FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED June 30, 2000 COMMISSION FILE NUMBER 1-2981
FIRSTAR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1940778
(State of Incorporation) (I.R.S. EMPLOYER Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Telephone Number (414) 765-4321
The registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
As of July 31, 2000, 958,208,593 shares of common stock were outstanding.
-1-
FIRSTAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2000
Page
Table of Contents Number
- - ----------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights.........................................3
Item 1. Financial Statements:
Consolidated Financial Statements ...................4
Notes to Consolidated Financial Statements ..........8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ..................................17
Part II. Other Information:
Item 1. Legal Proceedings.................................none
Item 2. Changes in Securities.............................none
Item 3. Defaults Upon Senior Securities...................none
Item 4. Submission of Matters to a Vote of
Security Holders..................................none
Item 5. Other Information.................................none
Item 6. Exhibits and Reports on Form 8-K....................27
Signatures..........................................................27
-2-
PART I FINANCIAL INFORMATION
FIRSTAR CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
Second Quarter Six Months Ended June 30,
----------------------------------------- -----------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------------- ------------- -------- ------------- ------------- --------
Net income $ 316,743 $ 291,289 8.7 % $ 624,542 $ 578,913 7.9 %
Per share:
Basic earnings per common share $ 0.33 $ 0.29 13.8 % $ 0.64 $ 0.58 10.3 %
Diluted earnings per common share 0.32 0.29 10.3 0.64 0.57 12.3
Common stock cash dividends
declared 0.1625 0.10 62.5 0.3250 0.20 62.5
Book value per common share 6.46 6.74 (4.2) 6.46 6.74 (4.2)
Market value per common share 21.06 29.83 (29.4) 21.06 29.83 (29.4)
Average balances:
Total assets $ 74,005,527 $ 73,921,886 0.1 % $ 73,273,162 $ 73,770,541 (0.7)%
Earning assets 66,789,034 66,289,421 0.8 66,200,091 66,217,080 (0.0)
Loans 51,413,536 49,180,220 4.5 51,279,286 48,775,187 5.1
Deposits 52,762,280 52,369,235 0.8 52,284,091 52,621,784 (0.6)
Total shareholders' equity 6,321,061 6,843,721 (7.6) 6,359,055 6,803,840 (6.5)
Ratios:
Return on average assets 1.72% 1.58% 1.71% 1.58%
Return on average equity 20.15 17.07 19.75 17.16
Average total shareholders' equity
to average total assets 8.54 9.26 8.68 9.22
Risk-based capital ratios:
Tier 1 7.90 9.22 7.90 9.22
Total 10.92 11.36 10.92 11.36
Leverage - average assets (a) 7.29 7.80 7.29 7.80
Net interest margin 4.12 4.09 4.14 4.09
Noninterest expense to net revenue 48.05 52.03 48.27 51.83
Noninterest income as a percent
of net revenue 35.14 34.26 34.89 33.96
Net income to net revenue 29.95 28.27 29.73 28.39
Excluding Merger Related Charges:
Net income $ 361,343 $ 310,736 16.3 % $ 703,742 $ 608,045 15.7 %
Noninterest expense 441,189 506,022 (12.8) 895,115 1,011,865 (11.5)
Basic earnings per common share 0.37 0.31 19.4 0.72 0.61 18.0
Diluted earnings per common share 0.37 0.31 19.4 0.72 0.60 20.0
Return on average assets 1.96% 1.69% 1.93% 1.66%
Return on average equity 22.99 18.21 22.26 18.02
Noninterest expense to net revenue 41.72 49.11 42.61 49.62
(a) - defined by regulatory authorities as tier 1 equity to the current quarter's adjusted
average assets
-3-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
June 30, December 31,
2000 1999
------------- -------------
ASSETS:
Cash and due from banks $ 3,502,277 $ 3,288,291
Money market investments 260,923 896,910
Investment securities:
Available-for-sale 12,756,055 12,919,413
Held-to-maturity (market value of $254,251
at June 30, 2000, $200,310 at December
31, 1999) 245,317 194,454
------------ ------------
Total securities 13,001,372 13,113,867
Loans held for sale 1,501,860 624,680
Loans:
Commercial loans 18,824,205 17,346,596
Real estate loans 18,151,027 19,815,017
Retail loans 15,171,619 13,464,395
------------ ------------
Total loans 52,146,851 50,626,008
Allowance for loan losses 717,631 714,898
------------ ------------
Net loans 51,429,220 49,911,110
Premises and equipment 1,008,170 1,002,887
Acceptances - customers' liability 15,913 15,149
Other assets 3,710,066 3,934,939
------------ ------------
Total assets $ 74,429,801 $ 72,787,833
------------ ------------
------------ ------------
LIABILITIES:
Deposits:
Noninterest-bearing deposits $ 9,842,403 $ 10,299,994
Interest-bearing deposits 42,880,129 41,586,417
------------ ------------
Total deposits 52,722,532 51,886,411
Short-term borrowings 9,666,931 8,302,019
Long-term debt 4,481,685 5,038,383
Acceptances outstanding 15,913 15,149
Other liabilities 1,336,259 1,237,235
------------ ------------
Total liabilities 68,223,320 66,479,197
SHAREHOLDERS' EQUITY:
Common stock:
Shares authorized - 2,000,000,000 at June 30,
2000 and December 31, 1999.
Shares issued - 984,397,677 at June 30,
2000 and 984,579,636 at December 31, 1999. 9,844 9,846
Surplus 1,879,301 1,926,239
Retained earnings 4,971,621 4,660,463
Treasury stock, at cost - 23,972,502 shares at
June 30, 2000 and 9,033,176 shares at
December 31, 1999. (531,854) (192,894)
Accumulated other comprehensive income (122,431) (95,018)
------------ ------------
Total shareholders' equity 6,206,481 6,308,636
------------ ------------
Total liabilities and shareholders' equity $ 74,429,801 $ 72,787,833
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
-4-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
Second Quarter Six Months Ended June 30,
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -------------
INTEREST INCOME:
Interest and fees on loans $ 1,094,152 $ 978,116 $ 2,153,339 $ 1,939,819
Interest and fees on loans held for sale 34,318 22,320 46,032 53,121
Interest on investment securities:
Taxable 204,541 210,990 403,906 427,735
Non-taxable 21,523 23,168 44,352 46,867
Interest on trading securities 1 2,814 (1) 5,378
Interest on money market investments 6,179 6,778 13,197 13,032
----------- ----------- ----------- -----------
Total interest income 1,360,714 1,244,186 2,660,825 2,485,952
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 473,746 413,227 914,023 840,444
Interest on short-term borrowings 139,957 84,668 251,796 162,397
Interest on long-term debt 72,424 82,880 150,766 164,275
----------- ----------- ----------- -----------
Total interest expense 686,127 580,775 1,316,585 1,167,116
----------- ----------- ----------- -----------
Net interest income 674,587 663,411 1,344,240 1,318,836
Provision for loan losses 51,054 44,838 96,743 88,227
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 623,533 618,573 1,247,497 1,230,609
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income 113,365 106,804 227,211 208,301
Mortgage banking income 41,853 42,015 78,148 81,473
Retail deposit income 55,235 48,515 103,070 93,904
Cash management income 36,906 34,568 72,661 67,234
Credit card income 34,572 28,185 64,245 52,455
ATM Income 11,231 9,575 23,172 17,933
Investment securities gains - net 3 3,283 14 16,244
All other income 78,409 80,069 164,301 154,983
----------- ----------- ----------- -----------
Total noninterest income 371,574 353,014 732,822 692,527
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries 180,314 219,475 373,624 434,315
Pension and other employee benefits 23,747 40,837 53,127 86,307
Equipment expense 35,201 38,130 70,822 73,883
Occupancy expense - net 40,486 40,411 80,614 83,809
All other expense 161,441 167,169 316,928 333,551
----------- ----------- ----------- -----------
441,189 506,022 895,115 1,011,865
Merger related charges 66,900 30,100 118,800 45,100
----------- ----------- ----------- -----------
Total noninterest expense 508,089 536,122 1,013,915 1,056,965
----------- ----------- ----------- -----------
INCOME BEFORE TAX 487,018 435,465 966,404 866,171
Income tax 170,275 144,176 341,862 287,258
----------- ----------- ----------- -----------
NET INCOME $ 316,743 $ 291,289 $ 624,542 $ 578,913
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share $ 0.33 $ 0.29 $ 0.64 $ 0.58
Diluted earnings per common share 0.32 0.29 0.64 0.57
Common stock cash dividends declared 0.1625 0.10 0.3250 0.20
The accompanying notes are an integral part of these statements
-5-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
Accumulated
Other
Common Retained Treasury Comprehensive Total
Stock Surplus Earnings Stock Income Equity
--------- ------------ ------------ ----------- ------------- ------------
Balance, January 1, 1999 $ 9,876 $ 2,170,024 $ 4,302,420 $ (19,659) $ 141,007 $ 6,603,668
Net income 578,913 578,913
Unrealized loss
on securities
available for sale (364,973) (364,973)
Reclassification
adjustment for gains
realized in net income (16,244) (16,244)
Income taxes 134,566 134,566
-----------
Comprehensive income 332,262
Cash dividends declared
on common stock (239,323) (239,323)
Issuance of common stock
and treasury shares 73 84,080 55,300 139,453
Purchase of treasury
stock (171,241) (171,241)
Shares reserved to meet
deferred compensation
obligations 1,831 (1,831) --
Amortization of stock
awards 2,251 2,251
-------- ----------- ----------- ---------- ---------- -----------
Balance, June 30, 1999 $ 9,949 $ 2,258,186 $ 4,642,010 $ (137,431) $ (105,644) $ 6,667,070
-------- ----------- ----------- ---------- ---------- -----------
-------- ----------- ----------- ---------- ---------- -----------
Balance, January 1, 2000 $ 9,846 $ 1,926,239 $ 4,660,463 $ (192,894) $ (95,018) $ 6,308,636
Net income 624,542 624,542
Unrealized loss
on securities
available for sale (42,018) (42,018)
Reclassification
adjustment for gains
realized in net income (14) (14)
Income taxes 14,619 14,619
-----------
Comprehensive income 597,129
Cash dividends declared
on common stock (313,384) (313,384)
Issuance of common stock
and treasury shares (2) (54,264) 152,274 98,008
Purchase of treasury
stock (485,014) (485,014)
Shares reserved to meet
deferred compensation
obligations 6,220 (6,220) --
Amortization of stock
awards 1,106 1,106
-------- ----------- ----------- ---------- ---------- -----------
Balance, June 30, 2000 $ 9,844 $ 1,879,301 $ 4,971,621 $ (531,854) $ (122,431) $ 6,206,481
-------- ----------- ----------- ---------- ---------- -----------
-------- ----------- ----------- ---------- ---------- -----------
The accompanying notes are an integral part of these statements
-6-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months Ended
June 30
2000 1999
------------ ------------
Cash Flows from Operating Activities:
Net Income $ 624,542 $ 578,913
Adjustments:
Depreciation and amortization 72,044 87,680
Intangible amortization 60,199 60,723
Provision for loan losses 96,743 88,228
Net decrease in trading securities 0 39,136
Provision for deferred taxes 109,601 66,236
(Gain) / loss on sale of premises and equipment - net 7,040 (1,189)
Net (gain) / loss on sale of assets 4,965 (16,691)
Proceeds from sale of loans originated for sale 2,444,503 4,539,038
Mortgage loans originated for sale on the secondary market (2,576,436) (3,692,676)
Net change in other assets and liabilities 144,975 70,211
------------ ------------
Total adjustments 363,634 1,240,696
------------ ------------
Net cash provided by/(used in) operating activities 988,176 1,819,609
------------ ------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity securities 11,910 70,175
Proceeds from maturities of available-for-sale securities 695,127 2,707,746
Proceeds from sales of available-for-sale securities 5,321,333 1,379,789
Purchase of held-to-maturity securities (23,690) (19,978)
Purchase of available-for-sale securities (5,880,981) (3,487,620)
Net increase in loans (3,999,030) (2,328,184)
Proceeds from sales of loans 1,574,187 144,214
Proceeds from sales of premises and equipment 7,424 15,631
Purchases of premises and equipment (88,579) (89,593)
Purchases of corporate owned life insurance 0 (80,000)
Sale of banking offices, net of cash paid (78,211) (110,401)
------------ ------------
Net cash provided by/(used in) investing activities (2,460,510) (1,798,221)
------------ ------------
Cash Flows from Financing Activities:
Net increase/(decrease) in deposits 970,718 (1,707,952)
Net increase/(decrease) in short-term borrowings 1,364,912 902,949
Principal payments on long-term debt (856,698) (899,474)
Proceeds from issuance of long-term debt 298,626 1,210,000
Proceeds from issuance of common stock 73,917 129,864
Purchase of treasury stock (485,014) (171,242)
Dividends paid (316,128) (234,474)
------------ ------------
Net cash provided by/(used in) financing activities 1,050,333 (770,329)
------------ ------------
Net decrease in cash and cash equivalents (422,001) (748,941)
Cash and cash equivalents at beginning of period 4,185,201 4,605,484
------------ ------------
Cash and cash equivalents at end of period $ 3,763,200 $ 3,856,543
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,271,597 $ 1,179,497
Income taxes 214,914 141,445
Transfer to foreclosed assets from loans $ 39,164 $ 36,287
Sales of Banking Offices
Assets sold $ 47,218 $ 4,503
Liabilities sold $ 135,438 120,810
-7-
Notes to Consolidated Financial Statements
- - ------------------------------------------
Note 1. Basis of Presentation
- - ------------------------------
These consolidated financial statements have been prepared by Firstar
Corporation ("Firstar") pursuant to the rules and regulations of the
Securities and Exchange Commission and, therefore, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in Firstar's annual
report on Form 10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission.
These consolidated financial statements include the accounts of
Firstar and all of its subsidiaries and reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
results for the periods reported. All such adjustments are of a normal
recurring nature.
Note 2. Investment Securities
- - ------------------------------
The following table summarizes unrealized gains and losses for
held-to-maturity and available-for-sale securities at June 30, 2000 and
December 31, 1999. (dollars in thousands)
June 30, 2000 December 31, 1999
------------------------------------------ ------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- ------- ----------- ----------- ------- ------- ----------
Held-to-Maturity
- - ----------------
Mortgage-backed
securities $ 41,027 $ -- $ -- $ 41,027 $ 45,411 $ -- $ -- $ 45,411
Obligations of state and
political subdivisions 204,290 8,934 -- 213,224 149,043 5,856 -- 154,899
---------- ------- ------- ----------- ---------- ------- ------- -----------
Total held-to-
maturity securities $ 245,317 $ 8,934 $ -- $ 254,251 $ 194,454 $ 5,856 $ -- $ 200,310
---------- ------- ------- ----------- ---------- ------- ------- -----------
---------- ------- ------- ----------- ---------- ------- ------- -----------
June 30, 2000 December 31, 1999
------------------------------------------ ------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- ------- ----------- ---------- ------- ------- -----------
Available-for-Sale
- - ------------------
U.S. Treasuries and
agencies $ 1,090,420 $ 3,882 $ (15,202) $ 1,079,100 $ 1,787,717 $ 10,505 $ (12,210) $ 1,786,012
Mortgage-backed
securities 6,940,411 17,663 (125,496) 6,832,578 6,654,624 19,880 (119,652) 6,554,852
Obligations of state and
political subdivisions 1,456,897 9,914 (9,948) 1,456,863 1,598,685 14,860 (9,650) 1,603,895
Other debt securities 2,802,746 1,354 (70,449) 2,733,651 1,792,296 1 (50,061) 1,742,236
Money market mutual funds 193,057 -- -- 193,057 437,058 -- -- 437,058
Federal Reserve/FHLB
stock and other
equity securities 460,930 -- (124) 460,806 795,407 17 (64) 795,360
---------- ------- ------- ----------- ---------- ------- ------- -----------
Total available-for-
sale securities $12,944,461 $ 32,813 $(221,219) $12,756,055 $13,065,787 $ 45,263 $(191,637) $12,919,413
---------- ------- ------- ----------- ---------- ------- ------- -----------
---------- ------- ------- ----------- ---------- ------- ------- -----------
-8-
Note 3. Loans
- - -------------
The following table summarizes the composition of the loan portfolio,
net of unearned interest, as of June 30, 2000 and December 31, 1999.
(dollars in thousands)
June 30, December 31,
2000 1999
------------- ------------
Commercial loans:
Corporate loans $15,019,753 $13,848,385
Asset-based lending 1,493,636 1,326,741
Commercial leasing 2,014,932 1,816,250
Industrial revenue bonds 295,884 355,220
----------- -----------
Total commercial loans 18,824,205 17,346,596
----------- -----------
Real estate loans:
Residential mortgage 6,590,163 8,779,037
Commercial mortgage 9,072,117 8,851,504
Construction and land development 2,488,747 2,184,476
----------- -----------
Total real estate loans 18,151,027 19,815,017
----------- -----------
Retail loans:
Installment 10,695,948 10,053,901
Credit cards 1,443,327 1,403,655
Retail leasing 3,032,344 2,006,839
----------- -----------
Total retail loans 15,171,619 13,464,395
----------- -----------
Total loans $52,146,851 $50,626,008
----------- -----------
----------- -----------
Note 4. Impaired Loans
- - -----------------------
The following table shows Firstar's recorded investment in impaired loans and
the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No.
118) at June 30, 2000 and December 31, 1999. (dollars in thousands)
June 30, 2000 December 31, 1999
--------------------------- ------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ----------- ---------- ----------
Impaired Loans:
Valuation allowance required $ 31,453 $ 8,035 $ 21,696 $ 8,218
No valuation allowance required 150,314 -- 131,514 --
---------- ----------- ---------- ----------
Total impaired loans $ 181,767 $ 8,035 $ 153,210 $ 8,218
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The average recorded investment in impaired loans for the six months ended
June 30, 2000 was $166.8 million, compared to $157.4 million for the same period in
1999. As a general policy, Firstar applies both principal and interest payments
received on impaired loans as a reduction of principal.
-9-
Note 5. Allowance for Loan Losses
- - ---------------------------------
A summary of the activity in the allowance for loan losses is shown in the
following table. (dollars in thousands)
Six Months Ended
June 30,
--------------------
2000 1999
-------- --------
Balance - beginning of period $714,898 $704,846
Loans charged-off (133,402) (112,999)
Recoveries on loans previously charged-off 39,392 34,356
-------- --------
Net charge-offs (94,010) (78,643)
Provision charged to earnings 96,743 88,227
-------- --------
Balance - end of period $717,631 $714,430
-------- --------
-------- --------
Note 6. Deposits
- - -----------------
The following table summarizes the composition of deposits of Firstar as of
June 30, 2000 and December 31, 1999. (dollars in thousands)
June 30, December 31,
2000 1999
------------- ------------
Noninterest-bearing deposits $ 9,842,403 $10,299,994
Interest-bearing deposits:
Savings 3,120,312 3,349,308
NOW accounts 6,576,784 6,980,734
Money market deposit accounts 9,791,418 10,263,894
Time deposits $100,000 and over - domestic 4,543,126 3,753,526
Foreign deposits $100,000 and over 2,316,983 773,926
All other deposits 16,531,506 16,465,029
----------- -----------
Total interest-bearing deposits 42,880,129 41,586,417
----------- -----------
Total deposits $52,722,532 $51,886,411
----------- -----------
----------- -----------
-10-
Note 7. Merger Related Charges
- - ------------------------------
Firstar recorded merger and integration charges of $118.8 million
in the first six months of 2000 and $45.1 million in the first six months
of 1999. The components of the charges are shown below. Firstar expects
to incur additional merger-related expenses in connection with the combining
of operations of Firstar Corporation and Mercantile Bancorporation, Inc.
(dollars in thousands)
Six Months
Ended
Six Months Ended June 30, 2000 June 30, 1999
--------------------------------------------- -------------
Firstar/ Firstar/ Firstar/
Star Mercantile Star
Merger Merger Total Merger
----------- ----------- ----------- -----------
Severance and related costs $ 9,883 $ 17,351 $ 27,234 $ 8,739
Fixed asset write-downs 31 4,845 4,876 674
System conversions 15,313 58,751 74,064 33,575
Gain on sale of branches -- (11,507) (11,507) --
Other merger-related charges 10,573 13,560 24,133 2,112
---------- ---------- ---------- ----------
Total $ 35,800 $ 83,000 $ 118,800 $ 45,100
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The following table presents a summary of activity with respect to the merger
related accrual:
Firstar/ Firstar/
Mercantile Star
Merger Merger Other Total
----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 21,154 $ -- $ 10,173 $ 31,327
Merger-related charge 83,000 35,800 -- 118,800
Cash payments (78,433) (35,800) (1,041) (115,274)
Noncash write-downs (20,508) -- 27 (20,481)
---------- ---------- ---------- ----------
Balance at June 30, 2000 $ 5,213 $ -- $ 9,159 $ 14,372
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-11-
Note 8. Mortgage Servicing Assets
- - ----------------------------------
Mortgage servicing rights are capitalized based upon their fair value at
the time a loan is sold. Impairment testing is performed on a quarterly basis
in accordance with SFAS No. 125.
The fair value of capitalized mortgage servicing rights was $256.4 million
on June 30, 2000 and $269.1 million on December 31, 1999. Firstar serviced $19.0
billion of mortgage loans for other investors as of June 30, 2000 compared with
$19.5 billion as of December 31, 1999.
Changes in capitalized mortgage servicing rights at June 30, 2000 and
December 31, 1999 are summarized in the following table. (dollars in thousands)
June 30, December 31,
2000 1999
------------- ------------
Mortgage Servicing Assets:
Balance at beginning of year $ 212,297 $ 232,105
Amount added in acquisitions -- 811
Amount capitalized 57,490 169,678
Amortization (17,352) (46,808)
Sales (43,156) (143,489)
Impairment (558) --
--------- ---------
Balance at end of period $ 208,721 $ 212,297
--------- ---------
--------- ---------
Note 9. Earnings Per Share
- - ---------------------------
The following table shows the amounts used in the computation of basic
and diluted earnings per common share, in accordance with SFAS No. 128, for
the three and six months ended June 30, 2000 and 1999. (dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net income $316,743 $291,289 $624,542 $578,913
Weighted average shares (000s):
Common shares 968,446 992,496 971,758 991,843
Options and stock plans 10,932 17,173 10,225 16,835
--------- --------- --------- ---------
Weighted average diluted common shares 979,378 1,009,669 981,983 1,008,678
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per common share $ 0.33 $ 0.29 $ 0.64 $ 0.58
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per common share $ 0.32 $ 0.29 $ 0.64 $ 0.57
------- ------- ------- -------
------- ------- ------- -------
-12-
Note 10. Mergers
- - ----------------
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. Shares issued in the merger
totaled 331,772,028.
Note 11. 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, personal financial
management 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 provides 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 have
been allocated to the primary business segments. Certain asset and liability
balances have been reclassified between business segments during the second
quarter of 2000. Additionally, the allocation methods used for administrative
and support functions were altered in the second quarter. Prior period segment
data has been restated to be comparable to the current period presentation.
-13-
For the quarter ended June 30, 2000
-------------------------------------------------------------------------------------------
Merger-
Consumer Wholesale Related
Banking Banking Trust Treasury Total Expenses Consolidated
- - ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 475,413 $ 184,410 $ 5,629 $ 20,393 $ 685,845 $ -- $ 685,845
Provision for loan losses 41,187 9,839 (2,242) 2,270 51,054 -- 51,054
Noninterest income 194,323 53,389 111,959 11,903 371,574 -- 371,574
Noninterest expense 317,347 58,757 55,137 9,948 441,189 66,900 508,089
Income taxes* 112,235 61,026 23,332 7,240 203,833 (22,300) 181,533
- - ----------------------------------------------------------------------------------------------------------------------
Net income $ 198,967 $ 108,177 $ 41,361 $ 12,838 $ 361,343 $ (44,600) $ 316,743
- - ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 25,084 $ 19,897 $ 13 $ 6,240 $ 51,414
Total assets 31,702 22,897 193 19,214 74,006
Deposits 43,037 5,249 546 3,930 52,762
- - ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
For the quarter ended June 30, 1999
-------------------------------------------------------------------------------------------
Merger-
Consumer Wholesale Related
Banking Banking Trust Treasury Total Expenses Consolidated
- - ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 460,131 $ 182,149 $ 5,467 $ 29,550 $ 677,297 $ -- $ 677,297
Provision for loan losses 34,117 10,085 179 457 44,838 -- 44,838
Noninterest income 191,684 45,216 110,313 5,801 353,014 -- 353,014
Noninterest expense 374,047 66,624 57,502 7,849 506,022 30,100 536,122
Income taxes* 85,740 53,015 20,445 9,515 168,715 (10,653) 158,062
- - ----------------------------------------------------------------------------------------------------------------------
Net income $ 157,911 $ 97,641 $ 37,654 $ 17,530 $ 310,736 $ (19,447) $ 291,289
- - ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 25,151 $ 17,006 $ 6 $ 6,435 $ 49,180
Total assets 29,539 18,547 119 25,135 73,922
Deposits 44,439 5,932 327 1,671 52,369
- - ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
For the year through June 30, 2000
-------------------------------------------------------------------------------------------
Merger-
Consumer Wholesale Related
Banking Banking Trust Treasury Total Expenses Consolidated
- - ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 949,379 $ 367,209 $ 12,112 $ 39,029 $ 1,367,729 $ -- $ 1,367,729
Provision for loan losses 76,134 19,279 (2,253) 3,583 96,743 -- 96,743
Noninterest income 376,877 106,151 224,812 24,982 732,822 -- 732,822
Noninterest expense 654,124 116,346 107,350 17,295 895,115 118,800 1,013,915
Income taxes* 217,691 123,358 48,150 15,752 404,951 (39,600) 365,351
- - ----------------------------------------------------------------------------------------------------------------------
Net income $ 378,307 $ 214,377 $ 83,677 $ 27,381 $ 703,742 $ (79,200) $ 624,542
- - ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 25,660 $ 19,357 $ 24 $ 6,238 $ 51,279
Total assets 30,725 21,581 315 20,652 73,273
Deposits 43,317 5,361 600 3,006 52,284
- - ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
For the year through June 30, 1999
-------------------------------------------------------------------------------------------
Merger-
Consumer Wholesale Related
Banking Banking Trust Treasury Total Expenses Consolidated
- - ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 937,585 $ 353,987 $ 11,925 $ 43,327 $ 1,346,824 $ -- $ 1,346,824
Provision for loan losses 64,856 21,645 (143) 1,869 88,227 -- 88,227
Noninterest income 366,244 89,561 215,491 21,231 692,527 -- 692,527
Noninterest expense 751,711 130,809 112,663 16,682 1,011,865 45,100 1,056,965
Income taxes* 171,821 102,647 40,515 16,223 331,206 (15,960) 315,246
- - ----------------------------------------------------------------------------------------------------------------------
Net income $ 315,441 $ 188,447 $ 74,381 $ 29,784 $ 608,053 $ (29,140) $ 578,913
- - ----------------------------------------------------------------------------------------------------------------------
(dollars in millions)
Average balances:
Loans $ 24,940 $ 16,646 $ 5 $ 7,184 $ 48,775
Total assets 29,527 18,155 135 25,954 73,771
Deposits 44,795 5,913 327 1,587 52,622
- - ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
-14-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Net income of Firstar Corporation ("Firstar") for the quarter ended
June 30, 2000 was $316.7 million compared with $291.3 million in the second
quarter of 1999. Diluted earnings per common share was $.32 for the second
quarter of 2000, compared to $.29 for the same period of the prior year. Net
income for the first half of 2000 was $624.5 million compared with $578.9
million in the same period of 1999. Diluted earnings per share for the first
half of 2000 was $.64 compared to $.57 in the same period of 1999.
Net income before merger-related charges was $361.3 million in the
second quarter of 2000, a 16.3 % increase over the $310.7 million in the same
period of last year. Net income before merger related charges for the first
half of 2000 was $703.7 million, a 15.7% increase over the $608.0 million in
the same period of last year. The corresponding diluted earnings per share
before merger-related charges was $.37 in the second quarter of 2000, compared
to $.31 in the same quarter of last year, an increase of 19.4%. Diluted
earnings per share before merger charges for the first half of 2000 was $.72,
a 20.0% increase over the $.60 of the same period last year. Return on average
assets before merger-related charges was 1.96% in the second quarter of 2000
compared to 1.69% in the same period of last year and 1.93% for the first half
of 2000 compared to 1.66% for the same period of last year. Return on average
equity before merger-related charges was 22.99% in the second quarter of 2000
compared to 18.21% in the same period of last year and 22.26% for the first
half of 2000 compared to 18.02% for the same period of last year.
The improvement in net income before merger-related charges for both
the quarter and first half of 2000 resulted from higher net interest revenue
and noninterest revenue together with significantly lower operating costs.
Total assets at June 30, 2000 were $74.4 billion compared to $72.8
billion at December 31, 1999, while total earning assets were $66.9 billion
at June 30, 2000 compared to $65.3 billion at last year-end. Continued
restructuring of the balance sheet occurred during the first half of 2000
with the sale of residential mortgage loans from the loan portfolio and
changes in the mix of investment securities. Loan growth was strong in both
the commercial and retail portfolios during the period. On the liability side
of the balance sheet, short-term borrowings increased during the period to
fund earning asset growth and the stock buyback program.
Total loans were $52.1 billion at June 30, 2000 compared to $50.6
billion at year-end 1999. Residential real estate loans have declined
reflecting management's decision to sell $1.7 billion of the residential loan
portfolio. Excluding residential real estate loans, total loans increased
$3.7 billion, or 8.9%, since December 31, 1999. Specifically, retail loans,
which include such areas as installment lending, auto leasing and credit card
services have increased $1.7 billion, or 12.7%, led by a $1.0 billion, or 51.1%,
increase in retail leases. Specialized lending and corporate loans increased
$1.5 billion or 8.5% since December 31, 1999. Commercial and construction real
estate loans increased $525 million or 4.87% since December 31, 1999. In the
third quarter of 1998, Firstar established a loan conduit, Stellar Funding
Group, Inc. At June 30, 2000, $2.3 billion of short term, high quality, low
yielding commercial loans had been funded in the conduit compared to $1.7
billion at December 31, 1999.
-15-
Total investment securities were $13.0 billion at June 30, 2000 compared
to $13.1 billion at year-end 1999. At June 30, 2000 the net unrealized loss on
available for sale securities was $188.4 million and the related after tax
decrease to shareholders' equity was $122.4 million. Loans held for sale were
$ 1.5 billion at June 30, 2000 compared to $625 million at December 31, 1999.
This increase resulted from increased loan originations during the second
quarter.
Total deposits were $52.7 billion at June 30, 2000, an increase of
$836 million, or 1.6%, from year-end 1999. Non-interest bearing demand deposit
balances declined by $458 million from year-end when deposit levels typically
peak. Interest-bearing deposits increased by $1.3 billion from December 31,
1999 due to a $1.5 billion increase in large denomination CDs from the foreign
branch. Merger-related branch divestitures reduced deposits by $135 million
during the first half of 2000. The shift in deposit preferences continues with
reductions in savings, MMDA and NOW accounts, collectively down by $1.1 billion.
Retail deposit customers are seeking higher yields in deposit accounts and
alternative investment vehicles. Short-term borrowed funds of $9.7 billion at
June 30, 2000 were up $1.4 billion since year-end 1999 as additional funding was
necessary to replace the reduced levels of core deposits and to fund both
earning asset growth and the stock buyback program.
Results of Operations
Net interest income on a taxable equivalent basis, was $685.8 million
in the second quarter of 2000, an increase of $8.5 million, or 1.3%, as compared
to the second quarter of 1999. The increase in net interest income was due to a
higher net interest margin and increased average earning assets. Average
earning assets for the second quarter of 2000 were $66.8 billion, an increase
of $500 million from the same period of 1999.
Net interest income on a taxable equivalent basis, was $1.4 billion in
the first half of 2000, an increase of $20.9 million, or 1.6%, as compared to
the same period of 1999. The increase in net interest income was due to a higher
net interest margin and an improved mix of assets and liabilities. Average
earning assets for the first half of 2000 were $66.2 billion, unchanged from the
same period of 1999.
Year-to-date average retail loans increased by $2.6 billion or 22.8%,
which included a 61.0% increase in leases; a 19.0% increase in home equity
loans; a 16.9% increase in installment lending and an 11.7% increase in credit
card loans. Year-to-date average commercial loans rose by $2.1 billion, or
13.0%. Year-to-date average total real estate loans declined by $2.2 billion or
10.4%. Commercial mortgage and construction loans increased by $648 million or
6.1%. This growth was offset by a $2.9 billion decline in average residential
mortgage loans due to the sale of $1.7 billion of portfolio mortgage in the
first half of 2000 along with scheduled maturities and prepayments.
-16-
Year-to-date average investment securities were reduced by $1.9 billion,
or 12.8%, due to merger-related sales and restructuring of the investment
portfolio. The change in mix of assets from lower yielding investment
securities and residential mortgages to higher yielding loans has largely
contributed to the increase in net interest income.
This positive factor was partially offset by the increased use of higher
cost funding sources. Year-to-date average core deposits declined by $1.8
billion, or 3.8%, from the first half of 1999. Increased reliance on more
expensive funding sources including large denomination CDs and short-term
borrowed funds was required.
The net interest margin increased by three basis points to 4.12% in the
second quarter of 2000 compared to the second quarter of 1999. For the first
half
of 2000 the net interest margin increased by five basis points to 4.14%. The
year-to-date yield on total earning assets rose by 51 basis points to 8.14%.
Likewise, the yield on total loans increased by 42 basis points reflecting
generally market driven forces and the change in mix of loans. The comparable
rate
paid on interest bearing liabilities increased by 50 basis points similarly
reflecting higher market rates and more reliance on higher cost purchased funds.
Interest spread, the difference between the rate earned on total earning assets
and the rate paid on interest bearing liabilities increased by one basis points.
The contribution of interest free funds to the net interest margin increased by
four basis points producing the net increase to the margin of five basis points.
Tables 1 and 2 provide detailed information on the average balances, interest
income/expense and rates earned or paid.
Firstar's major market risk exposure is to changing interest rates. To
minimize the volatility of net interest income to adverse changes in interest
rates, Firstar has established guidelines for its asset and liability activities
through its Asset/Liability Policy Committee. This committee has the
responsibility for approving and ensuring compliance with policies including
interest rate risk exposure, off-balance-sheet activity and the investment
portfolio position.
One of the primary tools to measure interest rate risk and the effect of
interest rate changes on net interest income is simulation analysis. This
earnings
simulation model estimates net interest income under a variety of scenarios that
incorporate changes in the shape of the yield curve, changes in interest rate
relationships, changes in the direction of rates, and changes in the mix and
levels
of balance sheet accounts. The most recent simulation projected the impact of a
100 basis point upward or downward gradual change of market interest rates over
a
one year time period. The results of this simulation indicate that a declining
interest rate scenario would increase net interest revenue by $19.9 million from
a base case, while an increasing rate scenario would decrease net interest
revenue
by $13.2 million.
The loan loss provision charged to earnings in the second quarter of 2000
was $51.1 million, compared to $44.8 million during the same period of last
year.
For the first half of 2000 the provision for loan losses was $96.7 million
compared
to $88.2 million in the same period of last year. Net loan charge-offs were
$94.0
million in the first half of 2000 compared to $78.6 million a year earlier.
First
half 2000 net charge-offs were .37% of average loans compared with .33% in the
same
period of last year. Management has continued to focus on growing consumer
loans as
a higher percentage of total loans and, as a result of this, would expect
charge-offs to be somewhat greater during the remainder of 2000.
-17-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Second Quarter, 2000 Second Quarter, 1999
------------------------------------------ -----------------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
------------ ------------ -------- ------------ ------------ --------
ASSETS:
Commercial loans $ 18,542,883 $ 398,037 8.63% $ 16,247,312 $ 310,761 7.67%
Real estate loans 18,184,565 367,857 8.12 21,145,268 411,383 7.79
Retail loans 14,686,088 331,055 9.07 11,787,640 258,787 8.81
------------ ------------ ------------ -----------
Total loans 51,413,536 1,096,949 8.57 49,180,220 980,931 8.00
Loans held for sale 1,785,554 34,318 7.69 1,272,656 22,321 7.02
Investment securities 13,223,851 234,525 7.09 15,110,474 245,228 6.49
Money market investments 366,093 6,180 6.79 726,071 9,592 5.30
------------ ------------ ------------ -----------
Total interest-
earning assets 66,789,034 1,371,972 8.25% 66,289,421 1,258,072 7.60%
Cash and due from banks 3,301,013 3,474,343
Allowance for loan losses (719,708) (712,340)
Other assets 4,635,188 4,870,462
------------ ------------
Total assets $ 74,005,527 $ 73,921,886
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings and NOW $ 9,939,139 40,837 1.65% $ 10,776,103 48,684 1.81%
Money market deposit accounts 9,956,888 108,398 4.38 10,416,904 100,034 3.85
Time deposits 23,122,282 324,511 5.64 21,071,937 264,509 5.03
Short-term borrowings 9,337,828 139,957 6.03 7,531,483 84,668 4.51
Long-term debt 4,412,877 72,424 6.58 5,995,371 82,880 5.53
------------ ------------ ------------ -----------
Total interest-bearing
liabilities 56,769,014 686,127 4.86% 55,791,798 580,775 4.17%
Noninterest-bearing deposits 9,743,971 10,104,291
Other liabilities 1,171,481 1,182,076
Shareholders' equity 6,321,061 6,843,721
Total liabilities and
shareholders' equity $ 74,005,527 $ 73,921,886
------------ ------------
------------ ------------
Net interest revenue/margin $ 685,845 4.12% $ 677,297 4.09%
----------- -----------
----------- -----------
Interest rate spread 3.39 3.43
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent amounts
are calculated utilizing marginal federal income tax rate of 35 percent. The yield on available for sale
securities is based upon historical cost balances. The total of nonaccruing loans is included in average
amounts outstanding.
-18-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 2 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(Dollars in thousands)
Year through June 30, 2000 Year through June 30, 1999
------------------------------------------ -----------------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
------------ ------------ -------- ------------ ------------ --------
ASSETS:
Commercial loans $ 18,085,726 $ 761,231 8.46% $ 16,011,133 $ 606,368 7.63%
Real estate loans 18,979,983 759,238 8.03 21,193,401 824,679 7.82
Retail loans 14,213,577 636,783 9.01 11,570,653 514,907 8.97
------------ ----------- ------------ -----------
Total loans 51,279,286 2,157,252 8.45 48,775,187 1,945,954 8.03
Loans held for sale 1,193,446 46,032 7.71 1,480,549 53,121 7.18
Investment securities 13,314,440 467,834 7.03 15,263,785 496,442 6.50
Money market investments 412,919 13,196 6.43 697,559 18,423 5.33
------------ ----------- ------------ -----------
Total interest-
earning assets 66,200,091 2,684,314 8.14% 66,217,080 2,513,940 7.63%
Cash and due from banks 3,217,950 3,399,248
Allowance for loan losses (714,095) (708,651)
Other assets 4,569,216 4,862,864
------------ ------------
Total assets $ 73,273,162 $ 73,770,541
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings and NOW $ 10,038,368 84,081 1.68% $ 10,823,230 98,987 1.84%
Money market deposit accounts 10,096,989 217,142 4.32 10,330,374 199,337 3.89
Time deposits 22,444,257 612,800 5.51 21,356,473 542,120 5.12
Short-term borrowings 8,814,169 251,796 5.74 7,279,623 162,397 4.50
Long-term debt 4,662,106 150,766 6.48 5,923,436 164,275 5.58
------------ ----------- ------------ -----------
Total interest-bearing
liabilities 56,055,889 1,316,585 4.72% 55,713,136 1,167,116 4.22%
Noninterest-bearing deposits 9,704,477 10,111,707
Other liabilities 1,153,741 1,141,858
Shareholders' equity 6,359,055 6,803,840
Total liabilities and
shareholders' equity $ 73,273,162 $ 73,770,541
------------ ------------
------------ ------------
Net interest revenue/margin $ 1,367,729 4.14% $ 1,346,824 4.09%
----------- -----------
----------- -----------
Interest rate spread 3.42 3.41
Note: Interest and average rate are presented on a fully-taxable equivalent basis. Taxable equivalent amounts
are calculated utilizing marginal federal income tax rate of 35 percent. The yield on available for sale
securities is based upon historical cost balances. The total of nonaccruing loans is included in average
amounts outstanding.
-19-
Noninterest income is a significant source of revenue for Firstar,
representing 35.1% of tax equivalent net revenue in the second quarter of 2000
and 34.9% for the first half of 2000. This compares with 34.1% in the second
quarter of last year and 33.4% in the first half of last year, excluding
securities gains. Noninterest income, excluding securities gains, increased
by $21.8 million, or 6.2%, to a level of $371.6 million in the second quarter
of 2000 when compared to the same quarter of last year. For the first half of
the year noninterest income, excluding securities gains, increased by $56.5
million, or 8.4%, to a level of $732.8 million.
Trust income is the largest source of noninterest income for Firstar and
in the first half of 2000 increased $18.9 million, or 9.1% due to new business
in
all product lines and higher stock market values. Additionally, this year's
trust
income benefited from one-time changes to accrual procedures, which increased
revenues by $3.7 million in the first quarter of this year. Retail deposit
income
increased $9.2 million, or 9.8%, due in part to new pricing policies. Credit
card
income increased $11.8 million, or 22.5%, due to an expanded customer base and
increased card usage. Electronic banking income increased $5.2 million or 29.2%
and
included $2.9 million of one-time income from resolution of reconciling issues
recorded in the first quarter of this year. Cash management income increased by
$5.4 million or 8.1% and included one-time changes in accrual procedures, which
increased revenues by $3.7 million primarily in the first quarter. Mortgage
banking revenue declined by $3.3 million, or 4.1%, with reduced gains from the
sale
of loans of $28.4 million partially offset by increased gains on the sale of
servicing rights of $18.7 million and higher net servicing income.
Securitization
revenue increased by $21.1 million or 127.7% due to the establishment and
continued
placement of loans and investments in conduits which provide management and
referral
fees to Firstar. Brokerage revenue declined as a result of the outsourcing of
that
product to a third party broker. Table 3 shows the components of noninterest
income.
Noninterest expense, excluding merger-related expenses, totaled $441.2
million, a decrease of $64.8 million, or 12.8%, from the second quarter of
1999. For
the first half of 2000 noninterest expense, excluding merger-related charges,
totaled
$895.1 million, a decrease of $116.8 million, or 11.5%, from the same period of
last year.
Staff expense for the first half of 2000 decreased $60.7 million, or 14.0%.
This decrease resulted from staff reductions in support and back room operations
as
a result of mergers and lower accruals for incentive programs. Employee
benefits
expense also declined during the quarter due to lower headcount and salary
levels,
the merger of employee benefit plans and reduced pension costs resulting from
increased cash contributions to the pension plan. Partially offsetting these
decreases were increases in staff as a result of opening new branches and
in-store
locations.
-20-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 3 NONINTEREST INCOME
(dollars in thousands)
% Increase/ % Increase/
Second Quarter Change (decrease) Year Through June 30, Change (decrease)
---------------------- From Prior ------------------------ From Prior
2000 1999 Period 2000/1999 2000 1999 Period 2000/1999
----------------------------------------------- -------------------------------------------------
Trust income $ 113,365 $ 106,804 $ 6,561 6.1 % $ 227,211 $ 208,301 $ 18,910 9.1 %
Mortgage banking:
Origination and sales 16,414 31,822 (15,408) (48.4) 34,527 62,948 (28,421) (45.2)
Loan Servicing, net 11,450 8,243 3,207 38.9 22,967 16,538 6,429 38.9
Gain on sale of servicing 13,989 1,950 12,039 n/m 20,654 1,987 18,667 n/m
--------- --------- --------- ------- --------- --------- --------- -------
Total mortgage banking 41,853 42,015 (162) (0.4) 78,148 81,473 (3,325) (4.1)
Retail deposit fees 55,235 48,515 6,720 13.9 103,070 93,904 9,166 9.8
Cash management income 36,906 34,568 2,338 6.8 72,661 67,234 5,427 8.1
Credit card income 34,572 28,185 6,387 22.7 64,245 52,455 11,790 22.5
ATM income 11,231 9,575 1,656 17.3 23,172 17,933 5,239 29.2
Brokerage revenue 6,001 11,919 (5,918) (49.7) 11,567 21,169 (9,602) (45.4)
International income 10,699 9,302 1,397 15.0 20,459 18,362 2,097 11.4
Bank owned life insurance 7,324 5,880 1,444 24.6 14,689 10,763 3,926 36.5
Insurance commissions 6,395 6,566 (171) (2.6) 13,730 14,687 (957) (6.5)
Securitization revenue 19,053 9,662 9,391 97.2 37,621 16,524 21,097 127.7
All other income 28,937 36,740 (7,803) (21.2) 66,235 73,478 (7,243) (9.9)
--------- --------- --------- ------- --------- --------- --------- -------
Subtotal 371,571 349,731 21,840 6.2 732,808 676,283 56,525 8.4
Investment securities
gains -- net 3 3,283 (3,280) n/m 14 16,244 (16,230) n/m
--------- --------- --------- ------- --------- --------- --------- -------
Total noninterest
income $ 371,574 $ 353,014 $ 18,560 5.3 % $ 732,822 $ 692,527 $ 40,295 5.8 %
--------- --------- --------- ------- --------- --------- --------- -------
--------- --------- --------- ------- --------- --------- --------- -------
n/m = not meaningful
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 4 NONINTEREST EXPENSE
(dollars in thousands)
% Increase/ % Increase/
Second Quarter Change (decrease) Year Through June 30, Change (decrease)
---------------------- From Prior ------------------------ From Prior
2000 1999 Period 2000/1999 2000 1999 Period 2000/1999
----------------------------------------------- -------------------------------------------------
Salaries $ 180,314 $ 219,475 $ (39,161) (17.8)% $ 373,624 $ 434,315 $ (60,691) (14.0)%
Pension and other
employee benefits 23,747 40,837 (17,090) (41.8) 53,127 86,307 (33,180) (38.4)
Equipment expense 35,201 38,130 (2,929) (7.7) 70,822 73,883 (3,061) (4.1)
Occupancy expense--net 40,486 40,411 75 0.2 80,614 83,809 (3,195) (3.8)
Amortization of intangible
assets 30,013 30,410 (397) (1.3) 60,199 60,723 (524) (0.9)
Outside services 26,362 33,896 (7,534) (22.2) 54,451 62,668 (8,217) (13.1)
Postage and courier 17,146 17,794 (648) (3.6) 35,066 35,644 (578) (1.6)
Marketing expense 8,448 13,756 (5,308) (38.6) 16,280 26,045 (9,765) (37.5)
Professional services 6,429 7,439 (1,010) (13.6) 12,561 13,883 (1,322) (9.5)
Travel and entertainment 7,426 6,740 686 10.2 13,164 12,456 708 5.7
Stationery and supplies 10,372 10,014 358 3.6 20,409 19,473 936 4.8
Communication expense 11,982 11,352 630 5.5 24,287 23,884 403 1.7
All other expense 43,263 35,768 7,495 21.0 80,511 78,775 1,736 2.2
--------- --------- --------- ------- --------- --------- --------- -------
Subtotal 441,189 506,022 (64,833) (12.8) 895,115 1,011,865 (116,750) (11.5)
Merger related expenses 66,900 30,100 36,800 n/m 118,800 45,100 73,700 n/m
--------- --------- --------- ------- --------- --------- --------- -------
Total noninterest
expense $ 508,089 $ 536,122 $ (28,033) (5.2)% $ 1,013,915 $ 1,056,965 $ (43,050) (4.1)%
--------- --------- --------- ------- --------- --------- --------- -------
--------- --------- --------- ------- --------- --------- --------- -------
n/m = not meaningful
-21-
Occupancy expenses declined $3.2 million, or 3.8%, due to the
consolidation of facilities related to recent mergers. Marketing costs
declined $9.8 million, or 37.5%, from the first half of last year. Marketing
costs will increase in future periods with the introduction of new products
and additional marketing emphasis in the Mercantile banks' markets. All other
operating expenses declined an aggregate $9.9 million, or 2.6%, reflecting the
first quarter reversal of $8.5 million of excess expense accruals from prior
periods. Table 4 shows the components of noninterest expenses.
Before merger-related costs, Firstar's efficiency ratio was 41.72%
in the second quarter of 2000, a significant improvement over the 49.11% of
the same quarter of last year. For the first half of 2000 the efficiency
ratio was 42.61% compared to 49.62% in the same period of last year.
Merger-related charges totaled $66.9 million in the second quarter
of 2000 compared to $30.1 million in the same period of last year. For the
first half of 2000 merger related charges totaled $118.8 million compared to
$45.1 million in the same period of last year. Note 7 to the financial
statements provides a summary of merger-related costs and activity in the
accrual accounts.
The effective income tax rate before merger related charges was
35.2% in the first half of 2000 compared to 33.3% in the same period of
last year. The increase in the effective tax rate was due to a tax refund
recognized in 1999 along with lower tax exempt revenues relative to taxable
income. The effective tax rate for the second quarter of 2000 declined to
34.8% reflecting current tax planning strategies involving projections of
tax-exempt income, deductions and state tax liabilities.
Asset Quality
As of June 30, 2000, the allowance for loan losses was $717.6
million, or 1.38% of loans outstanding compared to 1.41% at December 31,
1999 and 1.45% a year earlier. The decrease from the prior year resulted
from a change in the management of problem loans as a result of the merger
when a more aggressive charge-off policy had been adopted. The allowance as
a percentage of nonperforming loans was 311% at June 30, 2000 compared to
341% at December 31, 1999 and 295% a year earlier. Table 5 provides a
summary of activity in the allowance for loan losses by type of loan. Net
charge-offs totaled $48.4 million in the second quarter of 2000 compared with
$41.4 million in the same period of last year. For the first half of 2000 net
charge-offs were $94.0 million compared with $78.6 million in the same period
of last year. Annualized net charge-offs as a percent of average loans
increased from .34% in the second quarter of 1999 to .38% in the second
quarter of this year. For the first half of this year annualized net
charge-offs were .37% compared to .33% in the same period of last year.
Credit card net charge-offs decreased from 4.61% of average outstandings in
1999 to 4.47% in the first half of 2000. Commercial loan net charge-offs
increased from a level of .26% of loans in 1999 to.32% in the same period of
2000. Other retail lending net charge-offs increased from .42% of average
outstandings in 1999 to .47% in the current period. Management anticipates
the level of net charge-offs to trend higher over the remainder of 2000 with
the continued emphasis on expanding retail lending.
Nonperforming assets, as shown in Tables 6 and 7, were $250.2 million
at June 30, 2000. This is an increase of $21.3 million from December 31, 1999
and a $10.9 million reduction from a year earlier. Measured as a percent of
loans and other real estate, nonperforming assets have decreased from .53% at
June 30, 1999 to .48% at June 30, 2000. Lower levels of retail nonaccrual
loans and other real estate owned were partially offset by higher levels of
commercial nonaccrual loans.
-22-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 5 SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
Second Quarter Six Months
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Average loans $ 51,413,536 $ 49,180,220 $ 51,279,286 $ 48,775,187
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Allowance for loan losses:
Balance - beginning of period $ 714,966 $ 710,991 $ 714,898 $ 704,846
Charge-offs:
Commercial (23,960) (16,974) (44,342) (32,265)
Commercial real estate (2,697) (2,318) (4,058) (3,984)
Residential real estate (1,459) (3,009) (4,056) (6,593)
Credit card (18,841) (18,727) (37,850) (36,376)
Other retail (22,395) (17,248) (43,096) (33,781)
------------ ------------ ------------ ------------
Total charge-offs (69,352) (58,276) (133,402) (112,999)
------------ ------------ ------------ ------------
Recoveries:
Commercial 8,849 5,825 15,899 11,239
Commercial real estate 2,202 1,558 2,946 2,914
Residential real estate 41 131 120 224
Credit card 3,111 4,566 7,021 7,946
Other retail 6,760 4,797 13,406 12,033
------------ ------------ ------------ ------------
Total recoveries 20,963 16,877 39,392 34,356
------------ ------------ ------------ ------------
Net charge-offs (48,389) (41,399) (94,010) (78,643)
Provision charged to earnings 51,054 44,838 96,743 88,227
------------ ------------ ------------ ------------
Balance - end of period $ 717,631 $ 714,430 $ 717,631 $ 714,430
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Ratio of net charge-offs to average
loans:
Commercial 0.33% 0.28% 0.32% 0.26%
Commercial real estate 0.02% 0.03% 0.02% 0.02%
Residential real estate 0.08% 0.11% 0.10% 0.12%
Credit card 4.49% 4.56% 4.47% 4.61%
Other Retail 0.47% 0.47% 0.47% 0.42%
Total loans 0.38% 0.34% 0.37% 0.33%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-23-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 6 NONPERFORMING ASSETS
(dollars in thousands)
June 30, December 31, June 30,
2000 1999 1999
---------- ---------- ----------
Loans on nonaccrual status:
Commercial $ 135,185 $ 89,168 $ 112,380
Residential mortgage 28,243 36,806 53,929
Commercial mortgage 44,487 57,733 48,460
Construction and land
development 4,288 6,309 5,824
Retail loans 15,834 17,980 20,200
---------- ---------- ----------
Total nonaccrual loans 228,037 207,996 240,793
Loans which have been
renegotiated 2,866 1,664 1,693
---------- ---------- ----------
Total nonperforming loans 230,903 209,660 242,486
Other real estate owned 19,327 19,272 18,622
---------- ---------- ----------
Total nonperforming
assets $ 250,230 $ 228,932 $ 261,108
---------- ---------- ----------
---------- ---------- ----------
Percentage of nonperforming
loans to loans 0.44% 0.41% 0.49%
Percentage of nonperforming
assets to loans and other
real estate owned 0.48% 0.45% 0.53%
Loans past due 90 days
or more $ 166,314 $ 122,760 $ 132,744
---------- ---------- ----------
---------- ---------- ----------
-24-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 7 COMPOSITION OF NONPERFORMING LOANS
(dollars in thousands)
June 30, 2000
----------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
----------- -------- --------- ---------- -----------
Commercial loans:
Corporate $ 121,119 $ -- $ 121,119 0.72% $ 36,334
Commercial leasing 14,066 -- 14,066 0.70 --
--------- ------- --------- ---------
Total commercial loans 135,185 -- 135,185 0.72 36,334
--------- ------- --------- ---------
Real estate loans:
Residential 28,243 -- 28,243 0.43 49,407
Commercial mortgage 44,487 1,233 45,720 0.50 19,229
Construction/land
development 4,288 -- 4,288 0.17 6,445
--------- ------- --------- ---------
Total real estate loans 77,018 1,233 78,251 0.43 75,081
--------- ------- --------- ---------
Retail loans:
Other retail 10,431 1,633 12,064 0.11 28,139
Credit cards 5,362 -- 5,362 0.37 21,483
Retail leasing 41 -- 41 - 5,277
--------- ------- --------- ---------
Total retail loans 15,834 1,633 17,467 0.12 54,899
--------- ------- --------- ---------
Total loans $ 228,037 $ 2,866 $ 230,903 0.44% $ 166,314
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
December 31, 1999
----------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
----------- -------- --------- ---------- -----------
Commercial loans:
Corporate $ 76,382 $ 87 $ 76,469 0.49% $ 12,819
Commercial leasing 12,786 -- 12,786 0.70 17
--------- ------- --------- ---------
Total commercial loans 89,168 87 89,255 0.51 12,836
--------- ------- --------- ---------
Real estate loans:
Residential 36,806 -- 36,806 0.42 47,778
Commercial mortgage 57,733 1,577 59,310 0.67 11,281
Construction/land
development 6,309 -- 6,309 0.29 2,585
--------- ------- --------- ---------
Total real estate loans 100,848 1,577 102,425 0.52 61,644
--------- ------- --------- ---------
Retail loans:
Other retail 12,563 -- 12,563 0.12 25,827
Credit cards 4,960 -- 4,960 0.35 20,210
Retail leasing 457 -- 457 0.02 2,243
--------- ------- --------- ---------
Total retail loans 17,980 -- 17,980 0.13 48,280
--------- ------- --------- ---------
Total loans $ 207,996 $ 1,664 $ 209,660 0.41% $ 122,760
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
June 30, 1999
----------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------------
or
Non- Restruc- Percentage More
accrual tured Total of Loans Past Due
----------- -------- --------- ---------- -----------
Commercial loans:
Corporate $ 97,551 $ 94 $ 97,645 0.65% $ 18,419
Commercial leasing 14,829 -- 14,829 0.98 1,172
--------- ------- --------- ---------
Total commercial loans 112,380 94 112,474 0.68 19,591
--------- ------- --------- ---------
Real estate loans:
Residential 53,929 -- 53,929 0.54 54,690
Commercial mortgage 48,460 -- 48,460 0.53 13,457
Construction/land
development 5,824 -- 5,824 0.34 5,490
--------- ------- --------- ---------
Total real estate loans 108,213 -- 108,213 0.52 73,637
--------- ------- --------- ---------
Retail loans:
Other retail 15,765 1,599 17,364 0.19 17,683
Credit cards 3,880 -- 3,880 0.31 20,992
Retail leasing 555 -- 555 0.03 842
--------- ------- --------- ---------
Total retail loans 20,200 1,599 21,799 0.18 39,517
--------- ------- --------- ---------
Total loans $ 240,793 $ 1,693 $ 242,486 0.49% $ 132,745
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
-25-
Capital Resources
Total shareholders' equity was $6.21 billion at June 30, 2000, a
decrease of $102.2 million from December 31, 1999 and $460.6 million from a
year earlier. These declines are the result of strong core earnings offset
by dividend payments, the merger-related charges, the stock repurchase
program and unrealized losses on investment securities reflected in other
comprehensive income. The tangible common ratio was 6.64% at June 30, 2000,
compared to 6.83% at December 31, 1999 and 7.19% a year earlier. The ratio
of total shareholders' equity to total assets was 8.34% at June 30, 2000
compared to 8.67% at December 31, 1999 and 9.05% at June 30, 1999.
Banking industry regulators define minimum capital requirements for
bank holding companies. At June 30, 2000, Firstar's Tier I and Total
Risk-Based Capital ratios amounted to 7.90% and 10.92%, respectively well
above the minimum requirements of 4.00% for Tier I and 8.00% for Total
Risk-Based Capital. This compares to Tier I and Total Risk-Based Capital
ratios of 9.22% and 11.36% at June 30, 1999. Regulatory authorities have
also established a minimum leverage ratio of 4.00%, which is defined as
Tier I equity to average quarterly assets. For the second quarter of 2000,
the Firstar's average leverage ratio was 7.29% compared to 7.80% in the
same quarter of 1999. These declines since 1999 were due to the stock
repurchase program and changes in balance sheet mix of earning assets.
These regulatory ratios continue to be in excess of stated "well
capitalized" requirements.
On April 11, 2000, the Board of Directors approved an additional
common stock repurchase program of 100 million shares to be completed
during the next two years. The reacquired common shares will be held as
treasury shares for reissuance for various corporate purposes, including
employee stock option plans. During the second quarter of 2000 Firstar
repurchased 12.4 million shares at a cost of $302 million.
This discussion may contain forward-looking statements with
respect to the financial condition, results of operations and business
of Firstar. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated include among other things, the
following possibilities: (i)expected cost savings from recent
acquisitions cannot be fully realized or realized within the expected
time; (ii)revenues are lower than expected; (iii)competitive pressure
among depository institutions increases significantly; (iv)changes
in the interest rate environment reduce interest margins; (v)general
economic conditions are less favorable than expected; and (vi)
legislation or regulatory requirements adversely affect the business
that Firstar is engaged in.
-26-
PART II. OTHER INFORMATION
- - --------------------------
ITEM 6. Exhibits and Reports on Form 8-K
- - -------
(A) Exhibits filed:
Exhibit 27. Financial Data Schedule
(B) Reports on Form 8-K
None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
FIRSTAR CORPORATION
August 11, 2000 /s/ Jerry A. Grundhofer
- - ----------------- ------------------------------------------
Date Jerry A. Grundhofer
President and Chief Executive Officer
August 11, 2000 /s/ David M. Moffett
- - ----------------- ------------------------------------------
Date David M. Moffett
Vice Chairman and Chief Financial Officer
August 11, 2000 /s/ James D. Hogan
- - ----------------- ------------------------------------------
Date James D. Hogan
Executive Vice President and Controller
-27-