mercantile balance sheet restructuring. This decline reflects Firstar's strategy
to reduce these lower yielding loans and the related adverse prepayment risk,
with resulting proceeds utilized to fund growth in higher yielding commercial
and retail loans.
Commercial loans, real estate loans and retail loans represent 34.3, 39.1 and
26.6 percent, respectively, of the total loan portfolio at year-end 1999
compared with 32.1, 44.6 and 23.3 percent at December 31, 1998, reflecting the
results of the strategies implemented to downsize the residential loan portfolio
and use the proceeds to fund higher yielding commercial and retail loans. The
commercial portfolio remains diversified as to both industry and geographic
concentrations, and the vast majority of all loans are extended in Firstar's
natural trade area.
Loans held for sale are not included in the loan discussion above. They totaled
$625 million at December 31, 1999 compared with $1.76 billion at year-end 1998.
The decrease is due to the general decline in residential mortgage loan
originations due to the higher level of interest rates.
Table 8 provides a summary of loans by type at year-end for each of the past
five years. Table 9 provides maturity distribution data for selected types of
loans.
ASSET QUALITY
As of December 31, 1999, the allowance for loan losses was $715 million, or
1.41 percent, of total loans. This compares to $705 million, or 1.47 percent, of
total loans, as of December 31, 1998. The allowance as a percentage of
nonperforming loans improved to 341 percent at year-end 1999, compared with 325
percent last year and 323 percent at December 31, 1997. The provision for loan
losses totaled $187 million in 1999, $165 million in 1998 and $204 million in
1997. In connection with merger activities, additional provisions for loan
losses were made to conform credit and charge-off policies. These amounts are
included in the reported loan loss provision and amounted to $7.5 million in
1999, $37.9 million in 1998, and $20.3 million in 1997. Table 10 provides a
summary of activity in the allowance for loan loss account by type of loan.
24 FIRSTAR CORPORATION
30
As shown in Table 10, net charge-offs increased slightly in 1999 to .36 percent
of average outstanding loans, compared to 0.35 in 1998 and 0.42 in 1997. All
three years included merger related charge-offs that were taken to conform
acquiree credit policies to those of Firstar. Excluding the merger-related
charge-offs of $7.5 million in 1999, $23.9 million in 1998 and $20.3 million in
1997, the adjusted net charge-off figures were .34 percent, .30 percent, and .37
percent.
Nonperforming loans as a percentage of total loans have declined to historically
low levels. Nonperforming loans as a percentage of total loans declined to .41
percent at December 31, 1999 compared with .45 percent at December 31, 1998, and
down from .46 percent at December 31, 1997. Nonperforming assets as a percentage
of total loans and other real estate owned remained at historically low levels
in 1999, down slightly to .45 percent at December 31, 1999, compared to .49
percent a year earlier.
[BAR GRAPH]
1995 1996 1997 1998 1999
NET CHARGE-OFFS TO AVERAGE LOANS (IN PERCENTS) 0.31 0.46 0.42 0.35 0.36
TABLE 8 -- LOANS BY TYPE
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial $15,530,346 $14,073,944 $12,269,552 $11,244,872 $10,366,652
Commercial leasing 1,816,250 1,348,202 663,684 502,920 466,624
Real estate construction and development 2,184,476 2,136,597 1,699,948 1,415,912 1,267,666
Commercial real estate mortgage 8,851,504 8,409,474 7,714,136 7,340,963 7,051,134
Residential real estate mortgage 8,779,037 10,856,161 11,853,504 9,059,509 8,428,285
Credit card 1,403,655 1,265,382 1,466,252 2,022,881 1,824,031
Retail leasing 2,006,839 1,439,515 1,084,429 787,785 458,414
Other retail 10,053,901 8,490,410 7,762,448 6,551,936 6,062,671
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans $50,626,008 $48,019,685 $44,513,953 $38,926,778 $35,925,477
- ---------------------------------------------------------------------------------------------------------------------------------
Percent of total loans by type
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial 30.6% 29.4% 27.7% 28.9% 28.8%
Commercial leasing 3.6 2.8 1.5 1.3 1.3
Real estate construction and development 4.3 4.4 3.8 3.6 3.5
Commercial real estate mortgage 17.5 17.5 17.3 18.9 19.6
Residential real estate mortgage 17.3 22.6 26.6 23.3 23.5
Credit card 2.8 2.6 3.3 5.2 5.1
Retail leasing 4.0 3.0 2.4 2.0 1.3
Other retail 19.9 17.7 17.4 16.8 16.9
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 9 -- SELECTED LOAN MATURITY DISTRIBUTION
OVER ONE
ONE YEAR THROUGH OVER
AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
Commercial $5,263,437 $10,454,695 $ 1,628,464 $17,346,596
Real estate 1,252,225 6,692,551 11,870,241 19,815,017
Retail 1,726,580 8,987,917 2,749,898 13,464,395
- ------------------------------------------------------------------------------------------------------------------
Total loans $8,242,242 $26,135,163 $16,248,603 $50,626,008
- ------------------------------------------------------------------------------------------------------------------
Total of loans due after one year with:
Predetermined interest rates $23,214,699
Floating interest rates 19,169,067
- ------------------------------------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 25
31
Nonaccrual loans decreased $7 million at December 31, 1999 to $208 million
compared to a $15 million increase in 1998. The decline in year-end 1999
nonperforming loans was led by decreases in residential mortgage loans, retail
loans and construction loans. These decreases were partially offset by an
increase in commercial and commercial mortgage loans.
Other real estate owned, which is carried at the lower of cost or fair value
less estimated selling costs, represents real estate of which Firstar has taken
ownership in partial or total satisfaction of loans. Other real estate owned was
$19 million at December 31, 1999, a $2 million decrease from $21 million at
December 31, 1998.
Loans past due 90 days or more decreased to $123 million at December 31, 1999
from $146 million at December 31, 1998. The decrease in 1999 was primarily in
the residential mortgage and commercial loan areas. These loans are on a full
accrual basis and are judged by management to be collectible in full.
[BAR GRAPH]
PLOT POINTS 1995 1996 1997 1998 1999
ALLOWANCE AS A PERCENTAGE OF NONPERFORMING LOANS (IN PERCENTS) 245 303 323 325 341
TABLE 10 -- SUMMARY OF LOAN LOSS EXPERIENCE
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Average loans $49,259,525 $46,673,396 $41,800,976 $37,191,126 $35,179,581
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of year $ 704,846 $ 657,098 $ 607,610 $ 579,310 $ 573,696
Acquired bank reserves 46,443 21,162 23,772 14,701
Transfer to Credit Card Master Trust (12,000)
Charge-offs:
Commercial (86,131) (77,341) (53,052) (61,438) (36,469)
Commercial real estate (10,217) (11,492) (8,733) (11,126) (18,051)
Residential real estate (12,638) (7,141) (4,417) (6,021) (4,875)
Credit card (67,139) (69,810) (116,129) (111,550) (66,858)
Other retail (75,855) (69,920) (59,889) (43,320) (36,927)
- ---------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (251,980) (235,704) (242,220) (233,455) (163,180)
- ---------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 28,437 26,325 20,526 19,354 18,037
Commercial real estate 5,905 5,453 6,387 9,097 7,243
Residential real estate 547 1,959 1,229 2,910 1,731
Credit card 16,357 15,538 18,081 12,880 12,032
Other retail 23,485 22,944 20,196 17,642 14,981
- ---------------------------------------------------------------------------------------------------------------------------------
Total recoveries 74,731 72,219 66,419 61,883 54,024
- ---------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (177,249) (163,485) (175,801) (171,572) (109,156)
Provision charged to earnings 187,301 164,790 204,127 176,100 112,069
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 714,898 $ 704,846 $ 657,098 $ 607,610 $ 579,310
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans:
Commercial 0.35% 0.35% 0.25% 0.37% 0.17%
Commercial real estate 0.05 0.08 0.03 0.03 0.13
Residential real estate 0.12 0.04 0.03 0.04 0.04
Credit card 4.00 4.24 5.66 5.38 3.41
Other retail 0.48 0.50 0.49 0.36 0.33
Total loans 0.36 0.35 0.42 0.46 0.31
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to end of
year loans 1.41 1.47 1.48 1.56 1.61
- ---------------------------------------------------------------------------------------------------------------------------------
26 FIRSTAR CORPORATION
32
TABLE 11 -- NONPERFORMING ASSETS
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Loans on nonaccrual status:
Commercial $ 89,168 $ 82,366 $ 99,112 $ 94,342 $108,907
Commercial mortgage 64,042 61,074 47,070 56,609 84,065
Residential mortgage 36,806 52,071 42,197 32,914 32,113
Retail 17,980 19,648 11,952 12,628 8,279
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 207,996 215,159 200,331 196,493 233,364
- ---------------------------------------------------------------------------------------------------------------------------------
Loans which have been renegotiated:
Commercial 87 66 91 679 1,005
Commercial mortgage 1,577 1,435 2,459 3,637 2,378
Residential mortgage 678
Retail 9
- ---------------------------------------------------------------------------------------------------------------------------------
Total renegotiated loans 1,664 1,501 3,237 4,316 3,383
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 209,660 216,660 203,568 200,809 236,747
Other real estate owned 19,272 20,835 26,917 26,693 31,343
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $228,932 $237,495 $230,485 $227,502 $268,090
- ---------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Commercial $ 12,836 $ 26,400 $ 28,178 $ 30,049 $ 24,410
Commercial mortgage 13,866 13,423 17,762 30,702 11,183
Residential mortgage 47,778 65,045 32,144 26,886 28,658
Retail 48,280 41,253 41,859 56,405 39,265
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more $122,760 $146,121 $119,943 $144,042 $103,516
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage of nonperforming loans to loans 0.41% 0.45% 0.46% 0.52% 0.66%
Percentage of nonperforming assets to loans and other
real estate owned 0.45 0.49 0.52 0.58 0.75
Percentage of allowance for loan losses to
nonperforming loans 341 325 323 303 245
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 12 -- COMPOSITION OF NONPERFORMING LOANS
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------- -----------------------
NONPERFORMING LOANS NONPERFORMING LOANS
----------------------------------------------- 90 DAYS -----------------------
NON- PERCENTAGE OR MORE NON-
(DOLLARS IN THOUSANDS) ACCRUAL RENEGOTIATED TOTAL OF LOANS PAST DUE ACCRUAL RENEGOTIATED
- -------------------------------------------------------------------------------------------------------------------
Commercial loans:
Corporate $ 76,382 $ 87 $ 76,469 0.49% $ 12,819 $ 75,950 $ 66
Commercial leasing 12,786 12,786 0.70 17 6,416
- -------------------------------------------------------------------------------------------------------------------
Total commercial loans 89,168 87 89,255 0.51 12,836 82,366 66
- -------------------------------------------------------------------------------------------------------------------
Real estate loans:
Residential 36,806 36,806 0.42 47,778 52,071
Commercial mortgage 57,733 1,577 59,310 0.67 11,281 49,897 1,435
Construction/ land
development 6,309 6,309 0.29 2,585 11,177
- -------------------------------------------------------------------------------------------------------------------
Total real estate loans 100,848 1,577 102,425 0.52 61,644 113,145 1,435
- -------------------------------------------------------------------------------------------------------------------
Retail loans:
Other retail 12,563 12,563 0.12 25,827 16,529
Credit cards 4,960 4,960 0.35 20,210 2,629
Retail leasing 457 457 0.02 2,243 490
- -------------------------------------------------------------------------------------------------------------------
Total retail loans 17,980 17,980 0.13 48,280 19,648
- -------------------------------------------------------------------------------------------------------------------
Total loans $207,996 $1,664 $209,660 0.41% $122,760 $215,159 $1,501
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
--------------------------------
NONPERFORMING LOANS
--------------------- 90 DAYS
PERCENTAGE OR MORE
(DOLLARS IN THOUSANDS) TOTAL OF LOANS PAST DUE
- -----------------------------
Commercial loans:
Corporate $ 76,016 0.54% $ 26,400
Commercial leasing 6,416 0.48
- -----------------------------
Total commercial loans 82,432 0.53 26,400
- -----------------------------
Real estate loans:
Residential 52,071 0.48 65,045
Commercial mortgage 51,332 0.61 10,444
Construction/ land
development 11,177 0.52 2,979
- -----------------------------
Total real estate loans 114,580 0.54 78,468
- -----------------------------
Retail loans:
Other retail 16,529 0.19 21,503
Credit cards 2,629 0.21 18,280
Retail leasing 490 0.03 1,470
- -----------------------------
Total retail loans 19,648 0.18 41,253
- -----------------------------
Total loans $216,660 0.45% $146,121
- -----------------------------
BANK WITHOUT BOUNDARIES 27
33
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 Firstar
from GNMA pools it services or from third parties. By purchasing delinquent
loans out of pools, Firstar is able to retain the benefit of the net interest
rate differential between the coupon rate Firstar (as servicer) would otherwise
be obligated to pay the GNMA security holder and Firstar's cost of funds. Most
of Firstar'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 Firstar remained as
servicer. The same risk from foreclosure or loss of interest exists for Firstar
as servicer or owner of the loan. At December 31, 1999, total loans included
$355 million of these FHA/VA buyout loans.
Responsibility for the establishment of policy and direction of the loan
portfolio lies with the Credit Policy Management Group. Composed of members of
senior management, this group determines and oversees the execution of
strategies for the growth and development of the loan portfolio. To maintain the
level of credit risk at an appropriate level, the group sets underwriting
standards and internal lending limits and provides for proper diversification by
monitoring and placing constraints on concentrations of credit within the
portfolio on a consolidated basis. In monitoring the level of credit risk within
the loan portfolio, Firstar utilizes a corporate-wide loan tracking program. As
part of this program, risk ratings are individually assigned to each commercial
and commercial real estate loan within the portfolio and are reported to
management on a monthly basis. Risk ratings are independently reviewed for
propriety by Firstar's loan review department. The system provides for the
proper measurement of the level of risk within the portfolio and facilitates
appropriate management and control.
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. The recorded
investment in impaired loans at December 31, 1999 was $153.2 million, compared
to $145.3 million at December 31, 1998. The related valuation allowance (as
calculated under SFAS No. 114) on impaired loans at December 31, 1999 was $8.2
million. In addition to the valuation for impaired loans, the adequacy of the
total allowance for loan losses is monitored on a continual basis and is based
on management's evaluation of several key factors, including: the quality of the
current loan portfolio, current economic conditions, concentrations in loan
types, geographic areas and industries, evaluation of significant problem loans,
an analysis of periodic loan reviews, historical charge-off and recovery
experience and other pertinent information. These factors are taken in
conjunction with a mathematical analysis of the wholesale and retail portfolios
to determine identifiable losses. It is these identifiable losses for which
reserves are specifically allocated. These estimates are reviewed continually
and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known.
For 2000, management expects net charge-offs of approximately .40 to .45 percent
of average loans. The estimated net charge-offs for the various loan portfolios
are as follows: commercial loans and leasing $68 million, commercial real estate
and construction $7 million, residential mortgages $8 million, credit card loans
$58 million, and other retail loans $70 million.
Management believes that the allowance for loan losses at December 31, 1999 was
adequate to absorb all anticipated losses existing in the loan portfolio as of
that date. The allowance for loan losses is based on estimates and ultimate
losses may vary from current estimates.
INVESTMENT SECURITIES
Total investment securities were $13.1 billion at December 31, 1999 compared
to $15.9 billion at December 31, 1998, a decrease of $2.8 billion or 17.4%. The
decrease was primarily due to the Mercantile balance sheet restructuring as well
as maturities and prepayments of mortgage securities. The assets related to the
Mercantile balance sheet restructuring were identified by management as having
risk characteristics which did not align with Firstar's risk management
policies. Due to a rise in interest rates subsequent to the announcement of the
Mercantile merger, the balance sheet restructuring completed at the end of
September 1999 resulted in realized investment portfolio security losses of
$177.7 million. The assets sold in connection with the restructuring were
previously carried on Mercantile's balance sheet at fair value, with net
unrealized losses carried in stockholders' equity as a component of other
comprehensive income. Specifically, the restructuring, which totaled $4.5
billion of investment securities, included the following: the sale of $2.4
billion in U.S. government agency callable securities, $1.9 billion in fixed
rate pass-through mortgage-backed securities and $175.0 million non-agency
securities out of compliance with Firstar's investment policies. The proceeds
from these sales were used to reduce short-term borrowed funds and to fund the
purchase of short-term investment securities.
Firstar's investment portfolio serves four important functions. First, it is a
vehicle for adjusting balance sheet rate sensitivity and protecting against the
impact of changes in interest rate movements by managing the purchases and
maturities of securities; second, it is a means for the investment of excess
funds depending on loan demand; third, the available-for-sale securities provide
potential immediate liquidity; and fourth, it serves as collateral for public
deposits. The investment portfolio is structured to maximize the return on
invested funds within acceptable interest rate risk guidelines and to meet
pledging requirements while giving consideration to loan demand, credit risk,
future liquidity needs, balance sheet strategies and the outlook for trends in
interest rates.
As of December 31, 1999, Firstar's investment securities portfolio included
$12.9 billion in securities classified as available-for-sale and $194 million
classified as held-to-maturity. As of December 31, 1999, Firstar reported a net
unrealized loss of $146 million on investment securities, with an offsetting
decrease to shareholders' equity of $95 million (net of tax). In 1999, the
unrealized net loss reported as a separate component of equity changed from a
gain of $141.0 million at year-end 1998 to a $95.0 million loss at year-end 1999
thereby decreasing equity by $236.0 million net of tax. This change was
primarily the result of the increase in interest rates in the second half of
1999. Firstar held no trading securities at year-end 1999 and an immaterial
amount last year-end.
Table 13 provides information as to the composition of Firstar's investment
securities portfolio at December 31, 1999. As noted the investment portfolio is
primarily made up of GNMA adjustable rate mortgages, FNMA and FHLMC pass-through
securities (primarily balloons and 15 year fixed rates), CMOs, U.S. Treasuries
and "bank qualified" municipal securities. The CMOs consist of planned
28 FIRSTAR CORPORATION
34
amortization classes ("PACs") and sequential pay bonds that are in the first or
second classes. Credit risk has been minimized by restricting purchases of
mortgage-backed securities to U.S. Agency backed or AAA rated securities. To
reduce interest rate risk associated with these securities, purchases are
restricted to securities with relatively short maturities and/or durations.
The average maturity of the overall portfolio increased to 6.8 years at the end
of 1999 from 4.2 years at year-end 1998. The overall taxable equivalent yield of
the portfolio was stable during 1999 at 6.58 percent compared with 6.68 percent
in 1998.
DEPOSITS
Total deposits were $51.9 billion at December 31, 1999 compared to $54.3
billion at December 31, 1998, a $2.4 billion, or 4.5 percent, decrease. The
decline since December 31, 1998 was partially due to branch sales (and the
related deposits of $127 million) as well as the managed continued run-off of
non-strategic higher cost retail certificates of deposit. Additionally,
compensating balances relating to Mercantile's tax payment processing business
were $600 million lower at year-end 1999 than last year-end.
Noninterest bearing deposits declined by $802 million and includes the impact of
the $600 million compensating balance reduction mentioned previously. Saving
accounts declined by $690 million, or 17.1 percent, as depositors sought higher
rate investment alternatives. NOW accounts and money market accounts remained
relatively level from year to year. Large denomination CDs, both domestic and
foreign, increased by $137 million. These deposits are for the most part viewed
as purchased funds and are managed to levels deemed appropriate given
alternative funding sources. All other time deposits, which are smaller balance
CDs, declined by $1.1 billion, or 6.1 percent during 1999.
TABLE 13 -- INVESTMENT SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE WEIGHTED
AMORTIZED MARKET MATURITY AVERAGE AMORTIZED MARKET
AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) COST VALUE IN YEARS YIELD COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agencies:
Within one year $ 551,712 $ 551,993 0.29 4.80% $ $
One through five years 1,189,062 1,188,016 2.45 6.86
Five through ten years 38,172 37,019 7.48 6.45
Over ten years 8,771 8,984 14.47 7.42
- ----------------------------------------------------------------------------------------------------------------------
Total 1,787,717 1,786,012 1.95 6.22
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Within one year 98,793 98,369 0.73 6.20 45,411 45,411
One through five years 2,982,054 2,941,098 3.30 6.78
Five through ten years 1,821,580 1,788,424 7.31 6.64
Over ten years 1,752,197 1,726,961 19.68 6.80
- ----------------------------------------------------------------------------------------------------------------------
Total 6,654,624 6,554,852 8.67 6.74 45,411 45,411
- ----------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions:
Within one year 226,071 226,794 0.42 7.34 24,960 26,571
One through five years 942,708 948,432 3.17 7.49 41,683 43,578
Five through ten years 322,211 319,321 7.32 7.54 38,606 44,558
Over ten years 107,695 109,348 13.71 7.51 43,794 40,192
- ----------------------------------------------------------------------------------------------------------------------
Total 1,598,685 1,603,895 4.33 7.48 149,043 154,899
- ----------------------------------------------------------------------------------------------------------------------
Other debt securities:
Within one year 11,345 11,302 0.75 6.34
One through five years 1,400,343 1,364,430 3.46 6.28
Five through ten years 100,666 95,794 5.40 5.99
Over ten years 279,942 270,710 27.48 7.06
- ----------------------------------------------------------------------------------------------------------------------
Total 1,792,296 1,742,236 7.31 6.38
- ----------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock and other equity
securities 795,407 795,360
Money market funds 437,058 437,058
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities $13,065,787 $12,919,413 $194,454 $200,310
- ----------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
- ---------------------------------------------- -------------------
AVERAGE WEIGHTED
MATURITY AVERAGE
AS OF DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) IN YEARS YIELD
- ---------------------------------------------- -------------------
U.S. Treasury and agencies:
Within one year %
One through five years
Five through ten years
Over ten years
- ----------------------------------------------
Total
- ----------------------------------------------
Mortgage-backed securities:
Within one year 0.48 7.92
One through five years
Five through ten years
Over ten years
- ----------------------------------------------
Total 0.48 7.92
- ----------------------------------------------
Obligations of states and political subdivisio
Within one year 0.58 8.84
One through five years 2.02 8.78
Five through ten years 7.65 6.01
Over ten years 12.24 6.01
- ----------------------------------------------
Total 6.24 7.27
- ----------------------------------------------
Other debt securities:
Within one year
One through five years
Five through ten years
Over ten years
- ----------------------------------------------
Total
- ----------------------------------------------
Federal Reserve Bank stock and other equity
securities
Money market funds
- ----------------------------------------------
Total investment securities
- ----------------------------------------------
Note: Information related to mortgage-backed securities included above is
presented based upon weighted average maturities anticipating future
prepayments. Average yields are presented on a fully-taxable equivalent
basis. Yields on available-for-sale securities are computed based on
historical cost balances.
BANK WITHOUT BOUNDARIES 29
35
Table 14 provides a summary of total deposits by type at year-end for each of
the last five years. Table 15 provides maturity distribution for domestic time
deposits $100,000 and over.
TABLE 15 -- MATURITY OF DOMESTIC TIME DEPOSITS
$100,000 AND OVER
As of December 31, 1999 (dollars in thousands)
- -----------------------------------------------------------------
Three months or less $1,845,178
Over three months through six months 755,737
Over six months through twelve months 495,144
Over twelve months 657,467
- -----------------------------------------------------------------
Total $3,753,526
- -----------------------------------------------------------------
The low interest rate environment over the last several years (particularly for
bank core deposits) has prompted many customers to increase their liquidity by
increasing funds in immediately accessible deposit vehicles and reducing the
amount in longer term instruments such as certificates of deposit. As short-term
market rates and savings rates were low in 1998 and increased moderately in
1999, customers continued to transfer their funds out of certificates of
deposits and savings accounts into tiered rate money market accounts. Firstar
has also noted a continued shift by customers out of traditional bank products
to other nonbank or nondeposit financial instruments or investments, which
Firstar aggressively markets.
LIQUIDITY
The Asset/Liability Policy Committee ("ALPC") establishes policies, as well
as analyzes and manages Firstar's liquidity to ensure that adequate funds are
always available at reasonable rates to meet normal operating requirements in
addition to unexpected customer demands for funds, such as high levels of
deposit withdrawals or loan demand, in a timely and cost-effective manner. The
most important factor in the preservation of liquidity is the maintenance of
public confidence which facilitates the retention and growth of a large, stable
supply of core deposits and funds. Ultimately, public confidence is generated
through profitable operations and a strong capital position. Firstar's strong
record in both of these areas has enabled it to succeed in developing a large
and reliable base of core funding from within its market areas. Liquidity
management is viewed from a long-term and short-term perspective, as well as
from a liability and asset perspective. Management monitors liquidity through a
periodic review of maturity profiles, yield and rate behaviors, and loan and
deposit forecasts to minimize funding risks.
The ALPC's liquidity policies limit the amount Firstar's subsidiary banks can
borrow, subject to Firstar's ability to borrow funds in the capital markets in
an efficient and cost effective manner. In addition, Firstar's strategic
liquidity and contingent planning are subject to the amount of asset liquidity
present in the balance sheet. The ALPC periodically reviews Firstar's ability to
meet funding deficiencies due to adverse business events. These funding needs
are then matched up with specific asset-based sources to ensure sufficient funds
are available. Also, strategic liquidity policy requires Firstar to diversify
its national market funding sources to avoid concentration in any one market. As
of December 31, 1999, Firstar was 83 percent core funded from customers within
its market area.
Firstar's subsidiary banks are members of various Federal Home Loan Banks, and
Firstar maintains a Grand Cayman office for issuing eurodollar certificates of
deposit. At December 31, 1999, there was $774 million in eurodollar deposits
outstanding and $2.6 billion borrowed from the Federal Home Loan Banks. Firstar
Bank, N.A. also has established relationships with dealers to issue national
market retail certificates of deposits. At December 31, 1999, there were $45
million of deposits outstanding in this program. In the fourth quarter of 1999
Firstar Bank, N.A. issued a $500 million subordinate bank note facility.
TABLE 14 -- DEPOSITS BY TYPE
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Non interest-bearing deposits $10,299,994 $11,102,247 $ 9,517,479 $ 9,073,183 $ 7,965,347
Interest-bearing deposits:
Savings accounts 3,349,308 4,039,413 3,788,415 3,867,429 4,087,496
NOW accounts 6,980,734 7,130,540 6,307,608 5,687,923 5,658,561
Money market deposit accounts 10,263,894 10,111,250 8,054,871 7,033,153 5,989,524
Time deposits $100,000 and over -- domestic 3,753,526 3,565,425 3,446,154 3,278,624 3,151,864
Foreign deposits $100,000 and over 773,926 825,347 771,121 459,529 375,522
All other time deposits 16,465,029 17,537,940 17,409,874 15,054,679 14,685,468
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $51,886,411 $54,312,162 $49,295,522 $44,454,520 $41,913,782
- ---------------------------------------------------------------------------------------------------------------------------------
Percent of total deposits by type
- ---------------------------------------------------------------------------------------------------------------------------------
Non interest-bearing deposits 19.9% 20.5% 19.3% 20.4% 19.0%
Interest-bearing deposits:
Savings accounts 6.4 7.4 7.7 8.7 9.8
NOW accounts 13.5 13.1 12.8 12.8 13.5
Money market deposit accounts 19.8 18.6 16.3 15.8 14.3
Time deposits $100,000 and over -- domestic 7.2 6.6 7.0 7.4 7.5
Foreign deposits $100,000 and over 1.5 1.5 1.6 1.0 0.9
All other time deposits 31.7 32.3 35.3 33.9 35.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
30 FIRSTAR CORPORATION
36
Additionally, both Firstar Bank, N.A. in Milwaukee and Mercantile Bank in St.
Louis function as major banks in the Midwest with significant correspondent bank
networks and corporate account bases. Accordingly they also have access to
national fed funds, repurchase agreements and certificate of deposit markets,
which can be considered stable sources of funds, similar to core deposits. The
debt ratings noted in Table 16 assist Firstar and its subsidiary banks in their
abilities to gather funds from the capital markets.
TABLE 16 -- DEBT RATINGS
THOMPSON
STANDARD & BANK
AS OF DECEMBER 31, 1999 POOR'S MOODY'S WATCH FITCH
- ---------------------------------------------------------------------
Holding company:
Senior debt A- A2 A+ A
Subordinated debt BBB+ A3 A-
Commercial paper A-2 P-1 TBW-1 F-1
Bank:
Senior debt A A1 AA- A+
Subordinated debt A- A2 A+ A
Short term CDs A-1 P-1 TBW-1 F-1
- ---------------------------------------------------------------------
The parent company obtains cash to meet its obligations from dividends collected
from its subsidiaries. At December 31, 1999, the parent company held $1.2
billion in cash, liquid investments and subsidiary loans. The parent company's
routine cash requirements consist primarily of operating expenses, dividends to
shareholders, principal and interest payments on debt, and funds used in
acquisitions. Operating expenses are funded by subsidiary bank management fees,
while shareholder dividends and debt service are satisfied by subsidiary bank
dividends. Federal banking laws regulate the amount of dividends that may be
declared by banking subsidiaries. During 1999, Firstar's subsidiary banks could
have provided an additional $86 million in dividends to the parent company,
without additional regulatory approval, and still exceeded minimum regulatory
capital ratios.
Firstar issues commercial paper notes through a private placement memorandum up
to an aggregate amount of $200 million, with maturities of up to 270 days. At
December 31, 1999 there was $139 million in commercial paper outstanding.
Firstar also established a $1 billion universal shelf registration program which
had $550 million of notes issued at December 31, 1999. The proceeds from the
commercial paper and notes programs are used to provide funding to Firstar
Finance, Inc. and for general corporate purposes.
Firstar's consolidated long-term debt decreased $419 million to $5.0 billion at
December 31, 1999. This decrease was the result of payoffs and maturities of
Federal Home Loan Bank and subordinated notes, partially offset by the issuance
of new debt by the parent company and Firstar Bank, N.A.
In December 1996 and again in June 1997, Firstar issued $150 million of
Corporation-obligated mandatorily redeemable Capital Securities. Additionally,
Mercantile issued $150 million of similar securities in January 1997. The $450
million outstanding at December 31, 1999 qualifies as tier 1 capital for
regulatory capital purposes. The proceeds from the sale of these securities were
used for general corporate purposes.
CAPITAL RESOURCES
Total shareholders' equity was $6.3 billion at December 31, 1999, a decrease
of 4.5 percent from the $6.6 billion reported at December 31, 1998. This
decrease is the result of strong corporate earnings offset by dividend payments,
merger-related charges and share repurchases. Additionally, unrealized losses on
available-for-sale securities decreased equity $236 million in 1999.
On December 14, 1999 Firstar increased its dividend rate per common share 62.5
percent from $.10 per quarter to $.1625 per quarter. The anticipated annual
dividend is now $.65 per share compared to the former $.40 per share. This
follows an increase of 22.2 percent in 1998 from 1997. Excluding merger-related
charges and other nonrecurring items, the dividend payout ratio for 1999
increased to 37.0 percent, following payout ratios of 30.8 percent in 1998 and
29.3 percent in 1997.
Management has established financial objectives designed to monitor future
capital needs. Firstar's dividend policy is influenced by the belief that most
shareholders are interested in long-term performance as well as current yield.
The current dividend payout level is considered reasonable given Firstar's
present cash flow position, level of earnings and the strength of its subsidiary
banks' capital. Future dividends will be determined based on Firstar's results
of operations, growth expectations, financial condition, regulatory constraints
and other factors deemed relevant by the Board of Directors.
In March 1999, the Board of Directors approved a three-for-one stock split and a
15 million share common stock repurchase program. The repurchase of these shares
was completed in the third quarter of 1999. On October 12, 1999, the Board of
Directors approved an additional repurchase program of 17 million shares to be
completed during the next two years. The 8.4 million common shares acquired in
the fourth quarter will be held as treasury shares for reissuance for various
corporate purposes, including employee stock option plans. Total treasury shares
at December 31, 1999 are 9.0 million representing less than 1.0% of total shares
outstanding.
[BAR GRAPH]
PLOT POINTS 1995 1996 1997 1998 1999
COMMON DIVIDENDS PER SHARE* (IN DOLLARS) 0.18 0.21 0.27 0.33 0.46
BANK WITHOUT BOUNDARIES 31
* Based on historical Star Banc amounts where applicable.
37
Banking industry regulators define minimum capital requirements for banks and
bank holding companies. Firstar's tier 1 and total risk-based capital ratios as
of December 31, 1999 amounted to 8.10 percent and 10.79 percent, respectively,
well above the minimum requirements of 4.00 percent for tier 1 and 8.00 percent
for total risk-based capital. This compares to tier 1 and total risk-based
capital ratios of 9.25 percent and 11.62 percent at December 31, 1998.
Regulatory authorities have also established a minimum "leverage" ratio of 4.00
percent, which is defined as tier 1 equity to average quarterly assets. For the
fourth quarter of 1999 Firstar's leverage ratio improved to 7.61 percent,
compared to 7.35 percent a year earlier. The decline in the tier 1 and total
risk-based capital ratios in 1999 was due primarily to the changes in the
balance sheet mix of earning assets, an increase in off-balance sheet items and
the reduction of equity through the stock buyback program.
Firstar's subsidiary banks all maintain risk-based capital and leverage ratios
within the "well capitalized" category as defined by the FDIC. The "well
capitalized" category requires tier 1 and total risk-based capital ratios of at
least 6.00 percent and 10.00 percent, respectively, and a minimum leverage ratio
of 5.00 percent.
Table 17 provides a summary of the components of tier 1 and total risk-based
capital, the amounts of risk-weighted assets and capital ratios as defined by
the regulatory agencies as of December 31, 1999 and 1998.
TABLE 17 -- REGULATORY CAPITAL RATIOS
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------
Tier 1 capital:
Shareholders' equity $ 6,308,636 $ 6,603,668
Trust preferred securities 448,677 448,629
Less: Unrealized gains/(losses) on
securities (95,018) 141,007
Goodwill and other adjustments 1,525,213 1,645,555
- -------------------------------------------------------------------
Total tier 1 capital 5,327,118 5,265,735
Tier 2 capital components:
Qualifying long-term debt 1,052,663 639,083
Unrealized net gain on equity
securities 149
Allowance for loan losses 718,395 706,476
- -------------------------------------------------------------------
Total risk-based capital $ 7,098,176 $ 6,611,443
- -------------------------------------------------------------------
Risk-Weighted Assets:
Risk-weighted assets on-balance-sheet $54,199,472 $49,374,197
Risk-weighted assets off-balance-sheet 11,568,109 7,532,107
- -------------------------------------------------------------------
Net risk-weighted assets $65,767,581 $56,906,304
- -------------------------------------------------------------------
Fourth quarter average assets, net of
adjustments $69,983,869 $71,629,539
- -------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 8.10% 9.25%
Total 10.79 11.62
Tier 1 leverage ratio 7.61 7.35
- -------------------------------------------------------------------
FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THE MATTERS DISCUSSED OR
INCORPORATED BY REFERENCE IN THE ANNUAL REPORT MAY CONTAIN CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES INCLUDING, BUT
NOT LIMITED TO, ECONOMIC CONDITIONS, PRODUCT DEMAND AND INDUSTRY CAPABILITY,
COMPETITIVE PRODUCTS AND PRICING, NEW PRODUCT DEVELOPMENT, THE REGULATORY AND
TRADE ENVIRONMENT AND OTHER RISKS INDICATED IN FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
[BAR GRAPH]
PLOT POINTS 1995* 1996* 1997* 1998* 1999
COMMON STOCK PRICE BOOK VALUE (IN DOLLARS)
Book value per share (a) 3.89 4.23 4.45 5.38 6.47
High Stock Price (a) 6.92 10.46 19.33 31.31 35.33
Low Stock Price (a) 4.03 6.24 9.90 17.71 19.56
Closing Price @ 12/31 (a) 6.61 10.21 19.13 31.00 21.13
* Based on historical. Star Banc amounts where applicable.
32 FIRSTAR CORPORATION
38
RESPONSIBILITY FOR FINANCIAL
STATEMENTS OF FIRSTAR CORPORATION
Responsibility for the financial information presented in the Annual Report
rests with Firstar Corporation's management. Firstar believes that the
consolidated financial statements reflect fairly the substance of transactions
and present fairly Firstar's financial position and results of operations in
conformity with generally accepted accounting principles appropriate in the
circumstances applying certain estimates and judgments as required.
In meeting its responsibilities for the reliability of the financial statements,
Firstar depends on its system of internal controls. The system is designed to
provide reasonable assurance that assets are safeguarded and transactions are
executed in accordance with the appropriate corporate authorization and recorded
properly to permit the preparation of financial statements in accordance with
generally accepted accounting principles. Although control procedures are
designed to achieve these objectives, it must be recognized that errors or
irregularities may nevertheless occur. Also, estimates and judgments are
required to assess and balance the relative cost and expected benefits of the
controls. Firstar believes that its internal controls provide reasonable
assurance that errors or irregularities that could be material to the financial
statements are prevented or would be detected within a timely period by
employees in the normal course of performing their assigned functions. An
important element of the system is a continuing and extensive internal audit
program.
The board of directors of Firstar has an Audit Committee composed of directors
who are not officers or employees of Firstar. The committee meets periodically
and privately with management, the internal auditors and the independent public
accountants to consider audit results and to discuss internal accounting
control, auditing and financial reporting matters.
PricewaterhouseCoopers LLP, independent public accountants, have been engaged to
render an independent professional opinion on Firstar's financial statements.
Their audit is conducted in accordance with generally accepted auditing
standards and forms the basis for their report as to the fair presentation, in
the financial statements, of Firstar's financial position, operating results and
cash flows.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Firstar Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Firstar Corporation and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 14, 2000
BANK WITHOUT BOUNDARIES 33
39
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,288,291 $ 4,110,168
Money market investments 896,910 495,316
Trading securities 129,294
Investment securities:
Available-for-sale 12,919,413 15,641,934
Held-to-maturity (fair value $200,310 and $236,623,
respectively) 194,454 233,014
- -------------------------------------------------------------------------------------------------------------------------
Total securities 13,113,867 15,874,948
Loans held for sale 624,680 1,757,833
Loans:
Commercial loans 17,346,596 15,422,146
Real estate loans 19,815,017 21,402,232
Retail loans 13,464,395 11,195,307
- -------------------------------------------------------------------------------------------------------------------------
Total loans 50,626,008 48,019,685
Allowance for loan losses 714,898 704,846
- -------------------------------------------------------------------------------------------------------------------------
Net loans 49,911,110 47,314,839
Premises and equipment 1,002,887 1,116,712
Acceptances -- customers' liability 15,149 38,569
Other assets 3,934,939 3,438,337
- -------------------------------------------------------------------------------------------------------------------------
Total assets $72,787,833 $74,276,016
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing deposits $10,299,994 $11,102,247
Interest-bearing deposits 41,586,417 43,209,915
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 51,886,411 54,312,162
Short-term borrowings 8,302,019 6,645,968
Long-term debt 5,038,383 5,457,203
Acceptances outstanding 15,149 38,569
Other liabilities 1,237,235 1,218,446
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 66,479,197 67,672,348
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock:
Issued -- 984,579,636 in 1999
-- 987,596,220 in 1998 9,846 9,876
Surplus 1,926,239 2,170,024
Retained earnings 4,660,463 4,302,420
Treasury stock, at cost:
Held -- 9,033,176 in 1999
-- 2,223,365 in 1998 (192,894) (19,659)
Accumulated other comprehensive income (95,018) 141,007
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,308,636 6,603,668
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $72,787,833 $74,276,016
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
34 FIRSTAR CORPORATION
40
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $3,968,923 $3,928,140 $3,645,628
Interest and fees on loans held for sale 102,685 84,844 27,633
Interest on investment securities:
Taxable 828,975 906,911 711,309
Non-taxable 92,832 95,362 89,887
Interest on money market investments 21,920 28,037 31,995
Interest on trading securities 6,377 8,894 7,208
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 5,021,712 5,052,188 4,513,660
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,678,839 1,843,674 1,647,355
Interest on short-term borrowings 368,252 381,985 342,655
Interest on long-term debt 331,475 290,908 155,862
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,378,566 2,516,567 2,145,872
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,643,146 2,535,621 2,367,788
Provision for loan losses 187,301 164,790 204,127
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,455,845 2,370,831 2,163,661
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 427,346 375,258 338,123
Mortgage banking income 151,736 202,590 93,399
Retail deposit fees 181,348 177,762 163,283
Cash management income 142,037 117,466 95,952
Credit card income 112,672 93,670 99,377
ATM income 38,602 36,865 29,523
Investment securities gains-net 14,762 16,530 3,733
All other income 334,068 345,210 276,825
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,402,571 1,365,351 1,100,215
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 862,092 953,309 860,020
Pension and other employee benefits 137,550 172,990 176,175
Equipment expense 147,821 160,737 146,910
Occupancy expense-net 167,788 169,467 153,045
Amortization of intangible assets 120,831 114,983 75,462
All other expense 539,304 581,038 571,741
Merger and restructuring expenses 470,463 377,292 121,393
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,445,849 2,529,816 2,104,746
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,412,567 1,206,366 1,159,130
Income taxes 537,249 400,916 398,414
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 875,318 $ 805,450 $ 760,716
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE
Basic earnings per common share $ 0.89 $ 0.83 $ 0.83
Diluted earnings per common share 0.87 0.81 0.82
Dividends declared on common stock 0.4625 0.33 0.27
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares (000's) 987,488 970,420 913,042
Weighted average diluted common shares (000's) 1,002,754 989,085 932,407
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
BANK WITHOUT BOUNDARIES 35
41
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
PREFERRED COMMON RETAINED TREASURY COMPREHENSIVE
(DOLLARS IN THOUSANDS) STOCK STOCK SURPLUS EARNINGS STOCK INCOME
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1997 $11,344 $ 9,319 $1,524,802 $3,545,129 $(169,601) $ 35,136
Net income 760,718
Unrealized gain on securities available for
sale 29,598
Reclassification adjustment for gains
realized in net income (3,724)
Income taxes (10,446)
Comprehensive income
Cash dividends declared on common stock (356,166)
Cash dividends declared on preferred stock (483)
Conversion of preferred stock into common
stock (6,036) (518) (3,780) 10,334
Issuance of common stock and treasury shares 30 17,160 (2,339) 53,877
Issuance of common stock in acquisitions 257 352,520 (273) 309,794 7,506
Purchase of treasury stock (427,012)
Purchase and retirement of common stock and
treasury stock (165) (103,054) (122,611) 50,346
Shares reserved to meet deferred compensation
obligations 2,868 (923)
Amortization of restricted stock 432
ESOP debt reduction, net
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 5,308 9,441 1,794,210 3,820,195 (173,185) 58,070
Net income 805,450
Unrealized gain on securities available for
sale 142,241
Reclassification adjustment for gains
realized in net income (16,530)
Income taxes (45,009)
Comprehensive income
Cash dividends declared on common stock (461,361)
Cash dividends declared on preferred stock (83)
Conversion of preferred stock into common
stock (5,308) 9 4,715 492 64
Issuance of common stock and treasury shares 288 430,687 12,482 194,324
Issuance of common stock in acquisitions 180 31,003 125,245 357 2,235
Purchase of treasury stock (140,008)
Purchase and retirement of common stock and
treasury stock (42) (106,989) 106,722
Shares reserved to meet deferred compensation
obligations 9,126 (7,933)
Amortization of restricted stock 7,272
ESOP debt reduction, net
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 9,876 2,170,024 4,302,420 (19,659) 141,007
Net income 875,318
Unrealized loss on securities available for
sale (527,472)
Reclassification adjustment for losses
realized in net income 162,971
Income taxes 128,476
Comprehensive income
Cash dividends declared on common stock (517,275)
Issuance of common stock and treasury shares 97 86,793 111,946
Purchase of treasury stock (627,086)
Retirement of treasury stock (127) (343,866) 343,993
Shares reserved to meet deferred compensation
obligations 2,088 (2,088)
Amortization of restricted stock 11,200
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ 9,846 $1,926,239 $4,660,463 $(192,894) $(95,018)
- ------------------------------------------------------------------------------------------------------------------------
EMPLOYEE
STOCK
OWNERSHIP
PLAN
SHARES
PURCHASED TOTAL
WITH SHAREHOLDERS'
(DOLLARS IN THOUSANDS) DEBT EQUITY
- --------------------------------------------- ---------------------------
BALANCE, JANUARY 1, 1997 $(2,451) $ 4,953,678
Net income 760,718
Unrealized gain on securities available for
sale 29,598
Reclassification adjustment for gains
realized in net income (3,724)
Income taxes (10,446)
-------------
Comprehensive income 776,146
Cash dividends declared on common stock (356,166)
Cash dividends declared on preferred stock (483)
Conversion of preferred stock into common
stock
Issuance of common stock and treasury shares 68,728
Issuance of common stock in acquisitions 669,804
Purchase of treasury stock (427,012)
Purchase and retirement of common stock and
treasury stock (175,484)
Shares reserved to meet deferred compensation
obligations 1,945
Amortization of restricted stock 432
ESOP debt reduction, net 605 605
- ---------------------------------------------
BALANCE, DECEMBER 31, 1997 (1,846) 5,512,193
Net income 805,450
Unrealized gain on securities available for
sale 142,241
Reclassification adjustment for gains
realized in net income (16,530)
Income taxes (45,009)
-------------
Comprehensive income 886,152
Cash dividends declared on common stock (461,361)
Cash dividends declared on preferred stock (83)
Conversion of preferred stock into common
stock (28)
Issuance of common stock and treasury shares 637,781
Issuance of common stock in acquisitions 159,020
Purchase of treasury stock (140,008)
Purchase and retirement of common stock and
treasury stock (309)
Shares reserved to meet deferred compensation
obligations 1,193
Amortization of restricted stock 7,272
ESOP debt reduction, net 1,846 1,846
- ---------------------------------------------
BALANCE, DECEMBER 31, 1998 6,603,668
Net income 875,318
Unrealized loss on securities available for
sale (527,472)
Reclassification adjustment for losses
realized in net income 162,971
Income taxes 128,476
-------------
Comprehensive income 639,293
Cash dividends declared on common stock (517,275)
Issuance of common stock and treasury shares 198,836
Purchase of treasury stock (627,086)
Retirement of treasury stock
Shares reserved to meet deferred compensation
obligations
Amortization of restricted stock 11,200
- ---------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ 6,308,636
- ---------------------------------------------
The accompanying notes are an integral part of these statements.
36 FIRSTAR CORPORATION
42
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 875,318 $ 805,450 $ 760,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 171,480 204,183 139,278
Intangible amortization 120,831 114,915 75,462
Provision for loan losses 187,301 164,790 204,127
Net (increase) decrease in trading securities 130,372 (43,759) (41,824)
Provision for deferred taxes 197,246 60,583 30,285
(Gain)/loss on sale of premises and
equipment -- net 5,555 (589) (8,209)
(Gain)/loss on sale of securities and other
assets -- net 157,261 (41,478) 19,769
(Gain)/loss on sale of mortgage loans (104,163) (93,086) (29,694)
Mortgage loans originated for sale in the
secondary market (6,117,100) (8,303,095) (3,250,980)
Proceeds from sale of mortgage loans 7,333,448 7,102,880 3,093,330
Net change in other assets and liabilities (310,173) 198,347 73,758
- ------------------------------------------------------------------------------------------------------------------
Total adjustments 1,772,058 (636,309) 305,302
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,647,376 169,141 1,066,018
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
securities 93,304 537,232 566,963
Proceeds from maturities of available-for-sale
securities 3,793,849 5,300,172 4,445,677
Proceeds from sales of available-for-sale securities 5,819,045 2,580,502 1,018,035
Purchase of held-to-maturity securities (19,978) (169,161) (641,358)
Purchase of available-for-sale securities (7,342,838) (8,195,068) (5,172,722)
Net change in loans (5,419,097) (1,536,953) (2,259,960)
Proceeds from sales of loans 2,415,120 914,432 530,728
Proceeds from sales of premises and equipment 24,168 22,630 30,985
Purchase of premises and equipment (154,965) (214,853) (198,732)
Purchases of bank owned life insurance (160,000) (125,000) (151,405)
Acquisitions, net of cash acquired (230,787) (231,537)
Sale of banking offices, net of cash received (paid) (116,961) 16,300 (193,058)
Net change due to acquisitions of branch offices 901,611 81,978
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,068,353) (198,943) (2,174,406)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (2,298,345) 531,562 (608,576)
Net change in short-term borrowings 1,661,248 (1,087,410) 757,358
Principal payments on long-term debt (2,653,270) (1,115,385) (45,519)
Proceeds from issuance of long-term debt 2,252,381 2,786,134 1,520,502
Proceeds from issuance of trust preferred securities 298,554
Proceeds from issuance of common stock 122,343 112,781 43,103
Purchase of treasury stock (627,086) (140,317) (614,271)
Shares reserved to meet deferred compensation
obligations 1,193 1,945
Dividends paid (456,577) (405,056) (352,861)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing
activities (1,999,306) 683,502 1,000,235
- ------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (420,283) 653,700 (108,153)
Cash and cash equivalents at beginning of year 4,605,484 3,951,784 4,059,937
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,185,201 $ 4,605,484 $ 3,951,784
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,354,667 $ 2,564,823 $ 2,103,927
Income taxes 199,420 263,282 366,943
Noncash transfer of loans to other real estate owned 71,335 61,247 40,067
Acquisitions and branch purchases/sales:
Assets acquired (sold) (4,560) 5,591,120 7,936,825
Liabilities (assumed)/sold 127,858 (5,628,013) (6,900,962)
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
BANK WITHOUT BOUNDARIES 37
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Firstar Corporation ("Firstar") and
subsidiaries follow generally accepted accounting principles and conform to
general practices within the banking industry. The following is a description of
the more significant accounting policies followed by Firstar.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Firstar and
all of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ from those
estimates. Financial statements have been restated to include historical
information of acquisitions accounted for as pooling-of-interests. Certain
amounts within the consolidated financial statements from prior years have been
restated to conform to the current year's presentation.
NATURE OF OPERATIONS
Firstar Corporation is a multi-state bank holding company headquartered in
Milwaukee, Wisconsin. Financial services are provided through approximately
1,200 banking offices in Wisconsin, Ohio, Missouri, Iowa, Minnesota, Illinois,
Kentucky, Kansas, Tennessee, Indiana, Arkansas, Arizona, and Florida. These
banking services include accepting demand, time and savings deposits; making
both secured and unsecured business and personal loans; providing trust and
investment management services to individuals and corporate customers; providing
correspondent banking services to other financial institutions; conducting
mortgage banking activities; providing international banking services;
conducting retail brokerage services; providing mutual fund custody services;
and other related banking activities.
INVESTMENT SECURITIES
When securities are purchased, they are classified in the held-to-maturity
portfolio, the available-for-sale portfolio, or as trading securities.
Held-to-maturity securities are debt securities that Firstar has the positive
intent and ability to hold to maturity. Held-to-maturity securities are reported
at historical cost adjusted for amortization of premiums and accretion of
discounts. Available-for-sale securities are debt and equity securities which
will be held for an indefinite period of time and may be sold from time to time
for asset/liability management purposes, in order to manage interest rate risk
or for liquidity needs. Available-for-sale securities are reported at fair
value. Unrealized gains or losses on these securities are included in
comprehensive income as a separate component of stockholders' equity, net of
tax. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in current
earnings. The cost of securities sold is determined on a specific identification
basis.
LOANS
Loans are stated at the principal amount outstanding, net of unearned
interest and unamortized origination fees and costs. Interest income on loans is
recognized using the effective interest method or methods that approximate the
effective interest method.
Loans held-for-sale are carried in the aggregate at lower of cost or fair value
after consideration of related loan sale commitments.
Loans are placed on nonaccrual status when, in the opinion of management, there
is a reasonable doubt as to future collectibility of interest or principal.
Loans are generally placed on nonaccrual status when they are past due 90 days
as to either principal or interest. However, loans that are well secured and in
the process of collection may not be placed on nonaccrual status, at the
discretion of senior management. All accrued interest receivable is reversed
when loans are placed on nonaccrual status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level adequate to absorb
probable loan and lease losses inherent in the portfolio. The allowance is based
upon a continuing review of loans which includes consideration of actual net
loan loss experience, changes in the size and character of the loan portfolio,
identification of problem situations which may affect the borrowers' ability to
repay, estimated value of underlying collateral and evaluation of current
economic conditions. With respect to loans which are deemed impaired, the
calculation of allowance levels is based upon the discounted present value of
expected cash flows to be received from the debtor or other measures of value
such as market prices or collateral values. Firstar considers all nonaccrual
commercial loans to be impaired. Loan losses are recognized through charges to
the allowance for loan losses. Any subsequent recoveries are added to the
allowance.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost, less accumulated depreciation
and amortization. Expenditures for major additions and improvements are
capitalized, and maintenance and repair costs are charged to operating expense.
Depreciation and amortization of premises and equipment are computed on a
straight-line basis over the estimated useful lives of the individual assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents real estate of which Firstar has taken
control in partial or total satisfaction of loans. Other real estate owned is
carried at the lower of cost or fair value, less estimated costs to sell, and is
included in other assets in the consolidated balance sheets. Losses at the time
property is repossessed in satisfaction of loans and classified as other real
estate owned are charged to the allowance for loan losses. Subsequent gains and
losses, as well as operating income or expense related to other real estate
owned, are recorded in noninterest expense.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights associated with loans originated and sold, where
servicing is retained, are capitalized and included in other assets in the
consolidated balance sheets. The value of these capitalized servicing rights is
amortized in proportion to, and over the period of, estimated net servicing
revenue and recorded as a reduction of servicing income. The carrying value of
these rights is periodically reviewed for impairment
38 FIRSTAR CORPORATION
44
based on fair value. For purposes of measuring impairment, the servicing rights
are stratified based on the underlying loan type and note rate and compared to a
valuation prepared based on a discounted cash flow methodology, current
prepayment speeds and discount rate. Impairment is recognized through a
valuation allowance for each impaired stratum and charged against servicing
income.
INTANGIBLE ASSETS
The excess of Firstar's cost of acquisitions over the fair value of net
assets acquired is amortized on a straight-line basis over periods of 12 to 25
years. Core deposit intangibles, which represent the net present value of the
future economic benefits related to deposits purchased, are amortized on a
straight-line basis over periods ranging from 8 to 17 years. Other identified
intangible assets are amortized on a straight-line basis over 25 years.
Intangible asset values and the related amortization expense are based on
estimated lives. Firstar reviews intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable over the original estimated life and reflect such impairment charges
as additional amortization expense.
INCOME TAXES
Firstar and its subsidiaries file a consolidated federal income tax return.
Income taxes are accounted for using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized as tax expense in the period
that includes the enactment date.
DERIVATIVE FINANCIAL INSTRUMENTS
Firstar uses interest rate swaps, caps and floors to manage its interest
rate risks from recorded financial assets and liabilities. These instruments are
utilized when they can be demonstrated to effectively hedge a designated asset
or liability and such asset or liability exposes Firstar to interest rate risk.
Amounts to be paid or received under interest rate swaps, caps and floors are
accounted for on the accrual basis and recognized as interest income or expense
of the related asset or liability. Gains and losses on early termination of
these instruments are deferred and amortized as an adjustment to the yield on
the related asset or liability over the shorter of the remaining contract life
or the maturity of the related asset or liability. If the related asset or
liability is sold or otherwise liquidated, the instrument is marked to market,
with the resultant gains and losses recognized in other income. Fees paid or
received in connection with caps or floors are deferred and amortized over the
life of the instrument.
Interest rate swaps, caps, floors and foreign exchange contracts are offered to
Firstar's customers. In these transactions, Firstar acts as an intermediary and
hedges its risk by entering into offsetting positions with other counterparties.
The fair value of these transactions is included in other assets and liabilities
and the related gain or loss is recorded in other income.
STOCK-BASED COMPENSATION
Firstar has various stock-based compensation plans that authorize the
granting of stock options, restricted stock, and other stock-based awards to
eligible employees. These plans are accounted for under the intrinsic value
method as prescribed in APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Included in Note 16 are the pro forma disclosures required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which assumes the fair value method of accounting had
been adopted.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold and securities purchased under agreements to resell.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
adjusted net income by the sum of the weighted average number of shares
outstanding and the potentially dilutive shares that could be issued through
stock award programs or convertible securities. All per share amounts have been
restated for stock splits.
RECENT ACCOUNTING PRONOUNCEMENTS
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 requires that changes in the derivatives' fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. In June
1999 SFAS 133 was amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" which deferred the effective date to the first quarter of
2001. Firstar has not yet determined the impact, if any, that this standard
could have on its financial position or results of operations.
BANK WITHOUT BOUNDARIES 39
45
- ---------------------------------------------------------------
NOTE 2 -- MERGERS AND ACQUISITIONS
On September 20, 1999, Firstar Corporation and Mercantile Bancorporation,
Inc. merged in a pooling of interests transaction and accordingly all financial
information has been restated to include the historical information of both
companies. Each share of Mercantile Bancorporation stock was converted into and
exchanged for 2.091 shares of Firstar Corporation common stock.
On November 20, 1998, Firstar Corporation and Star Banc Corporation merged in a
pooling of interests transaction and accordingly all financial information has
been restated to include the historical information of both companies. As a
result of the merger a new holding company was formed which retained the name
Firstar Corporation. Each share of Star Banc Corporation stock was converted
into and exchanged for one share of the new Firstar Corporation common stock
while each share of Firstar Corporation stock was converted into and exchanged
for .76 of a share of the new Firstar Corporation common stock.
Separate results of operations of the three companies for the periods prior to
the mergers were as follows:
YEAR YEAR
THROUGH THROUGH
JUNE 30 SEPT. 30
(DOLLARS IN MILLIONS) 1999 1998 1998 1997
- -------------------------------------------------------------------
Net interest income:
Firstar Corporation $ 739 $ 1,413 $ 561 $ 760
Star Banc Corporation 483 542
Mercantile
Bancorporation, Inc. 580 1,123 821 1,066
- -------------------------------------------------------------------
Total $ 1,319 $ 2,536 $ 1,865 $ 2,368
- -------------------------------------------------------------------
Net income:
Firstar Corporation $ 340 $ 430 $ 231 $ 295
Star Banc Corporation 186 219
Mercantile
Bancorporation, Inc. 239 375 285 247
- -------------------------------------------------------------------
Total $ 579 $ 805 $ 702 $ 761
- -------------------------------------------------------------------
Total assets:
Firstar Corporation $38,137 $38,476 $20,666 $19,794
Star Banc Corporation 17,291 13,066
Mercantile
Bancorporation, Inc. 35,520 35,800 34,597 33,332
- -------------------------------------------------------------------
Total $73,657 $74,276 $72,554 $66,192
- -------------------------------------------------------------------
The following table summarizes acquisitions by Firstar and its acquirees
completed during the past three years:
GOODWILL &
INTANGIBLES METHOD OF
(DOLLARS IN MILLIONS) DATE ASSETS DEPOSITS RECORDED CASH PAID SHARES ISSUED ACCOUNTING
- ---------------------------------------------------------------------------------------------------------------------------------
Mercantile Bancorporation September 1999 $35,520 $24,334 $ $ 331,772,028 Pooling
Firstar Corporation November 1998 20,688 14,560 331,737,543 Pooling
First Financial Bancorporation September 1998 558 478 6,563,279 Pooling(1)
Financial Services Corporation of
the Midwest August 1998 514 414 4,331,398 Pooling(1)
Trans Financial, Inc. August 1998 2,409 1,620 32,100,000 Pooling
CBT Corporation July 1998 1,006 696 10,712,640 Pooling
Firstbank of Illinois Co. July 1998 2,285 1,970 27,920,372 Pooling
Cargill Leasing Corporation July 1998 613 64 220 Purchase
Bank One Branches June/August 1998 193 1,198 137 137 Purchase
HomeCorp, Inc. March 1998 335 309 1,787,303 Pooling(1)
Horizon Bancorp, Inc. February 1998 537 454 5,331,987 Pooling(1)
Great Financial Corporation February 1998 2,809 2,001 363 135 28,500,000 Purchase
Roosevelt Financial Group July 1997 7,252 5,318 608 374 39,622,116 Purchase
Mark Twain Bancshares, Inc. April 1997 3,228 2,519 50,369,499 Pooling
Regional Bancshares, Inc. March 1997 172 136 16 12 1,883,207 Purchase
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Firstar's historical financial statements were not restated for the
acquisition due to the immateriality of the acquiree's financial condition
and the results of operations to those of Firstar.
- ---------------------------------------------------------------
NOTE 3 -- MERGER AND RESTRUCTURING EXPENSES
Firstar has recorded merger, integration and restructuring expenses in
conjunction with its merger activity and internal restructuring programs during
the past three years. The components of these expenses are shown in the tables
below. Firstar expects to incur additional merger related expenses during 2000
in connection with the combining of the operations of Firstar and Mercantile.
1997
MERCANTILE
(DOLLARS IN THOUSANDS) ACQUISITIONS
- ---------------------------------------------------------------------
Severance and related costs $ 21,449
Fixed asset write-downs 43,170
Lease termination charges 3,700
System conversions 33,207
Other merger related charges 19,867
- ---------------------------------------------------------------------
Total $121,393
- ---------------------------------------------------------------------
40 FIRSTAR CORPORATION
46
1998
---------------------------------------------------------------------
FIRSTAR/STAR MERCANTILE MERCANTILE STAR
(DOLLARS IN THOUSANDS) MERGER ACQUISITIONS RESTRUCTURING ACQUISITIONS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Severance and related costs $ 79,958 $16,477 $40,000 $ 6,618 $143,053
Asset write-downs 28,306 9,140 5,130 5,340 47,916
Lease termination charges 16,076 400 16,476
System conversions 26,884 23,892 7,142 57,918
Charitable contributions 20,000 3,000 23,000
Other merger related charges 39,776 39,683 9,470 88,929
- -----------------------------------------------------------------------------------------------------------------------------------
Total $211,000 $89,192 $45,130 $31,970 $377,292
- -----------------------------------------------------------------------------------------------------------------------------------
1999
-------------------------------------------------------
FIRSTAR/MERCANTILE FIRSTAR/STAR
(DOLLARS IN THOUSANDS) MERGER MERGER OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Severance and related costs $131,023 $ 10,563 $ $141,586
Asset write-downs 173 2,568 2,741
Lease termination charges 58 1,837 1,895
System conversions 19,515 78,876 98,391
Charitable contributions 35,000 35,000
Loss on sale of securities 177,733 177,733
Other merger related charges 45,955 21,905 67,860
Reversal of prior accruals (19,893) (34,850) (54,743)
- ---------------------------------------------------------------------------------------------------------------------
Total $409,457 $ 95,856 $(34,850) $470,463
- ---------------------------------------------------------------------------------------------------------------------
The following presents a summary of activity with respect to the
merger/restructuring related accruals:
FIRSTAR/MERCANTILE FIRSTAR/STAR MERCANTILE MERCANTILE STAR
(DOLLARS IN THOUSANDS) MERGER MERGER ACQUISITIONS RESTRUCTURING ACQUISITIONS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 $ $ $ 29,861 $ $ $ 29,861
Merger/restructuring expense 121,393 121,393
Cash payments (73,482) (73,482)
Noncash write-downs (6,300) (6,300)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 71,472 71,472
Merger/restructuring expense 211,000 89,192 45,130 31,970 377,292
Cash payments (78,750) (98,677) (2,288) (23,370) (203,085)
Noncash write-downs (7,059) (8,197) (4,593) (19,849)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 125,191 53,790 42,842 4,007 225,830
Merger/restructuring expense 409,457 115,749 525,206
Cash payments (182,836) (176,519 (33,100) (13,674) (3,275) (409,404)
Noncash write-downs (27,734) (44,528) (2,256) (2,686) (625) (77,829)
Loss on sale of securities (177,733) (177,733)
Reverse accrual (19,893) (12,437) (22,306) (107) (54,743)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ 21,154 $ 0 $ 5,997 $ 4,176 $ 0 $ 31,327
- ---------------------------------------------------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 41
47
- ---------------------------------------------------------------
NOTE 4 -- RESERVE BALANCE REQUIREMENTS
Banking regulations require Firstar's banking subsidiaries to maintain cash
reserves which are unavailable for investment. The amounts of such reserves,
which are included in cash and due from banks in the consolidated balance
sheets, were $462 million and $507 million at December 31, 1999 and 1998,
respectively.
- ---------------------------------------------------------------
NOTE 5 -- INVESTMENT SECURITIES
The table below summarizes unrealized gains and losses for held-to-maturity
and available-for-sale securities at December 31, 1999 and 1998.
1999 1998
------------------------------------------------ -----------------------------------------------
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasuries and
agencies $ $ $ $ $ 8,817 $ 64 $ 12 $ 8,869
Mortgage-backed securities 45,411 45,411 150,745 3,413 2,184 151,974
Obligations of state and
political subdivisions 149,043 5,856 154,899 73,452 2,951 623 75,780
- ---------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity
securities $ 194,454 $ 5,856 $ $ 200,310 $ 233,014 $ 6,428 $ 2,819 $ 236,623
- ---------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries and
agencies $ 1,787,717 $10,505 $ 12,210 $ 1,786,012 $ 4,321,195 $ 79,527 $ 1,998 $ 4,398,724
Mortgage-backed securities 6,654,624 19,880 119,652 6,554,852 7,120,985 96,755 9,583 7,208,157
Obligations of state and
political subdivisions 1,598,685 14,860 9,650 1,603,895 1,897,461 52,939 367 1,950,033
Other debt securities 1,792,296 1 50,061 1,742,236 1,141,622 9,767 9,658 1,141,731
Money market mutual funds 437,058 437,058 221,734 221,734
Federal Reserve/FHLB stock
and other equity
securities 795,407 17 64 795,360 720,811 745 1 721,555
- ---------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale
securities $13,065,787 $45,263 $191,637 $12,919,413 $15,423,808 $239,733 $21,607 $15,641,934
- ---------------------------------------------------------------------------------------------------------------------------------
The following table presents the amortized cost and fair value of
held-to-maturity and available-for-sale debt securities at December 31, 1999.
AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE
- -----------------------------------------------------------------
Held-to-maturity:
One year or less $ 70,371 $ 71,982
After one year through five years 41,683 43,578
After five years through ten years 38,606 44,558
After ten years 43,794 40,192
- -----------------------------------------------------------------
Total $ 194,454 $ 200,310
- -----------------------------------------------------------------
Available-for-sale:
One year or less $ 887,921 $ 888,458
After one year through five years 6,514,167 6,441,976
After five years through ten years 2,282,629 2,240,558
After ten years 2,148,605 2,116,003
- -----------------------------------------------------------------
Total 11,833,322 11,686,995
Equity securities 1,232,465 1,232,418
- -----------------------------------------------------------------
Total $13,065,787 $12,919,413
- -----------------------------------------------------------------
Note: Maturity information related to mortgage-backed securities included above
is presented based upon weighted average maturities anticipating future
prepayments.
As of December 31, 1999, Firstar reported a net unrealized loss of $146 million
for available-for-sale securities. For 1999, the unrealized loss reported as a
separate component of equity (net of tax) changed from an unrealized gain of
$141 million to an unrealized loss of $95 million, decreasing equity $236
million.
The following table provides information as to the amount of gross gains and
(losses) realized through the sales of available-for-sale investment securities.
Included in the gross losses below is $177.7 million related to the Mercantile
balance sheet restructuring. These losses were included in merger and
restructuring expense.
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------
Gross gains $ 16,577 $21,904 $ 9,918
Gross (losses) (179,548) (5,374) (6,185)
- ------------------------------------------------------------------
Net securities gains/(losses) $(162,971) $16,530 $ 3,733
- ------------------------------------------------------------------
Securities with a carrying value of $6,631 million at December 31, 1999 and
$8,899 million at December 31, 1998, were pledged to secure deposits and for
other purposes. All securities pledged to secure deposits and repurchase
agreements are controlled solely by Firstar.
42 FIRSTAR CORPORATION
48
- ---------------------------------------------------------------
NOTE 6 -- LOANS
The composition of loans is summarized below. Loans are presented net of
unearned interest which amounted to $335,600,000 and $492,739,000 at December
31, 1999 and 1998 respectively.
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------
Commercial $15,530,346 $14,073,944
Commercial leasing 1,816,250 1,348,202
Real estate construction and development 2,184,476 2,136,597
Commercial real estate mortgage 8,851,504 8,409,474
Residential real estate mortgage 8,779,037 10,856,161
Credit card 1,403,655 1,265,382
Retail leasing 2,006,839 1,439,515
Other retail 10,053,901 8,490,410
- -------------------------------------------------------------------
Total loans $50,626,008 $48,019,685
- -------------------------------------------------------------------
The following table lists information related to nonperforming loans as of
December 31.
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
Loans on nonaccrual status $207,996 $215,159
Renegotiated loans 1,664 1,501
- ----------------------------------------------------------------
Total nonperforming loans $209,660 $216,660
- ----------------------------------------------------------------
Interest that would have been recognized on
nonperforming loans in accordance with
their original terms $ 14,488 $ 13,474
Actual interest recorded for nonaccrual and
renegotiated loans 4,657 7,073
- ----------------------------------------------------------------
Firstar evaluates the credit risk of each customer on an individual basis and
obtains collateral when it is deemed appropriate. Collateral varies by
individual loan customer, but may include accounts receivable, inventory, real
estate, equipment, deposits, personal and government guarantees, and general
security agreements. Access to collateral is dependent on the type of collateral
obtained. On an ongoing basis, Firstar monitors its collateral and the
collateral value related to the loan balance outstanding.
- ---------------------------------------------------------------
NOTE 7 -- ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
A summary of the activity in the allowance for loan losses is shown in the
following table.
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------
Balance at beginning of year $ 704,846 $ 657,098 $ 607,610
Loans charged off (251,980) (235,704) (242,220)
Recoveries on loans
previously charged off 74,731 72,219 66,419
- -----------------------------------------------------------------
Net charge-offs (177,249) (163,485) (175,801)
Acquired reserves 46,443 21,162
Provision charged to
earnings 187,301 164,790 204,127
- -----------------------------------------------------------------
Balance at end of year $ 714,898 $ 704,846 $ 657,098
- -----------------------------------------------------------------
A portion of the reserve for loan losses is allocated to loans deemed impaired.
All impaired loans are included in nonperforming assets. Information on these
loans and their related reserve for loan losses is as follows:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
RECORDED VALUATION RECORDED VALUATION RECORDED VALUATION
(DOLLARS IN THOUSANDS) INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
- -----------------------------------------------------------------------------------------------------------------------------
Impaired Loans:
Valuation allowance required $ 21,696 $ 8,218 $ 44,963 $ 9,723 $ 78,796 $ 18,686
No valuation allowance required 131,514 100,299 67,713
- -----------------------------------------------------------------------------------------------------------------------------
Total impaired loans $ 153,210 $ 8,218 $ 145,262 $ 9,723 $ 146,509 $ 18,686
- -----------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans during year $ 153,005 $ 147,676 $ 161,578
Interest income recognized on impaired loans during
year 3,258 4,570 3,671
- -----------------------------------------------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 43
49
- ---------------------------------------------------------------
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment as of December 31 are summarized in the following table.
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
Land $ 148,571 $ 156,261
Bank buildings 899,375 942,527
Furniture, fixtures & equipment 927,980 910,631
Leasehold improvements 174,979 132,795
Construction in progress 45,853 27,603
- ----------------------------------------------------------------
Total premises and equipment 2,196,758 2,169,817
Less: Accumulated depreciation and
amortization 1,193,871 1,053,105
- ----------------------------------------------------------------
Net premises and equipment $1,002,887 $1,116,712
- ----------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment amounted
to $128,354,000 in 1999, $136,075,000 in 1998 and $122,519,000 in 1997.
Total rental expense was $82,555,000 in 1999, $76,836,000 in 1998 and
$80,385,000 in 1997.
Future minimum rental payments, net of sublease rental payments, related to
non-cancelable operating leases having initial terms in excess of one year are
$54,375,000 in 2000, $47,522,000 in 2001, $40,890,000 in 2002, $34,198,000 in
2003, $26,016,000 in 2004 and $119,443,000 in later years.
- ---------------------------------------------------------------
NOTE 9 -- MORTGAGE SERVICING RIGHTS
The fair value of capitalized mortgage servicing rights was $269.1 million
on December 31, 1999 and $253.2 million on December 31, 1998. Firstar serviced
$19.5 billion and $26.3 billion of mortgage loans for other investors as of
December 31, 1999 and 1998, respectively. Changes in capitalized mortgage
servicing rights are summarized as follows:
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------
Balance at beginning of year $232,105 $124,292
Amount added in acquisitions 811 52,648
Amount capitalized 169,678 166,069
Amortization (46,808) (43,066)
Sales (143,489) (67,838)
- ------------------------------------------------------------
Balance at end of year $212,297 $232,105
- ------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 10 -- INTANGIBLE ASSETS
The following is a summary of intangible assets as of December 31 which are
included in other assets in the consolidated balance sheets.
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------
Goodwill $1,305,816 $1,393,470
Core deposit benefits 230,726 259,535
Mortgage servicing rights 212,297 232,105
Other identified intangibles 10,237 8,630
- ------------------------------------------------------------------
Total intangible assets $1,759,076 $1,893,740
- ------------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 11 -- DEPOSITS
The following is a summary of Firstar's total deposits as of December 31.
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------
Noninterest-bearing deposits $10,299,994 $11,102,247
Savings accounts 3,349,308 4,039,413
NOW accounts 6,980,734 7,130,540
Money market deposit accounts 10,263,894 10,111,250
Time deposits $100,000 and over 3,753,526 3,565,425
Foreign deposits $100,000 and over 773,926 825,347
All other time deposits 16,465,029 17,537,940
- -----------------------------------------------------------------
Total interest-bearing deposits 41,586,417 43,209,915
- -----------------------------------------------------------------
Total deposits $51,886,411 $54,312,162
- -----------------------------------------------------------------
44 FIRSTAR CORPORATION
50
- --------------------------------------------------------------------------------
NOTE 12 -- SHORT-TERM BORROWINGS
The following table is a summary of short-term borrowings for the last three
years.
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------------------
At year end:
Federal funds purchased $5,192,850 4.8% $3,494,436 4.8% $3,030,565 5.3%
Securities sold under agreements to repurchase 1,938,238 3.1 1,748,455 3.7 1,728,273 4.8
Commercial paper 139,347 4.4 134,060 5.5 103,613 5.8
Treasury, tax and loan notes 171,004 5.8 321,315 4.4 604,472 5.3
Other short-term borrowings 860,580 5.7 947,702 5.2 1,625,947 5.6
- --------------------------------------------------------------------------------------------------------------
Total $8,302,019 4.5% $6,645,968 4.5% $7,092,870 5.3%
- --------------------------------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased $4,255,185 5.0% $3,528,098 5.4% $3,165,832 5.6%
Securities sold under agreements to repurchase 1,894,359 3.9 1,852,858 4.4 1,916,899 4.6
Commercial paper 183,023 4.8 101,822 5.4 118,713 5.6
Treasury, tax and loan notes 259,741 4.2 417,243 5.2 338,316 5.3
Other short-term borrowings 1,227,254 5.2 1,469,206 5.6 937,720 5.7
- --------------------------------------------------------------------------------------------------------------
Total $7,819,562 4.7% $7,369,227 5.2% $6,477,480 5.3%
- --------------------------------------------------------------------------------------------------------------
Maximum month-end balances:
Federal funds purchased $5,192,850 $3,995,677 $4,080,447
Securities sold under agreements to repurchase 2,077,538 1,998,619 2,215,937
Commercial paper 199,711 134,060 139,707
Treasury, tax and loan notes 968,817 1,117,037 750,012
Other short-term borrowings 2,007,713 1,867,973 7,107,640
- --------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 13 -- LONG-TERM DEBT
The following is a summary of Firstar's long-term debt as of December 31.
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------
Firstar Corporation (parent company only):
Medium term notes $ 343,807 $ 248,784
7.30% subordinated notes, due 2007 200,000 200,000
7.625% subordinated notes, due 2002 150,000 150,000
5.88% senior notes, due 2003 99,831 99,785
6.35% senior notes, due 2001 199,781
6.50% senior notes, due 2002 199,387
6.80% senior notes, due 2001 150,000 150,000
7.05% senior notes, due 2004 150,000 150,000
8.32% trust capital securities, due
2026 150,000 150,000
Variable rate trust capital
securities, due 2027 298,677 298,629
7.25% subordinated notes, due 2003 32,685 32,685
Other debt 1,829 4,500
- -----------------------------------------------------------------
Subtotal 1,975,997 1,484,383
Banks:
Federal Home Loan Bank advances 1,948,376 3,275,650
6.375% subordinated notes, due 2004 75,000 75,000
6.38% subordinated notes, due 2004 149,183 148,994
6.63% subordinated notes, due 2006 99,046 99,004
7.125% subordinated notes, due 2009 494,658
6.25% senior notes, due 2002 248,780 248,191
7.13% senior notes, due 2000 25,000 25,000
Other debt 22,343 100,981
- -----------------------------------------------------------------
Subtotal 3,062,386 3,972,820
- -----------------------------------------------------------------
Total long-term debt $5,038,383 $5,457,203
- -----------------------------------------------------------------
Firstar's unsecured medium term notes mature from 2000 through 2002 and have
interest rates ranging from 5.45% to 6.97%.
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank
stock and first mortgage residential real estate loans. The advances mature from
2000 through 2008 and have variable interest rates averaging 5.40% as of
December 31, 1999.
Firstar formed three statutory business trusts ("the Trusts") for the issuance
of trust preferred capital securities. The primary assets of the Trusts are $450
million of Firstar's subordinated debentures with like maturities and interest
rates to the securities. Firstar has fully and unconditionally guaranteed the
obligations of the Trusts. Firstar 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 periods extend beyond the stated
maturities of the debentures. Such deferral of interest payments by Firstar
could result in a deferral of distribution payments on the related securities.
The securities qualify as tier I capital of Firstar for regulatory capital
purposes. The Trusts each issued $150 million of securities which are redeemable
in whole or in part in 2006 and 2007 in the amounts of $150 million and $300
million, respectively.
Long-term debt has aggregate maturities for the five years 2000 through 2004 as
follows: $1,103 million in 2000, $862 million in 2001, $875 million in 2002,
$139 million in 2003, and $374 million in 2004.
BANK WITHOUT BOUNDARIES 45
51
- ---------------------------------------------------------------
NOTE 14 -- PENSION PLANS
Firstar has non-contributory defined benefit pension plans covering
substantially all employees. The benefits are based on years of service and
employees' compensation while employed. The plans include both funded and
unfunded plans. The funding policy, where applicable, is to make an annual
contribution to the plan which at least equals the minimum required
contribution. The pension plans were amended in 1998 to conform certain
provisions of the previously separate plans of Firstar Corporation and Star Banc
Corporation upon their merger. Plan assets primarily consist of listed stocks,
corporate bonds, U.S. Treasury and Agency securities, and mutual funds. Included
in plan assets are shares of Firstar stock with a market value of $13 million
and $20 million at December 31,1999 and 1998, respectively. The tables below
summarize data relative to the plans.
(DOLLARS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $723,293 $681,844
Service cost 23,765 24,158
Interest cost 46,118 47,531
Amendments 29,815 (15,156)
Curtailments (4,039)
Acquisition/divestitures 1,859 8,981
Actuarial (gain)/loss (95,236) 3,553
Benefits paid (49,110) (27,618)
- ----------------------------------------------------------------
Benefit obligation at end of year $676,465 $723,293
- ----------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of
year $743,089 $660,390
Actual return on plan assets 61,170 31,545
Employer contribution 69,716 65,260
Acquisition/divestitures 7,966 13,512
Benefits paid (49,110) (27,618)
- ----------------------------------------------------------------
Fair value of plan assets at end of
year $832,831 $743,089
- ----------------------------------------------------------------
Funded status $156,366 $ 19,796
Unrecognized transition obligation (3,238) (5,642)
Unrecognized prior service cost (14,247) (13,031)
Unrecognized net (gain)/loss (34,408) 48,492
- ----------------------------------------------------------------
Prepaid pension cost $104,473 $ 49,615
- ----------------------------------------------------------------
Information about pension plans based upon funded status is as follows:
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------
Plans with assets in excess of
obligations:
Fair value of plan assets $ 832,831 $ 743,089
Benefit obligation (582,133) (651,030)
- -----------------------------------------------------------------
Funded status $ 250,698 $ 92,059
- -----------------------------------------------------------------
Plans with obligations in excess of
assets:
Fair value of plan assets $ $
Benefit obligation (94,332) (72,263)
- -----------------------------------------------------------------
Funded status $ (94,332) $ (72,263)
- -----------------------------------------------------------------
Weighted average assumptions used in determining pension values were as follows:
1999 1998
- ----------------------------------------------------
Discount rate 6.58% 6.59%
Expected return on plan assets 11.38 9.62
Rate of compensation increase 4.06 4.34
- ----------------------------------------------------
Pension costs included the following components:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------
Service cost $ 23,765 $ 24,158 $ 24,984
Interest cost 46,118 47,531 45,179
Expected return on plan assets (79,169) (54,837) (48,535)
Net amortization and deferral 13,420 185 (875)
Curtailment gain (4,275)
- ---------------------------------------------------------------
Net periodic benefit cost $ (141) $ 17,037 $ 20,753
- ---------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 15 -- OTHER EMPLOYEE BENEFITS
Firstar maintains plans to provide health care benefits to certain retired
employees and has a group of active employees who will be eligible for health
care benefits upon their retirement. The plans were amended to limit eligibility
of future retirees. This action was treated as a plan curtailment. The liability
for these benefits is unfunded. The tables below summarize data relative to
these plans:
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 86,746 $ 94,366
Service cost 981 943
Interest cost 5,812 5,689
Amendments (10,014) (12,053)
Actuarial gain (loss) (1,553) 3,605
Benefits paid (6,179) (5,804)
- -----------------------------------------------------------------
Benefit obligation at end of year $ 75,793 $ 86,746
- -----------------------------------------------------------------
Funded status $ 75,793 $ 86,746
Unrecognized transition obligation (10,762) (22,429)
Unrecognized prior service cost 30 (35)
Unrecognized net loss 5,249 3,560
- -----------------------------------------------------------------
Postretirement benefit liability $ 70,310 $ 67,842
- -----------------------------------------------------------------
Postretirement benefit costs included the following components:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------
Service cost $ 981 $ 943 $ 1,736
Interest cost 5,812 5,689 6,644
Curtailment loss 18,136 1,287
Net amortization and deferral 1,854 3,027 3,648
- -----------------------------------------------------------------
Net periodic benefit cost $ 8,647 $27,795 $13,315
- -----------------------------------------------------------------
46 FIRSTAR CORPORATION
52
The weighted average discount rates used in determining the amount of the
benefit obligation were 6.75% and 6.49% at December 31, 1999 and 1998,
respectively. The measurement of the benefit obligation at December 31, 1999
assumed a health care cost trend rate of 7.66% which gradually decreases to
5.50% by 2004 and thereafter. To illustrate the effects of changes in this
assumption, increasing the assumed health care cost trend by one percentage
point in each year would increase the benefit obligation by $3,987,000 and the
aggregate of the service and interest cost components of benefit cost by
$429,000, while decreasing the assumed cost trend by one percentage point would
decrease the benefit obligation by $3,556,000 and the aggregate of the service
and interest cost components of benefit cost by $350,000.
Firstar has defined contribution retirement savings plans under which eligible
employees can participate by contributing a portion of their salary for
investment in one or more investment funds. Contributions are made to the
accounts of each participant. Amounts expensed in connection with these plans
were $22,594,000 in 1999, $20,492,000 in 1998 and $28,120,000 in 1997.
- ---------------------------------------------------------------
NOTE 16 -- STOCK OPTIONS AND COMPENSATION PLANS
Firstar had stock options outstanding under various plans at December 31,
1999, including plans assumed in acquisitions. The plans provide for grants to
selected key managerial personnel of options to purchase shares of common stock
generally at the stock's fair market value at the date of grant. In addition,
the plans provide for grants to selected key managerial personnel of shares of
common stock which are subject to restriction on transfer and to a right of
repurchase by Firstar. Not more than 3.7 million authorized and unissued shares
of common stock, in the aggregate, are available for issue under the plans as of
December 31, 1999.
Firstar provided one-time grants of stock options to all eligible employees in
1998 and 1999. These options were granted to active employees as a performance
award and permit them to purchase stock at the stock's fair market value at the
date of grant. No additional shares are available for grant under these plans.
The grants of stock options vest over a four year period and expire ten years
from the date of grant. Awards of restricted shares vest over a period of up to
five years. Options granted by Star Banc Corporation and Firstar Corporation
prior to their merger became fully vested as a result of the merger. Similarly,
all Mercantile Bancorporation options became fully vested as a result of its
merger with Firstar.
The following is a summary of stock options outstanding and exercised under
various stock option plans of Firstar.
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
STOCK OPTIONS EXERCISE PRICE STOCK OPTIONS EXERCISE PRICE STOCK OPTIONS
- ----------------------------------------------------------------------------------------------------------------------------
Executive stock option plans:
Number outstanding at beginning of year 53,433,567 $ 13.34 50,652,994 $ 9.08 46,263,021
Granted 12,168,192 22.36 17,027,149 19.80 12,676,806
Assumed 287,420 9.95 1,276,631
Exercised (14,138,662) 9.26 (12,506,783) 8.20 (8,121,331)
Cancelled (1,467,383) 21.26 (2,027,213) 14.04 (1,442,133)
- ----------------------------------------------------------------------------------------------------------------------------
Number outstanding at end of year 49,995,814 $ 15.95 53,433,567 $ 12.95 50,652,994
- ----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 34,208,523 $ 13.07 37,224,167 $ 10.01 26,269,119
Weighted average fair value of options
granted $ 8.54 $ 7.86 $ 4.08
- ----------------------------------------------------------------------------------------------------------------------------
All employee stock option plans:
Number outstanding at beginning of year 12,350,898 $ 21.64 3,331,848 $ 9.84 4,473,783
Granted 5,227,000 21.50 10,200,000 24.13
Exercised (671,647) 9.93 (913,722) 9.79 (357,966)
Cancelled (3,362,441) 22.93 (267,228) 9.88 (783,969)
- ----------------------------------------------------------------------------------------------------------------------------
Number outstanding at end of year 13,543,810 $ 21.86 12,350,898 $ 21.64 3,331,848
- ----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 3,002,114 $ 18.36 2,150,898 $ 9.84 770,316
Weighted average fair value of options
granted $ 8.14 $ 9.53
- ----------------------------------------------------------------------------------------------------------------------------
1997
- ---------------------------------------
WEIGHTED-
AVERAGE
EXERCISE PRICE
- ---------------------------------------
Executive stock option plans:
Number outstanding at beginning of year $ 6.71
Granted 15.44
Assumed 8.47
Exercised 5.62
Cancelled 8.66
- ---------------------------------------
Number outstanding at end of year $ 9.08
- ---------------------------------------
Exercisable at end of year $ 7.01
Weighted average fair value of options
granted
- ---------------------------------------
All employee stock option plans:
Number outstanding at beginning of year $ 9.78
Granted
Exercised 8.64
Cancelled 10.09
- ---------------------------------------
Number outstanding at end of year $ 9.84
- ---------------------------------------
Exercisable at end of year $ 8.92
Weighted average fair value of options
granted
- ---------------------------------------
The fair value and pro forma income information calculated for options granted
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions in 1999, 1998 and 1997,
respectively: volatility of 41.0 percent, 37.7 percent, and 24.7 percent; risk
free interest rates of 5.55 percent, 4.79 percent, and 6.01 percent; dividend
yields of 2.00 percent, 1.58 percent, and 1.87 percent; and for all years,
expected lives of 2.5 to 5.5 years.
BANK WITHOUT BOUNDARIES 47
53
The following table summarizes information about stock options outstanding at
December 31, 1999 under various stock option plans of Firstar Corporation:
Outstanding Exercisable
--------------------------------------------- --------------------------
Number Weighted-Avg Weighted-Avg Number Weighted-Avg
Outstanding Remaining Exercise Exercisable Exercise
Range of exercise prices at 12/31/99 Contractual Life Price at 12/31/99 Price
- ----------------------------------------------------------------------------------------------------------------------------
$1.73 - 10.00 13,182,751 4.5 Years $ 5.50 12,277,023 $ 5.50
10.01 - 15.00 9,466,268 6.1 Years 11.18 9,451,674 11.17
15.01 - 20.00 6,839,260 7.6 Years 17.68 6,839,260 17.68
20.01 - 25.00 29,170,963 9.4 Years 22.77 5,999,323 23.26
25.01 - 30.00 4,343,932 8.7 Years 27.09 2,643,357 25.99
30.01 - 35.00 536,450 9.4 Years 31.56
- ----------------------------------------------------------------------------------------------------------------------------
Total 63,539,624 7.7 Years $ 17.28 37,210,637 $ 13.50
- ----------------------------------------------------------------------------------------------------------------------------
Firstar applies APB Opinion No. 25 and related interpretations in accounting for
all its stock-based compensation plans. Accordingly, no compensation expense has
been recognized for stock option grants.
The compensation cost that has been charged against income for stock-based
compensation plans was $32,916,000, $14,138,000, and $6,416,000 for 1999, 1998
and 1997 respectively. The vesting of restricted stock as a result of mergers
accelerated expense recognition in 1999 and 1998.
SFAS No. 123 encourages a "fair value" based method of accounting for
stock-based compensation plans. Had Firstar recognized compensation expense
based on the fair value of options at their grant date, as prescribed by SFAS
No. 123, Firstar's net income for 1999, 1998, and 1997 would have been
$821,702,000, $668,087,000, and $747,776,000, respectively. Pro forma basic
earnings per share would have been $0.83 in 1999, $0.69 in 1998, and $0.82 in
1997. Pro forma diluted earnings per share would have been $0.82 in 1999, $0.68
in 1998, and $0.80 in 1997. These pro forma disclosures are not likely to be
representative of the effect on reported net income and earnings per share for
future years since current options vest over a four-year period and additional
options are generally granted each year. Additionally, the vesting of options as
a result of mergers would have accelerated expense recognition in 1999 and 1998
under SFAS No. 123.
Directors and selected senior officers of Firstar and its banking subsidiaries
may participate in Firstar's Deferred Compensation Plan through which they may
postpone the receipt of compensation. Amounts deferred under the plan may be
valued on the basis of an interest index or be used to purchase shares of
Firstar's common stock. Although the plan is unfunded for tax purposes, a
portion of the shares of treasury stock held at December 31, 1999 and 1998 and
1997 were acquired to meet obligations arising from this plan and are considered
common stock equivalents for the purpose of computing earnings per share.
Firstar has entered into agreements with certain officers. In general, the
agreements provide for the payment of a lump sum benefit to the officer, plus
the continuation of certain medical and insurance benefits and immediate
exercisability of stock options, in the event that the officer's employment is
terminated involuntarily by Firstar or voluntarily by the officer for good
reason, following a change in control of Firstar during the officer's protected
period. The benefits payable under the agreements can be up to three times the
officer's base salary and incentive bonus.
48 FIRSTAR CORPORATION
54
- ---------------------------------------------------------------
NOTE 17 -- INCOME TAXES
The taxes applicable to income before income taxes were as follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------
Current income taxes:
Federal $354,477 $300,465 $336,846
State and other (14,474) 39,868 31,283
- ---------------------------------------------------------------------
Subtotal 340,003 340,333 368,129
Deferred income taxes:
Federal 172,813 66,449 30,202
State and other 24,433 (5,866) 83
- ---------------------------------------------------------------------
Subtotal 197,246 60,583 30,285
- ---------------------------------------------------------------------
Provision for income taxes $537,249 $400,916 $398,414
- ---------------------------------------------------------------------
Exercised stock options produced tax benefits of $74,303,000 in 1999,
$52,422,000 in 1998 and $17,260,000 in 1997 which were allocated directly to
shareholders' equity.
The effective tax rate differed from the statutory U.S. federal tax rate of
35% as shown below:
1999 1998 1997
- --------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increase/(reduction) in rate resulting
from:
Tax-exempt income, net of interest
expense disallowance (2.5) (3.0) (3.1)
State and local taxes, net of
federal income tax benefit 0.5 1.8 1.8
Amortization of intangibles 2.1 2.4 1.4
Nondeductible merger & acquisition
costs 4.0 0.7
Increase in cash surrender value of
life insurance (0.7) (0.6) (0.3)
Liquidation of affiliate (2.1)
Other -- net (0.4) (1.0) (0.4)
- --------------------------------------------------------------------
Effective tax rate 38.0% 33.2% 34.4%
- --------------------------------------------------------------------
The significant components of the net deferred tax asset (liability) were as
follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------
Deferred tax liabilities:
Equipment leased to
customers $(436,156) $(272,130) $(170,480)
Securities available for
sale (77,311) (32,898)
Bank premises and equipment (35,853) (24,655) (25,338)
Acquired assets accounted
for as a purchase (6,088) (4,725) (12,560)
Pension and post-retirement
benefits (16,790) (8,492)
Deferred loan fees / costs (4,103) (4,525)
FHLB dividends (17,061) (21,032) (12,916)
Other -- net (3,826) (27,796) (11,633)
Deferred tax assets:
Reserve for loan losses 250,603 243,755 233,483
Securities available for
sale 51,291
Pension and post-retirement
benefits 14,554 12,486 19,102
State and federal net
operating loss carry
forwards 22,931 20,904 11,462
Deferred compensation 26,533 27,186 20,407
Deferred loan fees / costs 2,857
Merger related charges 12,239 84,199 33,255
Foreclosed property 1,213 140 839
Federal AMT credit
carryforward 22,938 7,568
Charitable contributions
carryforward 6,523 4,202
Other -- net 5,923 12,741 1,497
- ---------------------------------------------------------------------
Subtotal (105,129) (27,485) 57,077
Valuation allowance (12,704) (10,854) (10,941)
- ---------------------------------------------------------------------
Net deferred tax
asset / (liability) $(117,833) $ (38,339) $ 46,136
- ---------------------------------------------------------------------
A valuation allowance has been recognized primarily to offset deferred tax
assets related to state net operating loss carry forwards totaling approximately
$436,176,000, which expire at various times within the next 20 years.
Certain events covered by Internal Revenue Code Section 593(e), which was not
repealed, will trigger a recapture of the base year reserve of acquired thrift
institutions. The base year reserve of acquired thrift institutions would be
recaptured if an entity ceases to qualify as a bank for federal income tax
purposes. The base year reserves of thrift institutions also remain subject to
income tax penalty provisions that, in general, require recapture upon certain
stock redemptions of, and excess distributions to, stockholders. At December 31,
1999, retained earnings included approximately $101.8 million of base year
reserves for which no deferred federal income tax liability has been recognized.
BANK WITHOUT BOUNDARIES 49
55
- ---------------------------------------------------------------
NOTE 18 -- STOCKHOLDERS' EQUITY
The authorized and outstanding shares of Firstar are as follows:
DECEMBER 31 1999 1998
- -------------------------------------------------------------------
Preferred stock, $1.00 par value
Authorized 10,000,000 10,000,000
Outstanding -- --
Common stock, $.01 par value:
Authorized 2,000,000,000 2,000,000,000
Outstanding (net of treasury
stock) 975,546,460 985,372,855
- -------------------------------------------------------------------
Under the Firstar Preferred Share Purchase Rights Plan each share of common
stock entitles its holder to one right. Under certain conditions, each right
entitles the holder to purchase one one-hundredth of a share of preferred stock
at a price of $300, subject to adjustment. The rights will only be exercisable
if a person or a group has acquired, or announced an intention to acquire, 15%
or more of the outstanding shares of Firstar common stock. Under certain
circumstances, including the existence of a 15% acquiring party, each holder of
a right, other than the acquiring party, will be entitled to purchase at the
exercise price Firstar common shares having a market value of two times the
exercise price. In the event of the acquisition of Firstar by another company
subsequent to a party acquiring 15% or more of Firstar common stock, each holder
of a right is entitled to receive the acquiring company's common shares having a
market value of two times the exercise price. The rights may be redeemed at a
price of $.01 per right prior to the existence of a 15% acquiring party, and
thereafter, may be exchanged for one common share per right prior to the
existence of a 50% acquiring party. The rights will expire on December 1, 2008.
The rights do not have voting or dividend rights and until they become
exercisable, have no dilutive effect on the earnings of Firstar. Under the
rights plan, the Board of Directors of Firstar may reduce the thresholds
applicable to the rights from 15% to not less than 10%.
A reconciliation of the transactions affecting Accumulated Other Comprehensive
Income included in shareholders' equity for the years ended December 31, is as
follows:
(DOLLARS IN THOUSANDS) PRE-TAX TAX EFFECT NET OF TAX
- -----------------------------------------------------------------------
1997
Unrealized gain on securities
available for sale $ 29,598 $ (11,310) $ 18,288
Reclassification adjustment
for gains realized in net
income (3,724) 864 (2,860)
- -----------------------------------------------------------------------
Total $ 25,874 $ (10,446) $ 15,428
- -----------------------------------------------------------------------
1998
Unrealized gain on securities
available for sale $ 142,241 $ (50,804) $ 91,437
Reclassification adjustment
for gains realized in net
income (16,530) 5,795 (10,735)
- -----------------------------------------------------------------------
Total $ 125,711 $ (45,009) $ 80,702
- -----------------------------------------------------------------------
1999
Unrealized losses on
securities available for
sale $(527,472) $ 185,923 $(341,549)
Reclassification adjustment
for losses realized in net
income 162,971 (57,447) 105,524
- -----------------------------------------------------------------------
Total $(364,501) $ 128,476 $(236,025)
- -----------------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 19 -- REGULATORY CAPITAL
Firstar and its banking subsidiaries are subject to various capital
requirements as defined by banking industry regulators for banks and bank
holding companies. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by the
regulators that, if undertaken, could have a material effect on the financial
statements of Firstar. As of the most recent notification from its regulators,
at December 31, 1999 and 1998, Firstar and its banking subsidiaries were
categorized as "well capitalized" under the regulatory framework for prompt
corrective action.
50 FIRSTAR CORPORATION
56
The following provides a summary of the tier 1 and total risk-based capital
amounts and ratios, as compared to minimum capital requirements for 1999 and
1998 for Firstar and its significant bank subsidiaries.
FOR MINIMUM
CAPITAL ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Total capital (to risk weighted assets):
Consolidated $7,098,176 10.79% $5,261,406 8.00% $ n/a n/a%
Firstar Bank, N.A. 3,980,658 10.22 3,115,410 8.00 3,894,263 10.00
Mercantile Bank, N.A. 1,907,197 11.44 1,333,976 8.00 1,667,469 10.00
Tier 1 capital (to risk weighted assets):
Consolidated 5,327,118 8.10 2,630,703 4.00 n/a n/a
Firstar Bank, N.A. 2,893,411 7.43 1,557,705 4.00 2,336,558 6.00
Mercantile Bank, N.A. 1,678,587 10.07 666,988 4.00 1,000,482 6.00
Tier 1 capital (to average assets):
Consolidated 5,327,118 7.61 2,779,355 4.00 n/a n/a
Firstar Bank, N.A. 2,893,411 7.30 1,585,604 4.00 1,982,005 5.00
Mercantile Bank, N.A. 1,678,587 8.26 812,396 4.00 1,015,495 5.00
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total capital (to risk weighted assets):
Consolidated $6,611,443 11.62% $4,553,091 8.00% $ n/a n/a%
Firstar Bank, N.A. 3,224,758 10.77 2,396,226 8.00 2,995,784 10.00
Mercantile Bank, N.A. 1,974,542 12.34 1,279,795 8.00 1,599,744 10.00
Tier 1 capital (to risk weighted assets):
Consolidated 5,265,735 9.25 2,276,546 4.00 n/a n/a
Firstar Bank, N.A. 2,317,218 7.74 1,198,114 4.00 1,797,171 6.00
Mercantile Bank, N.A. 1,731,390 10.82 639,898 4.00 959,847 6.00
Tier 1 capital (to average assets):
Consolidated 5,265,735 7.35 2,865,182 4.00 n/a n/a
Firstar Bank, N.A. 2,317,218 6.27 1,477,464 4.00 1,846,831 5.00
Mercantile Bank, N.A. 1,731,390 7.99 866,856 4.00 1,083,570 5.00
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 20 -- FINANCIAL INSTRUMENTS AND COMMITMENTS
Firstar is a party to financial instruments with off-balance-sheet risk in
the normal course of business in managing its interest rate risk and meeting the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit, interest rate swap
agreements, interest rate caps and floors, forward contracts to purchase or sell
foreign currencies and forward commitments to sell residential mortgage loans.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized on the consolidated balance sheet.
The contract or notional amounts of these instruments reflect the extent of
involvement that Firstar has in particular classes of financial instruments.
Firstar's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit and commercial letters of credit is represented by the
contract amount of these instruments. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to typically expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. Firstar uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. The
need for collateral is assessed on a case-by-case basis, based upon management's
credit evaluation of the other party.
The following table shows the contract amount of off-balance-sheet financial
instruments associated with Firstar's commercial and consumer lending activities
as of December 31.
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------
Commitments to extend credit $21,019,156 $20,291,066
Credit card lines 4,979,941 4,556,596
Standby letters of credit 2,609,846 1,092,723
Letters of credit 269,704 137,247
- -----------------------------------------------------------------
BANK WITHOUT BOUNDARIES 51
57
As part of its asset and liability management, Firstar uses various types of
interest rate contracts for the purpose of managing its interest rate risk. The
use of interest rate contracts enables Firstar to synthetically alter the
repricing characteristics of designated earning assets and interest bearing
liabilities. The following table summarizes the notional amounts and fair market
values of interest rate contracts used in the interest rate risk management
process at December 31.
1999 1998
NOTIONAL MARKET NOTIONAL MARKET
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------
Interest rate swaps:
In a receivable
position $ 135,000 $ 404 $ 860,000 $37,469
In a payable
position 765,000 (19,766) 8,000 (158)
Interest rate floors:
In a receivable
position 305,000 516,500 343
- --------------------------------------------------------------------
Total $1,205,000 $(19,362) $1,384,500 $37,654
- --------------------------------------------------------------------
The interest rate swaps were used to convert certain fixed rate deposits and
borrowed funds to a variable rate basis and to convert certain floating rate
commercial loans to a fixed rate basis. Interest rate floors provide for the
receipt of payments when the three month LIBOR rate is below a predetermined
level. These interest rate floors have been entered into to protect against the
impact of declining rates on certain variable rate loans along with the interest
rate risk associated with certain money market deposit accounts which have
guaranteed minimum interest rates.
The net cash flows associated with these off-balance-sheet interest rate
contracts used to manage interest rate risk increased net interest income by
$7.5 million, $6.2 million and $0.9 million during 1999, 1998 and 1997,
respectively. The maturities of these interest rate contracts in terms of
notional values as of December 31, 1999 are as follows:
MATURITY RANGE OF DERIVATIVE FINANCIAL INSTRUMENTS
(DOLLARS IN MILLIONS) 2000 2001 2009+ TOTAL
- -------------------------------------------------------------------------
Interest rate swaps:
Receive fixed rate $ 205 $ 45 $ 650 $ 900
Average receive
rate 8.74% 8.42% 7.40% 7.76%
Average pay rate 8.29% 7.97% 6.53% 7.00%
- -------------------------------------------------------------------------
Interest rate floors 305 305
Average floor rate 4.76% 4.76%
- -------------------------------------------------------------------------
Total $ 510 $ 45 $ 650 $ 1205
- -------------------------------------------------------------------------
Firstar enters into commitments to sell groups of residential mortgage loans
that it originates or purchases as part of its mortgage banking activities.
Firstar commits to sell the loans at specified prices in a future period
typically within 90 days. The risk associated with these commitments consists
primarily of loans not closing in sufficient volumes and at appropriate yields
to meet the sale commitments. Firstar had contracts totaling $589 million and
$2.1 billion on December 31, 1999 and 1998, respectively. Gains or losses on
these contracts are included in the determination of the market value of
mortgages held for sale.
Firstar has established two off-balance-sheet conduits which hold commercial
loans and securities totaling $8.1 billion at December 31, 1999. These conduits
obtain financing in the commercial paper market. Firstar, under credit
enhancement agreements with these conduits, may be required to repurchase assets
or provide alternative funding to the conduit if the credit quality of the
assets held falls below certain levels. These commitments totaled $1.7 billion
at December 31, 1999. No material funding or repurchase of assets had occurred
as of December 31, 1999.
Firstar also securitized $400 million of credit card receivables in 1995 through
a trust. At December 31, 1999 Firstar has a $216 million seller's interest in
the trust which owns $565 million of credit card receivables. The seller's
interest is recorded in the consolidated balance sheets as available-for-sale
securities. In November 1998 the trust began to pay down its investors'
interests and anticipates that all investors will be paid by December 2000 ("the
amortization period"). At the end of the amortization period, Firstar's seller's
interest will equal 100% of the trust's underlying credit card receivables which
will be transferred to Firstar upon termination of the trust.
Firstar also acts as an intermediary for customers in their management of
interest rate and foreign currency risk. In this regard, Firstar will enter into
interest rate swaps, caps, floors and foreign exchange contracts with its
customers to minimize their exposure to market risk. Firstar enters into
essentially offsetting transactions with other counterparties. Revenue from this
intermediary activity was $13.7 million and $10.4 million in 1999 and 1998,
respectively. Information on these transactions at December 31 is shown below:
1999 1998
- -------------------------------------------------------------------
NOTIONAL MARKET NOTIONAL MARKET
(dollars in thousands) AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------
Interest rate swaps:
In a receivable
position $725,784 $ 33,935 $596,598 $ 12,702
In a payable position 725,784 (31,057) 526,418 (10,578)
Interest rate
caps/floors:
Held 136,396 71 102,975 183
Written 136,396 (71) 102,975 (183)
Foreign exchange
contracts:
In a receivable
position 501,828 7,071 512,246 1,195
In a payable position 456,999 (5,063) 456,637 (1,789)
- -------------------------------------------------------------------
The notional values of derivative financial instruments do not represent direct
credit exposures. Firstar is exposed to credit-related losses in the event of
nonperformance by counterparties to these instruments. Where appropriate,
Firstar requires collateral based upon the positive market value of the exposure
taking into account bilateral netting agreements with certain counterparties.
Based upon market values of all derivative financial instruments, Firstar's
credit exposure was $41.5 million at December 31, 1999.
52 FIRSTAR CORPORATION
58
- ---------------------------------------------------------------
NOTE 21 -- LITIGATION
Various legal claims have arisen during the normal course of business which,
in the opinion of management, will not result in material liability to Firstar.
- ---------------------------------------------------------------
NOTE 22 -- DIVIDEND RESTRICTIONS
Bank regulatory agencies limit the amount of dividends a subsidiary bank can
declare to the parent company in any calendar year without obtaining prior
approval. The amount of dividends available to the parent company from the bank
subsidiaries at January 1, 2000 was $86 million.
- ---------------------------------------------------------------
NOTE 23 -- OTHER NONINTEREST EXPENSE
The following are included in all other expense for the years ended December
31.
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------
Outside services $113,569 $100,546 $ 82,714
Postage and courier 70,261 65,479 61,908
- -----------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 24 -- EARNINGS PER SHARE
The following table shows the amounts used in the computation of basic and
diluted earnings per share.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- -------------------------------------------------------------------------------
Net income $ 875,318 $805,450 $760,716
Dividends on preferred stock (83) (483)
Interest on convertible notes 43 83
- -------------------------------------------------------------------------------
Net income available to common shareholders $ 875,318 $805,410 $760,316
- -------------------------------------------------------------------------------
Weighted average shares:
Common shares 987,488 970,420 913,042
Convertible notes and preferred shares 602 1,639
Options & stock plans 15,266 18,063 17,726
- -------------------------------------------------------------------------------
Weighted average diluted common shares 1,002,754 989,085 932,407
- -------------------------------------------------------------------------------
Basic earnings per common share $ 0.89 $ 0.83 $ 0.83
Diluted earnings per common share 0.87 0.81 0.82
- -------------------------------------------------------------------------------
- ---------------------------------------------------------------
NOTE 25 -- BUSINESS SEGMENTS
Firstar's operations include three primary business segments: Consumer
Banking, Wholesale Banking, and Trust and Private Banking. Selected financial
information by business segment is summarized below. This information is derived
from the internal reporting systems used by management to assess segment
performance.
Consumer banking provides deposit, installment and credit card lending,
mortgage banking, leasing, investment, payment systems and other financial
services to individuals and small businesses. These services are provided
through retail branch offices, ATMs, voice banking, PC and video banking
options.
Wholesale banking provides traditional business lending, asset-based
lending, commercial real estate loans, equipment financing, cash management
services and international trade services to businesses and governmental
entities.
Trust and private banking provides personal financial and asset management
services, comprehensive employee benefit plan services, mutual fund custody and
corporate bond and stock transfer services.
Treasury includes the net effect of transfer pricing of interest income and
expense along with the operating results of the investment securities and
residential loan portfolios.
All revenue and expenses of administrative and support functions has been
allocated to the primary business segments.
Prior year amounts are not presented due to the unavailability of comparable
data from the merged companies.
TRUST AND
CONSUMER WHOLESALE PRIVATE
FOR THE YEAR ENDED DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) BANKING BANKING BANKING TREASURY
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income* $ 1,573,856 $ 628,192 $ 68,141 $ 427,253
Provision for loan losses 123,180 48,768 1,950 5,903
Noninterest income 662,134 195,755 463,061 81,621
Noninterest expense 1,442,250 181,377 333,619 18,140
Income taxes* 231,678 205,159 67,591 187,129
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 438,882 $ 388,643 $ 128,042 $ 297,702
- -----------------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $23,439,290 $18,019,753 $1,081,378 $6,719,104
Total assets 27,103,049 19,555,043 1,433,203 25,131,295
Deposits 42,668,953 5,893,310 1,828,970 1,429,969
- -----------------------------------------------------------------------------------------------------------------------------
MERGER-
RELATED
FOR THE YEAR ENDED DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) TOTAL EXPENSES CONSOLIDATED
- ----------------------------------------------------------- --------------------------------------------
Net interest income* $ 2,697,442 $ $ 2,697,442
Provision for loan losses 179,801 7,500 187,301
Noninterest income 1,402,571 1,402,571
Noninterest expense 1,975,386 470,463 2,445,849
Income taxes* 691,557 (100,012) 591,545
- -----------------------------------------------------------
Net income $ 1,253,269 $(377,951) $ 875,318
- -----------------------------------------------------------
Average balances:
Loans $49,259,525
Total assets 73,222,590
Deposits 51,821,202
- -----------------------------------------------------------
* Taxable equivalent basis
BANK WITHOUT BOUNDARIES 53
59
- ---------------------------------------------------------------
NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about both on- and
off-balance-sheet financial instruments for which it is practicable to estimate
fair value. For financial instruments where an available trading market does not
exist, significant estimations and present value calculations were used to
determine fair values as described below. Changes in those estimates and
assumptions could have a significant impact on fair values.
CASH AND CASH EQUIVALENTS
For cash and due from banks, federal funds sold, securities purchased under
agreement to resell and interest-bearing deposits in banks, the carrying value
is a reasonable estimate of fair value due to their short-term nature.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments or estimated current
replacement cost of the instrument.
LOANS
For variable rate loans which reprice frequently or are based on market
changes, with no significant changes in credit risk, fair values are based on
carrying values. The fair values for all other types of loans (including
nonperforming loans) are estimated by discounting the future cash flows using
current rates being offered for similar loans to borrowers of similar credit
quality.
DEPOSITS
The fair values of noninterest-bearing deposits, savings, NOW and money
market deposit accounts are, by definition, equal to the amount payable on
demand at the reporting date. The carrying values of variable rate, fixed-term
time deposits and certificates of deposit approximate their fair values. For
fixed-rate certificates of deposit, fair values are estimated using a discounted
cash flow analysis based on rates currently offered for deposits of similar
remaining maturities.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings approximate their fair
values due to their short-term nature.
LONG-TERM DEBT
Fair values of Firstar's long-term debt are estimated by using discounted
cash flow analyses, based on current market rates for debt with similar terms
and remaining maturities.
OFF-BALANCE SHEET INSTRUMENTS
The fair value of interest rate swap agreements is based on the present
value of the swap primarily using counterparty or third party dealer quotes.
Fair values for caps and floors were obtained using an option pricing model.
These values represent the estimated amount Firstar would receive or pay to
terminate the contracts or agreements taking into account current interest rates
and market volatility. Prices obtained from counterparties or pricing models are
tested by obtaining third party valuations. The fair value of commitments to
extend credit and standby letters of credit is not material and is not shown
here.
Due to the wide range of permitted valuation techniques and numerous estimates
and assumptions which must be made for financial instruments which lack
available secondary markets, management is concerned that reasonable
comparability of estimated fair value disclosures between financial institutions
may not be likely.
The following table summarizes the estimated fair values of Firstar's financial
instruments at December 31.
1999 1998
- -------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 4,185,201 $ 4,185,201 $ 4,605,484 $ 4,605,484
Trading securities 129,294 129,294
Investment securities 13,113,867 13,119,723 15,874,948 15,878,557
Net loans 49,911,110 50,737,867 47,314,839 48,272,451
Loans held for sale 624,680 625,070 1,757,833 2,015,302
Financial liabilities:
Deposits 51,886,411 52,256,815 54,312,162 54,807,710
Short-term borrowings 8,302,019 8,302,019 6,645,968 6,645,968
Long-term debt 5,038,383 4,907,654 5,457,203 5,662,703
Derivative financial instruments:
Asset and liability management:
Interest rate contracts:
Asset 404 37,469
Liability 19,766 158
Customer activities:
Interest rate contracts:
Asset 34,006 34,006 12,885 12,885
Liability 31,128 31,128 10,761 10,761
Foreign exchange contracts:
Asset 7,071 7,071 1,195 1,195
Liability 5,063 5,063 1,789 1,789
- -------------------------------------------------------------------------------------------------------------------
54 FIRSTAR CORPORATION
60
- ---------------------------------------------------------------
NOTE 27 -- PARENT COMPANY FINANCIAL INFORMATION --
BALANCE SHEETS
AS OF DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------
Assets:
Investment in subsidiaries:
Banking subsidiaries $6,497,477 $6,356,137
Other subsidiaries 126,531 197,103
- ------------------------------------------------------------------
Total investment in subsidiaries 6,624,008 6,553,240
Cash and cash equivalents 577,017 384,516
Other investments 30,630 25,962
Advances to subsidiaries 570,380 707,820
Other assets 943,554 840,421
- ------------------------------------------------------------------
Total assets $8,745,589 $8,511,959
- ------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Short-term borrowings $ 139,347 $ 134,060
Long-term debt 1,980,637 1,485,382
Other liabilities 316,969 288,849
Shareholders' equity 6,308,636 6,603,668
- ------------------------------------------------------------------
Total liabilities and shareholders'
equity $8,745,589 $8,511,959
- ------------------------------------------------------------------
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Revenue:
Dividend from subsidiaries:
Banking subsidiaries $666,006 $803,176 $789,307
Nonbank subsidiaries 12,000 16,300 6,225
- ---------------------------------------------------------------------------------------
Total dividends from subsidiaries 678,006 819,476 795,532
Fees and assessments from subsidiaries 37,612 82,457 82,709
Other income 91,235 43,238 26,106
- ---------------------------------------------------------------------------------------
Total revenue 806,853 945,171 904,347
- ---------------------------------------------------------------------------------------
Expense:
Interest on short-term borrowings 11,308 9,734 6,587
Interest on long-term debt 112,234 96,059 78,709
Other operating expenses 221,548 285,623 240,510
- ---------------------------------------------------------------------------------------
Total expenses 345,090 391,416 325,806
Income before income tax benefit 461,763 553,755 578,541
Income tax benefit 19,790 81,056 64,166
Equity in undistributed income of subsidiaries 393,765 170,639 118,009
- ---------------------------------------------------------------------------------------
Net income $875,318 $805,450 $760,716
- ---------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------------------
Cash Flow from Operating Activities:
Net income $ 875,318 $ 805,450 $ 760,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (393,765) (170,639) (130,821)
Depreciation and amortization 63,649 63,254 37,154
Net change in receivables from subsidiaries (942) 2,574
(Gain)/loss on sale of securities available for
sale 1,630 (333) (210)
Net change in other assets and liabilities (68,219) (17,740) 48,628
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 478,613 679,050 718,041
- -----------------------------------------------------------------------------------------
Cash Flows form Investing Activities:
Capital contributions to subsidiaries (211,005) (7,875)
Net change in advances to subsidiaries 137,440 (100,577) (315,962)
Proceeds from maturities of available for sale
securities 1,071 10,939 4,100
Proceeds from sales of available for sale securities 328 616
Purchase of available for sale securities (10,790) (10,626) (4,554)
Cash from mergers of holding companies 55,659 (386,850)
Other investing activity 45,805 93 (12,444)
- -----------------------------------------------------------------------------------------
Net cash provided by (used) in investing
activities 173,854 (254,901) (723,585)
- -----------------------------------------------------------------------------------------
Cash Flows form Financing Activities:
Net change in short-term borrowings 5,287 30,447 (56,870)
Net change in long-term debt 494,008 63,601 906,459
Dividends paid (456,570) (394,583) (325,049)
Common stock transactions (502,691) (19,868) (572,626)
Shares reserved to meet deferred compensation
obligations 1,193 1,945
- -----------------------------------------------------------------------------------------
Net cash used in financial activities (459,966) (319,210) (46,141)
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 192,501 104,939 (51,685)
Cash and cash equivalents at beginning of year 384,516 279,577 331,262
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 577,017 $ 384,516 $ 279,577
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Interest expense $109,272 $129,329 $ 79,430
Taxes paid 199,420 137,166 196,824
- ---------------------------------------------------------------------------------------
BANK WITHOUT BOUNDARIES 55
61
- --------------------------------------------------------------------------------
NOTE 28 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for 1999 and
1998.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER ENDED
1999 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 662,829 $661,481 $663,411 $655,425
Provision for loan losses 43,749 55,325 44,838 43,389
Net interest income after provision for loan losses 619,080 606,156 618,573 612,036
Noninterest income 361,423 348,621 353,014 339,513
Noninterest expense 548,295 840,589 536,122 520,843
Income taxes 164,163 85,828 144,176 143,082
Net income 268,045 28,360 291,289 287,624
- ---------------------------------------------------------------------------------------------------------
Per share:
Basic earnings per common share $ 0.27 $ 0.03 $ 0.29 $ 0.29
Diluted earnings per common share 0.27 0.03 0.29 0.29
Cash dividends declared on common stock 0.1625 0.10 0.10 0.10
Book value of common shares at quarter-end 6.47 6.56 6.74 6.84
Market price -- high 29.50 29.63 35.33 31.94
low 19.56 22.13 26.00 27.42
Weighted average common shares outstanding (000's) 980,630 985,779 992,496 991,182
Weighted average diluted common shares (000's) 993,411 999,298 1,009,669 1,008,845
- ---------------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 1.49% 0.15% 1.58% 1.58%
Return on average common equity 16.48 1.69 17.07 17.25
Net interest margin 4.17 4.04 4.12 4.07
Efficiency ratio 52.88 82.11 52.04 51.62
Noninterest income as a percent of net revenue 34.86 34.05 34.26 33.65
- ---------------------------------------------------------------------------------------------------------
QUARTER ENDED
- ---------------------------------------------------------------------------------------------------------
1998 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 656,376 $633,187 $629,750 $616,308
Provision for loan losses 39,905 55,909 31,794 37,182
Net interest income after provision for loan losses 616,471 577,278 597,956 579,126
Noninterest income 342,760 380,127 317,692 324,772
Noninterest expense 812,501 664,870 535,878 516,567
Income taxes 43,560 99,769 123,949 133,638
Net income 103,170 192,766 255,821 253,693
- ---------------------------------------------------------------------------------------------------------
Per share:
Basic earnings per common share $ 0.10 $ 0.20 $ 0.26 $ 0.27
Diluted earnings per common share 0.10 0.19 0.26 0.26
Cash dividends declared on common stock 0.10 0.08 0.08 0.08
Book value of common shares at quarter-end 6.70 6.70 6.54 6.37
Market price -- high 31.31 24.50 21.46 20.42
low 19.06 18.29 19.73 17.71
Weighted average common shares outstanding (000's) 984,314 974,214 969,180 953,275
Weighted average diluted common shares (000's) 1,001,719 992,495 987,835 973,285
- ---------------------------------------------------------------------------------------------------------
Ratios:
Return on average assets 0.56% 1.07% 1.45% 1.50%
Return on average common equity 6.13 11.88 16.47 17.31
Net interest margin 4.07 4.02 4.02 4.08
Efficiency ratio 80.08 64.65 55.68 54.06
Noninterest income as a percent of net revenue 33.78 36.96 33.01 33.99
- ---------------------------------------------------------------------------------------------------------
56 FIRSTAR CORPORATION
62
OFFICE OF THE CEO
Jerry A. Grundhofer
President and Chief Executive Officer
Thomas H. Jacobsen
Chariman
William L. Chenevich
Vice Chairman
Richard K. Davis
Vice Chairman
David M. Moffett
Vice Chairman and Chief Financial Officer
MANAGEMENT COMMITTEE
Jerry A. Grundhofer
President and Chief Executive Officer
W. Randolph Adams
Executive Vice President
Mercantile Conversion Management
John Q. Arnold
Executive Vice President
Corporate Risk Management
Dan A. Arrigoni
Executive Vice President
Mortgage Banking
Kathy P. Beechem
Executive Vice President
Metropolitan Banking and In-Store Banking
Daniel B. Benhase
Executive Vice President
Trust
Joseph A. Campanella
Executive Vice President
Community Banking East and West
Jennie P. Carlson
Executive Vice President
General Counsel and Secretary
William L. Chenevich
Vice Chairman
Information Systems and Operations
Richard K. Davis
Vice Chairman
Consumer Banking
John R. Elmore
Executive Vice President
Community Banking Midwest
Russell L. Goldammer
Senior Vice President
Data Processing
Kenneth R. Griffith
Executive Vice President
Retail Lending and Finance Company
Joseph E. Hasten
Bank Vice Chairman
Large Corporate and Speciality Businesses
John R. Heistad
Executive Vice President
Credit Administration
James D. Hogan
Executive Vice President and Controller
Jerome C. Kohlhepp
Executive Vice President
Specialized Lending
Bruce R. Laning
President and Chief Executive Officer
FIRMCO
Mark J. Masuhr
Executive Vice President
Commercial Products
David M. Moffett
Vice Chairman and
Chief Financial Officer
Mark D. Quinlan
Executive Vice President
Information Systems
Thomas E. Rea
Senior Vice President
Information Systems
Jeffrey S. Rosen
Executive Vice President
Small Business Banking
Stephen E. Smith
Executive Vice President
Human Resources
Steven M. Soroka
Senior Vice President
Corporate Services
Patricia A. Wesner
Executive Vice President
Credit Card/Debit Card
Jay B. Williams
Executive Vice President
Commercial Banking
BANK WITHOUT BOUNDARIES 57
63
CORPORATE DIRECTORS
Victoria Buyniski Gluckman 3, 4
President and Chief Executive Officer
United Medical Resources, Inc.
John C. Dannemiller 4, 5
Chairman, Chief Executive Officer and President
Applied Industrial Technologies
David B. Garvin 3
Ironwood Farm
Jerry A. Grundhofer 1
President and Chief Executive Officer
Firstar Corporation
J. P. Hayden, Jr. 1, 2, 3, 5
Chairman
The Midland Company
Joe F. Hladky 3, 4
President
The Gazette Company
Roger L. Howe 1, 2, 3
Formerly Chairman
U. S. Precision Lens, Inc.
Thomas H. Jacobsen 1
Chairman
Firstar Corporation
Sheldon B. Lubar 1, 5
Chairman
Lubar & Company
Frank Lyon, Jr. 2, 4
Wingmead
Daniel F. McKeithan, Jr. 1, 3, 5
President & Chief Executive Officer
Tamarack Petroleum Company, Inc.
David B. O'Maley 2
Chairman, President and Chief Executive Officer
Ohio National Financial Services
O'dell M. Owens, M.D., M.P.H. 4
Medical Director of United Healthcare
Thomas E. Petry 1, 2, 3
Formerly Chairman and Chief Executive Officer
Eagle-Picher Industries, Inc.
Craig D. Schnuck 3, 4
Chairman and Chief Executive Officer
Schnuck Markets, Inc.
John J. Stollenwerk 2, 3, 4
President
Allen-Edmonds Shoe Corporation
Patrick T. Stokes 1, 5
President
Anheuser Busch
William W. Wirtz 3
President
Wirtz Corporation
1 Executive Committee
2 Compensation Committee
3 Audit Committee
4 Community Outreach and Fair Lending
Committee
5 Governance Committee
58 FIRSTAR CORPORATION
64
CORPORATE INFORMATION
FINANCIAL INFORMATION
Additional financial or general information, including copies of this annual
report, Form 10-K filed with the Securities and Exchange Commission, and interim
reports published quarterly during the year may be obtained online at
www.firstar.com/about/about.html or by contacting:
Firstar Investor Relations or Joseph D. Messinger
Request Line Senior Vice President
414.765.4808 Investor Relations
414.765.5235
MEDIA REQUESTS SHOULD BE MADE TO:
Steven W. Dale
Senior Vice President
Media Relations
414.765.4455
STOCK LISTING
Firstar Corporation common stock is listed under the symbol "FSR" on the New
York Stock Exchange.
TRANSFER AGENT/SHAREHOLDER SERVICES
Inquiries related to shareholder records, stock transfers, changes of ownership,
changes of address and dividend payment should be sent to the transfer agent at
the following address:
Firstar Bank, N.A.
1555 North River Center Drive, Suite 301
Milwaukee, WI 53212
Phone: 1.800.637.7549
Fax: 414.276.4226
email: firstarinvestorservice@firstar.com
DIVIDEND REINVESTMENT
Firstar Corporation offers its shareholders an automatic dividend reinvestment
program. The program enables shareholders to reinvest their dividends in shares
at the prevailing market price. For more information, write to Firstar Bank,
N.A., Dividend Reinvestment Department, 1555 North River Center Drive, Suite
301, Milwaukee, WI 53212 or call 1.800.637.7549.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants of Firstar Corporation are
PricewaterhouseCoopers LLP.
MILWAUKEE HEADQUARTERS CINCINNATI HEADQUARTERS
777 East Wisconsin Avenue 425 Walnut Street
Milwaukee, WI 53202 Cincinnati, OH 45202
414.765.4321 513.632.4000
ST. LOUIS HEADQUARTERS
Seventh Street and Washington Avenue
St. Louis, MO 63101
314.418.2525
ONLINE
For product, corporate and financial information, please visit our site on the
web at www.firstar.com
THE ANNUAL MEETING OF SHAREHOLDERS OF FIRSTAR CORPORATION WILL BE HELD AT 11:00
A.M. (EDT), TUESDAY, APRIL 11, 2000, IN THE PRESIDENTIAL BALLROOM, THIRD FLOOR
OF THE WESTIN HOTEL, FIFTH AND VINE STREETS, DOWNTOWN CINCINNATI.
DIVERSITY
Firstar Corporation and its subsidiaries are committed to creating and
maintaining a diverse workplace, and one of our many strengths is the diversity
of our workforce. We recognize and value each other's differences by promoting
fairness and respect in the way we behave toward one another. By treating
individual differences as assets, we are more effective in valuing the
diversity, not only of our employees, but also of our customers and the
communities we serve.
EQUAL EMPLOYMENT OPPORTUNITY/AFFIRMATIVE ACTION
Firstar Corporation and its subsidiaries are committed to providing Equal
Employment Opportunity to all employees and applicants for employment. In
keeping with this policy, employment decisions are made based upon job-related
knowledge, skills and abilities rather than race, color, religion, national
origin, gender, age, martial status, disability, veteran status, sexual
orientation or any other characteristics protected by law. The corporation
complies with state and federal Fair Employment Laws, including regulations
applying to federal contractors.
65
FIRSTAR CORPORATION
Milwaukee Headquarters
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202 U.S.A.
Cincinnati Headquarters
425 Walnut Street
Cincinnati, Ohio 45202 U.S.A.
St. Louis Headquarters
Seventh Street and Washington Avenue
St. Louis, Missouri 63101 U.S.A.
Website: www.firstar.com