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 MARCH 31, 1999 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 precedeing 12 months and (2) has been subject to such filing
requirements for the past 90 days.
As of April 30, 1999, 661,424,492 shares of common stock were
outstanding.
-1-
FIRSTAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 1999
Page
Table of Contents Number
- ----------------------------------------------------------------------
Part I. Financial Information:
Financial Highlights.........................................3
Item 1. Financial Statements:
Condensed Consolidated Financial Statements..........4
Notes to Condensed Consolidated Financial Statements.8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................16
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...................................27
Item 6. Exhibits and Reports on Form 8-K....................34
Signatures..........................................................34
-2-
PART I. FINANCIAL INFORMATION
FIRSTAR CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
First Quarter
-------------------------------------
Percent
1999 1998 Change
------------ ----------- --------
Net income............................... $ 169,587 $ 138,834 22.2 %
Per share:
Basic earnings per common share........ $ 0.26 $ 0.22 17.7 %
Diluted earnings per common share...... 0.25 0.21 17.9
Common dividends declared.............. 0.10 0.08 25.0
Book value per common share............ 5.56 5.11 8.9
Market value per common share.......... 29.83 19.71 51.3
Average balances:
Total assets........................... $ 38,202,899 $ 34,429,252 11.0 %
Earning assets......................... 33,732,071 31,061,688 8.6
Loans, net of unearned interest........ 26,170,012 24,198,975 8.1
Deposits............................... 27,825,322 25,399,428 9.6
Total shareholders' equity............. 3,656,466 3,077,477 18.8
Ratios:
Return on average assets............... 1.80 % 1.64 %
Return on average equity............... 18.81 18.30
Average total shareholders' equity
to average total assets.............. 9.57 8.94
Risk-based capital ratios:
Tier 1............................... 9.29 9.88
Total................................ 11.29 12.26
Leverage - average assets (a).......... 8.07 8.36
Net interest margin.................... 4.49 4.51
Noninterest expense to net revenue..... 50.10 55.02
Noninterest income as a percent
of net revenue....................... 37.24 36.09
Net income to net revenue.............. 28.31 25.43
Excluding Merger Related Charges:
Net income............................. $ 179,272 $ 138,834 29.1 %
Noninterest expense.................... 285,169 300,395 (5.1)
Basic earnings per common share........ 0.27 0.22 22.7
Diluted earnings per common share...... 0.27 0.21 28.6
Return on average assets............... 1.90 % 1.64 %
Return on average common equity........ 19.88 18.30
Noninterest expense to net revenue..... 47.60 55.02
(a) - defined by regulatory authorities as tier 1 equity to the current quarter'
average assets.
All per share data has been restated to reflect the three for one stock split
completed as of March 31, 1999.
-3-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
March 31, December 31,
1999 1998
----------- -----------
ASSETS:
Cash and due from banks.............................$ 2,069,888 $ 2,349,532
Money market investments............................. 86,220 75,524
Trading securities................................... -- 2,754
Investment securities:
Available-for-sale................................. 5,720,607 6,220,902
Held-to-maturity (market value of $229,713 at
March 31, 1999 and $137,287 at December 31, 1998) 219,007 135,407
---------- ----------
Total securities................................... 5,939,614 6,356,309
Loans:
Commercial loans................................... 9,284,217 9,264,143
Real estate loans.................................. 9,269,501 9,110,524
Retail loans....................................... 7,773,591 7,493,390
---------- ----------
Total loans......................................26,327,309 25,868,057
Allowance for loan losses.................. 401,943 395,956
---------- ----------
Net loans........................................25,925,366 25,472,101
Loans held for sale.................................. 1,179,985 1,539,892
Premises and equipment............................... 609,377 629,464
Acceptances - customers' liability................... 22,438 29,916
Other assets......................................... 2,118,962 2,020,347
---------- ----------
Total assets....................................$37,951,850 $38,475,839
---------- ----------
---------- ----------
LIABILITIES:
Deposits:
Noninterest-bearing deposits......................$ 5,982,868 $ 6,649,199
Interest-bearing deposits..........................21,884,893 22,201,566
---------- ----------
Total deposits.................................27,867,761 28,850,765
Short-term borrowings................................ 3,913,666 3,643,308
Long-term debt....................................... 1,687,599 1,708,869
Acceptances outstanding.............................. 22,438 29,916
Other liabilities.................................... 782,132 713,068
---------- ----------
Total liabilities................................34,273,596 34,945,926
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock:
Shares authorized - 800,000,000 at March 31, 1999 and
December 31, 1998
Shares issued - 664,101,978 at March 31, 1999 and
658,291,470 at December 31, 1998................. 6,641 6,583
Surplus.............................................. 1,266,731 1,172,148
Retained earnings.................................... 2,370,742 2,267,263
Treasury stock, at cost - 2,887,734 shares at March 31,
1999 and 2,050,458 shares at December 31, 1998..... (41,720) (15,928)
Accumulated other comprehensive income............... 75,860 99,847
---------- ----------
Total shareholders' equity....................... 3,678,254 3,529,913
---------- ----------
Total liabilities and shareholders' equity......$37,951,850 $38,475,839
---------- ----------
---------- ----------
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)
First Quarter
------------------
1999 1998
-------- --------
INTEREST INCOME:
Interest and fees on loans.............$528,102 $524,083
Interest and fees on loans held for sale 27,156 11,154
Interest on investment securities:
Taxable............................... 75,533 78,857
Non-taxable........................... 17,385 17,006
Interest on trading secyrities.......... 11 26
Interest on money market investments.... 1,298 2,670
------- -------
Total interest income.................649,485 633,796
------- -------
INTEREST EXPENSE:
Interest on deposits....................210,579 218,462
Interest on short-term borrowings....... 46,873 47,681
Interest on long-term debt.............. 26,180 28,922
------- -------
Total interest expense................283,632 295,065
------- -------
Net interest income.................365,853 338,731
Provision for loan losses............... 35,910 28,645
------- -------
Net interest income after
provision for loan losses.........329,943 310,086
------- -------
NONINTEREST INCOME:
Trust income............................ 72,353 62,741
Mortgage banking income................. 33,899 33,529
Retail deposit income................... 22,111 21,613
Cash management income.................. 23,028 20,042
Credit card income...................... 21,674 18,088
ATM Income.............................. 6,661 6,019
Investment securities gains/(losses)-net (2) 329
All other income........................ 43,360 34,682
------- -------
Total noninterest income..............223,084 197,043
------- -------
NONINTEREST EXPENSE:
Salaries................................116,767 127,746
Pension and other employee benefits..... 22,379 28,196
Equipment expense....................... 21,742 23,351
Occupancy expense - net................. 26,215 24,353
All other expense....................... 98,066 96,749
------- -------
285,169 300,395
Merger related charges.................. 15,000 --
------- -------
Total noninterest expense.............300,169 300,395
------- -------
INCOME BEFORE TAX.......................252,858 206,734
Income tax.............................. 83,271 67,900
------- -------
NET INCOME.............................$169,587 $138,834
------- -------
------- -------
PER SHARE:
Basic earnings per common share........$ 0.26 $ 0.22
Diluted earnings per common share....... 0.25 0.21
Common stock cash dividends declared.... 0.10 0.08
The accompanying notes are an integral part of these statement
All per share data has been restated to reflect the three for
stock split completed in as of March 31, 1999.
-5-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
Employee
Stock
Accumulated Ownership
Other Plan Shares
Preferred Common Retained Treasury Comprehensive Purchased Total
Stock Stock Surplus Earnings Stock Income With Debt Equity
--------- -------- ---------- ---------- ------------ ------------- ------------ ------------
Balance, January 1, 1998....$ 5,308 $ 6,328 $ 778,990 $2,095,443 $ (167,180) $ 32,848 $ (1,846) $ 2,749,891
Net income................. 138,834 138,834
Unrealized gain
on securities
available for sale........ 7,164 7,164
Reclassification adjustment
for gains realized
in net income............ (329) (329)
Income taxes............... (2,750) (2,750)
---------
Comprehensive income 142,919
Cash dividends declared
on common stock........... (54,528) (54,528)
Cash dividends declared
on preferred stock........ (83) (83)
Conversion of preferred
stock into common stock... (591) 34 492 64 (1)
Issuance of common stock
and treasury shares....... 183 305,883 12,509 173,067 491,642
Purchase of treasury
stock..................... (14,312) (14,312)
Shares reserved to meet
deferred compensation
obligations............... 1,912 (719) 1,193
Amortization of stock
awards.................... 142 142
ESOP debt reduction, net... 167 167
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
Balance, March 31, 1998.....$ 4,717 $ 6,511 $ 1,086,961 $ 2,192,667 $ (9,080) $ 36,933 $ (1,679) $ 3,317,030
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
Balance, January 1, 1999....$ -- $ 6,583 $ 1,172,148 $ 2,267,263 $(15,928) $ 99,847 $ -- $ 3,529,913
Net income................. 169,587 169,587
Unrealized loss
on securities
available for sale........ (39,361) (39,361)
Reclassification adjustment
for losses realized
in net income............ 2 2
Income taxes............... 15,372 15,372
---------
Comprehensive income 145,600
Cash dividends declared
on common stock........... (66,108) (66,108)
Issuance of common stock
and treasury shares....... 58 92,047 31 92,136
Purchase of treasury
stock..................... (24,407) (24,407)
Shares reserved to meet
deferred compensation
obligations............... 1,416 (1,416) --
Amortization of stock
awards.................... 1,120 1,120
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
Balance, March 31, 1999.....$ -- $ 6,641 $ 1,266,731 $ 2,370,742 $(41,720) $ 75,860 $ -- $ 3,678,254
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
The accompanying notes are an integral part of these statements.
-6-
FIRSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Three Months Ended
March 31
1999 1998
-------------------------------
(unaudited)
Cash Flows from Operating Activities:
Net Income $ 169,587 $ 138,834
Adjustments:
Depreciation and amortization 32,194 24,508
Intangible amortization 15,991 11,301
Provision for loan losses 35,910 28,645
Net (increase) decrease in trading securities 2,753 (2,516)
Provision for deferred taxes 50,794 13,050
(Gain) / loss on sale of premises and equipment - net 393 (386)
(Gain) / loss on sale of securities - and other assets (84) (285)
(Gain) / loss on sale of mortgage loans (26,261) (12,403)
Proceeds from sale of mortgage loans 2,198,366 1,223,344
Mortgage loans originated for sale on the secondary market (1,812,198) (1,704,831)
Net change in other assets and liabilities (3,279) 6,140
------------- --------------
Total adjustments 494,579 (413,433)
------------- --------------
Net cash provided by/(used in) operating activities 664,166 (274,599)
------------- --------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity securities 3,028 119,828
Proceeds from maturities of available-for-sale securities 426,242 149,310
Proceeds from sales of available-for-sale securities 15,782 311,676
Purchase of held-to-maturity securities 0 (65,207)
Purchase of available-for-sale securities (3,258) (285,384)
Net change in loans (646,121) (100,247)
Proceeds from sales of loans 28,443 47,720
Proceeds from sales of premises and equipment 727 (8,727)
Purchases of premises and equipment (25,894) (26,661)
Acquisitions, net of cash acquired 0 (134,854)
------------- --------------
Net cash provided by/(used in) investing activities (201,051) 7,454
------------- --------------
Cash Flows from Financing Activities:
Net change in deposits (983,004) 647,719
Net change in short-term borrowings 270,358 22,752
Principal payments on long-term debt (61,522) (425,042)
Proceeds from issuance of long-term debt 40,000 127,022
Proceeds from issuance of common stock 92,136 21,117
Purchase of treasury stock (24,407) (14,312)
Shares reserved to meet deferred compensation obligations 0 1,193
Dividends paid (65,624) (49,730)
------------- --------------
Net cash provided by/(used in) financing activities (732,063) 330,719
------------- --------------
Net change in cash and cash equivalents (268,948) 63,574
Cash and cash equivalents at beginning of period 2,425,056 2,228,920
------------- --------------
Cash and cash equivalents at end of period $ 2,156,108 $ 2,292,494
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 285,526 $ 256,045
Income taxes 3,123 1,562
Transfer to foreclosed assets from loans $ 10,457 $ 3,787
-7-
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
- ------------------------------
These condensed 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 included in
Firstar's annual report on Form 10-K for the year ended December
31, 1998, filed with the Securities and Exchange Commission.
These condensed 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 March 31,
1999 and December 31, 1998. (dollars in thousands)
March 31, 1999 December 31, 1998
------------------------------------------------ --------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- --------- ---------- ---------- -------- -------- ----------
Held-to-Maturity
- ----------------
Mortgage-backed
securities $ 56,540 $ -- $ 167 $ 56,373 $ 61,955 $ -- $ 448 $ 61,507
Obligations of state and
political subdivisions 162,467 10,993 120 173,340 73,452 2,951 623 75,780
---------- ---------- --------- ---------- ---------- -------- -------- ----------
Total held-to-
maturity securities $ 219,007 $ 10,993 $ 287 $ 230,713 $ 135,407 $ 2,951 $ 1,071 $ 137,287
---------- ---------- ---------- ---------- ---------- -------- -------- ----------
---------- ---------- ---------- ---------- ---------- -------- -------- ----------
March 31, 1999 December 31, 1998
------------------------------------------------ --------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- --------- ---------- ---------- -------- -------- ----------
Available-for-Sale
- ------------------
U.S. Treasuries and
agencies $1,178,301 $ 38,000 $ 1 $1,216,300 $1,263,768 $ 53,076 $ 12 $1,316,832
Mortgage-backed
securities 2,744,412 47,290 3,667 2,788,035 3,042,011 66,666 2,152 3,106,525
Obligations of state and
political subdivisions 1,396,026 36,975 346 1,432,655 1,467,641 39,737 346 1,507,032
Other debt securities 5,661 4 51 5,614 8,176 1 31 8,146
Money market mutual funds 61,509 -- -- 61,509 47,492 -- -- 47,492
Federal Reserve/FHLB
stock and other -- -- -- -- -- -- -- --
equity securities 216,494 -- -- 216,494 234,708 167 -- 234,875
---------- ---------- ------- ---------- ---------- -------- -------- ----------
Total available-for-
sale securities $5,602,403 $ 122,269 $ 4,065 $5,720,607 $6,063,796 $159,647 $ 2,541 $6,220,902
---------- ---------- ------- ---------- ---------- -------- ------- ----------
---------- ---------- ------- ---------- ---------- -------- ------- ----------
-8-
As of March 31, 1999, Firstar reported a net unrealized gain
of $118.2 million for available-for-sale securities. For the
first three months of 1999, the after-tax net unrealized gain/
(loss) reported as a separate component of equity decreased from
a net unrealized gain of $99.8 million to a net unrealized gain
of $75.9 million.
During the first quarter of 1999 approximately $89 million
in municipal loans were reclassified to obligations of state
and political subdivisions.
The following table presents the amortized cost and fair
value of held-to-maturity and available-for-sale debt
securities at March 31, 1999 (dollars in thousands)
Amortized Fair
Held-to-Maturity Cost Value
- ---------------- ----------- -----------
One year or less $ 92,637 $ 92,669
After one year through five years 33,273 34,651
After five years through ten years 46,789 50,726
After ten years 46,308 51,667
----------- -----------
Total $ 219,007 $ 229,713
----------- -----------
----------- -----------
Available-for-Sale
- ------------------
One year or less $ 691,156 $ 699,882
After one year through five years 3,437,983 3,520,221
After five years through ten years 1,062,897 1,087,213
After ten years 193,873 196,797
----------- -----------
Total $ 5,385,909 $ 5,504,113
----------- -----------
----------- -----------
Note: Maturity information related to mortgage-backed
securities included above is presented based
upon weighted average maturities anticipating
future prepayments.
-9-
Note 3. Loans
- -------------
The following table summarizes the composition of the
loan portfolio, net of unearned interest, as of
March 31, 1999 and December 31, 1998.
(dollars in thousands)
March 31, December 31,
1999 1998
----------- -----------
Commercial loans:
Corporate loans $ 6,995,395 $ 6,889,149
Asset-based lending 767,836 860,024
Commercial leasing 1,307,493 1,204,549
Industrial revenue bonds 213,493 310,421
----------- -----------
Total commercial loans 9,284,217 9,264,143
----------- -----------
Real estate loans:
Residential mortgage 3,211,104 3,285,400
Commercial mortgage 4,868,793 4,611,442
Construction and land development 1,189,604 1,213,682
----------- -----------
Total real estate loans 9,269,501 9,110,524
----------- -----------
Retail loans:
Installment 5,106,120 4,907,715
Credit cards 1,184,806 1,220,240
Retail leasing 1,482,665 1,365,435
----------- -----------
Total retail loans 7,773,591 7,493,390
----------- -----------
Total loans $26,327,309 $25,868,057
----------- -----------
----------- -----------
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 March 31, 1999 and December 31, 1998.
(dollars in thousands)
March 31, 1999 December 31, 1998
-------------------------- --------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ---------- ---------- ----------
Impaired Loans:
Valuation allowance required $ 34,532 $ 10,094 $ 44,096 $ 9,042
No valuation allowance required 57,376 -- 53,568 --
---------- ---------- ---------- ----------
Total impaired loans $ 91,908 $ 10,094 $ 97,664 $ 9,042
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The average recorded investment in impaired loans for
the three months ended March 31, 1999 was $94.6 million,
compared to $87.1 million for the same period in 1998.
As a general policy, Firstar applies both principal and
interest payments received on impaired loans as a
reduction of principal.
-10-
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)
Three Months Ended Year Ended
--------------------- -----------
March 31, December 31,
--------------------- -----------
1999 1998 1998
--------- --------- ---------
Balance - beginning of period $ 395,956 $ 372,933 $ 372,933
Loans charged-off (41,981) (40,161) (170,838)
Recoveries on loans previously charged-off 12,058 13,163 49,437
--------- --------- ---------
Net charge-offs (29,923) (26,998) (121,401)
Provision charged to earnings 35,910 28,645 113,636
Allowances of banks purchased -- 18,367 30,788
--------- --------- ---------
Balance - end of period $ 401,943 $ 392,947 $ 395,956
--------- --------- ---------
--------- --------- ---------
Note 6. Deposits
- -----------------
The following table summarizes the composition of
deposits of Firstar as of March 31, 1999 and
December 31, 1998. (dollars in thousands)
March 31, December 31,
1999 1998
----------- -----------
Noninterest-bearing deposits $5,982,868 $6,649,199
Interest-bearing deposits:
Savings 2,236,033 2,272,495
NOW accounts 3,601,242 3,848,752
Money market deposit accounts 6,109,870 5,959,710
Time deposits $100,000 and over - domestic 1,404,532 1,614,748
Foreign deposits $100,000 and over 512,688 343,574
All other deposits 8,020,528 8,162,287
----------- -----------
Total interest-bearing deposits 21,884,893 22,201,566
----------- -----------
Total deposits $27,867,761 $28,850,765
----------- -----------
----------- -----------
-11-
Note 7. Income Tax
- ------------------
The components of the net deferred tax liability included
in other liabilities on the Corporation's consolidated balance
sheets at March 31, 1999 and December 31, 1998 are shown in
the following table. (dollars in thousands)
March 31, December 31,
1999 1998
---------- ------------
Deferred tax liabilities:
Equipment leased to customers (287,151) (251,215)
Securities available for sale (42,559) (57,716)
Bank premises and equipment (16,886) (16,886)
Acquired assets accounted for
as a purchase (11,455) (11,777)
Pension and post-retirement
benefits (9,527) (8,492)
Deferred loan fees and costs (5,615) (4,525)
FHLB dividends (10,459) (9,959)
Other--net (7,789) (6,214)
Deferred tax assets:
Allowance for loan losses 151,502 144,625
State and federal net
operating loss carry forwards 20,406 20,406
Deferred compensation 18,986 14,977
Merger-related charges 24,409 43,790
Federal ATM credit carryforward 12,568 7,568
Charitable contributions carryforward 4,100 4,100
---------- ----------
Subtotal (159,470) (131,318)
---------- ----------
Valuation Allowance (10,854) (10,854)
---------- ----------
Net deferred tax liability $ (170,324) $(142,172)
---------- ----------
---------- ----------
Note 8. Merger and Related Charges
- ----------------------------------
Firstar recorded merger and integration charges of $243.0
million in 1998 and $15.0 million in the first quarter
of 1999. Merger and integration charges were associated
with the mergers of Firstar Corporation and Star Banc
Corporation in the fourth quarter of 1998 and the
acquisition of Trans Financial Inc. in the third
quarter of 1998. The components of the charges are
shown below. (dollars in thousands)
First Quarter
1999 1998
------------- --------
Severance and related costs $ 1,030 $ 86,576
Fixed asset write-downs -- 26,646
Lease termination charges -- 16,476
System conversions 13,636 34,026
Charitable contributions -- 23,000
Professional fees -- 45,700
Other merger-related expenses 334 10,546
-------- --------
Total $ 15,000 $242,970
-------- --------
-------- --------
-12-
The following table presents a summary of activity
with respect to the merger related accrual:
Balance at December 31, 1998 $ 129,198
Merger-related charge 15,000
Cash payments (47,642)
Noncash write-downs (27,509)
---------
Balance at March 31, 1999 $ 69,047
---------
---------
Firstar expects to incur additional merger-related
expenses during 1999 in connection with the combining
of operations of Firstar Corporation and Star Banc
Corporation.
Note 9. 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 which was adopted by Firstar in 1997.
The fair value of capitalized mortgage servicing rights
was $202.3 million on March 31, 1999 and $199.8 million
on December 31, 1998. Firstar serviced $14.9 billion of
mortgage loans for other investors as of March 31, 1999
and $14.7 billion of mortgage loans for other
investors as of December 31, 1998.
Changes in capitalized mortgage servicing rights at
March 31, 1999 and December 31, 1998 are summarized
in the following table. (dollars in thousands)
March 31, December 31,
1999 1998
-------- -----------
Mortgage Servicing Assets:
Balance at beginning of year $ 182,692 $ 72,337
Amount added in acquisitions -- 51,731
Amount capitalized 46,497 152,070
Amortization (10,227) (28,586)
Sales (39,747) (64,630)
Valuation allowance (230) (230)
--------- ---------
Balance at end of period $ 178,985 $ 182,692
--------- ---------
--------- ---------
-13-
Note 10. Earnings Per Share
- ----------------------------
The following table shows the amounts used in the
computation of basic and diluted earnings per share,
in accordance with SFAS No. 128 for the three months
ended March 31, 1999 and 1998. (dollars in thousands)
First Quarter
------------------------
1999 1998
-------- --------
Net income $169,587 $138,834
Dividends on preferred stock -- 83
-------- --------
Net income available to
common shareholders $169,587 $138,751
-------- --------
-------- --------
Weighted average shares (000's):
Common shares 661,572 637,416
Options and stock plan 13,546 14,112
-------- --------
Weighted average diluted common shares 675,118 651,527
-------- --------
-------- --------
Basic earnings per common share $ 0.26 $ 0.22
-------- --------
-------- --------
Diluted earnings per common share $ 0.25 $ 0.21
-------- --------
-------- --------
Note 11. Pending Acquisitions
- ------------------------------
On April 30, 1999, Firstar Corporation and Mercantile
Bancorporation Inc. signed a definitive agreement to
merge through an exchange of shares. Under the terms
of the agreement, Mercantile shareholders will receive
2.091 shares of Firstar common stock for each share of
Mercantile common stock. The combined company will have
assets of approximately $75 billion. The merger is
expected to be completed in the fourth quarter of
1999 and, subsequent to regulatory and shareholder
approvals, will be accounted for as a pooling of
interests.
A summary of unaudited pro forma financial information
giving effect to the merger is shown below. The
unaudited financial information is not indicative of the
results that would have been realized had the entities
been a single company during these periods, nor is it
indicative of the actual results the combined company
will report in the future.
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(millions of dollars, except per share)
Total average assets $ 71,096 $ 60,722 $ 54,565
Net interest revenue 2,517 2,350 2,201
Other operating revenue 1,402 1,126 989
Other operating expense 2,548 2,113 1,957
Net income 805 761 700
Diluted earnings per common share .81 .82 .75
-14-
Note 12. 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.
Certain asset balances have been reclassified between business
segments during the first quarter of 1999. Prior year segment data has
been restated to be comparable to the current period's presentation.
Additionally, transfer pricing methodology used for allocating net
interest income for certain asset and liability categories is different
from that used in the prior year's reporting. The transfer pricing
methodology used in the first quarter of 1999 was based upon the
anticipated cash flows ("cash flow method") of underlying assets and
liabilities. During 1998, net interest revenue was allocated to segments
based upon average maturities ("average maturity method") of the
underlying assets and liabilities. Accurate data related to the
anticipated cash flows of the underlying assets and liabilities for
periods during 1998 or data related to average maturities of assets and
liabilities during 1999 is impracticable to cost effectively obtain.
Therefore, segment information for 1998 has not been restated using the
cash flow method. Additionally, restatement of segment information for
1999 determined under the average maturity method is also impracticable.
For the quarter ended March 31, 1999
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Related
Banking Banking Banking Treasury Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 226,874 $ 85,864 $ 15,618 $ 47,660 $ 376,016 $ $ 376,016
Provision for loan losses 24,412 8,260 180 3,058 35,910 35,910
Noninterest income 112,561 29,820 74,185 6,518 223,084 223,084
Noninterest expense 205,238 26,990 48,214 4,727 285,169 15,000 300,169
Income taxes* 38,994 28,569 14,708 16,478 98,749 (5,315) 93,434
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 70,791 $ 51,865 $ 26,701 $ 29,915 $ 179,272 $ (9,685) $ 169,587
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $11,427,935 $11,105,815 $ 872,658 $ 2,763,604 $25,990,012
Total assets 14,082,840 12,617,111 1,117,466 10,385,482 38,202,899
Deposits 22,240,773 3,534,295 1,537,862 512,392 27,825,322
- ----------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 1998
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Related
Banking Banking Banking Treasury Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 196,116 $ 78,056 $ 14,032 $ 60,736 $ 348,940 $ $ 348,940
Provision for loan losses 22,677 5,475 49 444 28,645 28,645
Noninterest income 101,082 24,462 66,994 4,505 197,043 197,043
Noninterest expense 203,153 26,770 65,171 5,301 300,395 300,395
Income taxes* 25,696 25,302 5,691 21,421 78,110 78,110
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 45,672 $ 44,971 $ 10,115 $ 38,075 $ 138,833 $ 0 $ 138,833
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $10,355,444 $ 9,398,857 $ 798,879 $ 3,645,795 $24,198,975
Total assets 11,966,801 10,506,217 988,092 10,968,142 34,429,252
Deposits 20,356,776 3,131,779 1,398,225 512,648 25,399,428
- ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
-15-
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 March 31, 1999 was $169.6 million, a 22.2%
increase over the first quarter of 1998. Diluted earnings
per common share was $.25 for the first quarter of 1999,
compared to $.21 for the same period of the prior year, an
increase of 17.9%. All per share amounts have been
restated for the three for one stock split completed as of
March 31, 1999. Return on average assets was 1.80% for the
first quarter of 1999, compared to 1.64% for the same
period in 1998. Return on average common equity was
18.81% compared to 18.30% in the first quarter of last
year.
Included in the first quarter of 1999 expenses were
$15.0 million of merger related charges relating to the
November 1998 merger of Star Banc Corporation and Firstar.
Firstar anticipates a total of $325.0 million of
restructuring and merger related charges of which $232.0
million have been recognized through the end of the first
quarter of this year.
Excluding the merger related charges, net income for
the first quarter would have been $179.3 million, an
increase of 29.1% over the first quarter of 1998. First
quarter 1999 diluted earnings per common share, before
merger-related charges, was $.27, or a 28.6% increase
over the same quarter of last year. Return on average
assets was 1.90% and return on average common equity
was 19.88% in the first quarter of 1999, excluding
merger-related charges.
The improvement in net income before merger-related
charges resulted from higher net interest revenue and
noninterest revenue partially offset by somewhat higher
operating costs and an increased loan loss provision.
Financial Condition
Total assets at March 31, 1999 were $37.95 billion,
up $524 million from the $38.48 billion level at
December 31, 1998. Total loans increased $459 million,
or 1.8% from last year end to $26.33 billion at
March 31, 1999. Retail loans increased by $280.2 million,
or 3.7%, to $7.77 billion at March 31, 1999. Strong growth
in retail installment loans and leases of 4.0% and 8.6%,
respectively, were achieved in the first quarter of this
year. Commercial loans, including real estate loans, were
up $253.3 million, or 1.7%, from December 31, 1998 levels.
Residential mortgages continue to decline, down $74.3
million, as normal amortization and prepayments reduce
outstandings while new originations are held as an available
for sale asset.
Investment securities declined by $416.7 million during
the quarter to $5.94 billion as of March 31, 1999. Scheduled
maturities of the investment securities were used to fund in
part the increase in loans during the quarter. At March 31,
1999 the net unrealized gain on available for sale securities
was $118.2 million and the related after tax increase to
shareholders' equity was $75.9 million. Mortgage loans
held for sale were $1.18 billion at March 31, 1999, a
reduction from the $1.54 billion level at December 31, 1998.
-16-
Total deposits were $27.87 billion at March 31, 1999, a
reduction of $983.0 million, or 3.4%, from the December 31,
1998 level. Demand deposit balances declined by $666.3
million to $5.98 billion at March 31, 1999 reflecting, in
part, the tendency of commercial customers to maintain
higher cash balances at year ends. Interest bearing
deposits decreased by $316.7 million, or 1.4%, from year
end levels. The shift in deposit preferences continues
with reductions in savings, NOW accounts, and small
CDs, collectively down by $425.7 million, being partially
offset by the $150.2 million increase in money market
accounts. Retail deposit customers are seeking higher
yields in deposit accounts and alternative investment
vehicles thus limiting Firstar's ability to maintain or
increase deposits. Short-term borrowed funds increased
by $270.4 million, or 7.4%, during the quarter to a level
of $3.91 billion. Increased usage of this funding source
was necessary to replace the reduced levels of deposits.
Results of Operations
Net interest income, Firstar's principal source of
revenue, increased by $27.1 million, or 7.8% on a tax
equivalent basis compared to the first quarter of 1998.
The increase was due to higher average earning asset
balances partially offset by a slightly reduced net
interest margin. Average earning assets were up $2.67
billion, or 8.6% over the first quarter of 1998.
Average retail loans increased by $862 million, or 12.7%,
while commercial loans rose by $1.93 billion, or 14.6%.
Average loans held for sale more than doubled due to
both the acquisition of a mortgage banking business
in the first quarter of last year and increased market
activity this year.
The net interest margin decreased by two basis points
to 4.49% in the first quarter of 1999 compared to the
first quarter of 1998. The yield on total earning assets
declined by 46 basis points to 7.90% in the current
quarter. The yield on total loans decreased by 58
basis points reflecting generally market driven forces.
The rate paid on interest bearing liabilities declined
by 54 basis points similarly reflecting lower market
rates. Interest spread, the difference between the rate
on total earning assets and the rate on interest bearing
liabilities increased by eight basis points. The
contribution of interest free funds to net interest
margin declined, however, by ten basis points producing
the net reduction in margin of two basis points. The
contribution of interest free funds was lessened by the
absolute reduction in interest rate levels along with a
higher proportion of earning assets funded by interest
bearing liabilities. Table 1 provides 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
-17-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
First Quarter, 1999 First Quarter, 1998
--------------------------------- --------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- ------- ---------- --------- -------
ASSETS:
Commercial loans...................$ 9,447,227 $ 177,471 7.60 % $8,558,458 $ 177,749 8.41 %
Real estate loans.................. 9,079,713 180,904 8.04 8,859,346 185,026 8.37
Retail loans....................... 7,643,072 171,774 9.10 6,781,171 163,219 9.75
---------- ------- ---------- -------
Total loans.................. 26,170,012 530,149 8.19 24,198,975 525,994 8.77
Loans held for sale................ 1,493,754 27,156 7.27 634,564 11,154 7.03
Taxable investment securities...... 5,955,329 101,035 6.81 6,035,705 104,162 6.93
Money market investments........... 112,976 1,308 4.70 192,444 2,696 5.68
---------- ------- ---------- -------
Total interest-earning
assets..................... 33,732,071 $ 659,648 7.90 % 31,061,688 $ 644,006 8.36 %
------- ---- ------- ----
------- ---- ------- ----
Cash and due from banks............ 1,900,638 1,634,331
Allowance for loan losses.......... (397,604) (383,477)
Other assets....................... 2,967,794 2,116,710
---------- ----------
Total assets..................$38,202,899 $34,429,252
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW....................$ 5,963,638 $ 27,091 1.84 % $5,559,661 $ 29,723 2.17 %
Money market deposit accounts...... 5,999,374 59,339 4.01 4,518,195 49,831 4.47
Time deposits...................... 9,847,594 124,149 5.11 10,068,835 138,908 5.59
Short-term borrowings.............. 4,325,306 46,873 4.39 3,699,460 47,681 5.23
Long-term debt..................... 1,707,222 26,180 6.15 1,740,417 28,922 6.65
---------- ------- ---------- -------
Total interest-bearing
liabilities................ 27,843,134 $ 283,632 4.13 % 25,586,568 $ 295,065 4.67 %
------- ---- ------- ----
------- ---- ------- ----
Noninterest-bearing deposits....... 6,014,716 5,252,737
Other liabilities.................. 688,583 512,470
Shareholders' equity............... 3,656,466 3,077,477
---------- ----------
Total liabilities and
shareholders' equity........$38,202,899 $34,429,252
---------- ----------
---------- ----------
Net interest revenue/margin............. $ 376,016 4.49 % $ 348,941 4.51 %
Interest rate spread.................... 3.77 3.69
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-
curve, changes in interest rate relationships,
changes in the direction rates, and changes in
the mix and levels of balance sheet accounts.
The most recent simulation projected the impact
of a 300 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 1.0% from
a base case, while an increasing rate scenario
would decrease net interest revenue by 1.3%.
The loan loss provision charged to earnings
increased by $7.3 million to $35.9 million in the
first quarter of 1999 from the first quarter of 1998
due in part to slightly higher charge-offs. Net loan
charge-offs were $29.9 million in the first quarter
of 1999 compared to $27.0 a year earlier.
Additionally, loan growth during the period
required an increased loan loss reserve to maintain
adequate reserve levels.
Noninterest income is a growing source of revenue
for Firstar, representing 37.2% of tax equivalent net
revenue in the first quarter of 1999, up from 36.1%
in the same period of last year. Noninterest income
increased by $26.0 million, or 13.2%, to a level of
$223.1 million in the first quarter of 1999. Trust
income increased $9.6 million, or 15.3%, due to new
business in all product lines and market segments as
well as higher stock market values. Additionally,
first quarter trust income benefited from the transfer
of Firstar sponsored Stellar Funds to in-house processing.
Mortgage banking revenue was up slightly by 1.1% with
higher servicing income and origination gains being
offset by increased amortization of servicing rights
and a lower level of gains realized on the sale
of servicing rights. Corporate cash management
income increased $3.0 million, or 14.9%, due to new
business development, an expanded product line and
higher customer transaction volumes. Credit card
revenue rose $3.6 million, or 19.8%, due to an expanded
customer base, increased merchant activity and card
usage. Brokerage revenue declined as a result of the
outsourcing of that product to a third party broker.
All other income increased by $5.9 million, or 31.5%,
and included leasing related revenues from a recently
acquired leasing company. Table 2 shows the components
of noninterest income.
Noninterest expense, excluding merger related expenses,
totaled $285.2 million, a decrease of $15.2 million, or 5.1%,
from the first quarter of 1998. Staff expense for the first
quarter decreased $16.8 million, 10.8%. This decrease resulted
primarily from staff reductions in support and back room
operations as a result of recently completed mergers. In
addition, staff expenses were reduced through new deferrals
of loan origination costs and the outsourcing of the brokerage
business. Offsetting these decreases somewhat were normal
salary increases and staff additions for new branches.
Fringe benefits also declined as result of merging the
separate companies' plans.
Equipment expense declined by $1.6 million, or 6.9%, due
to savings resulting from the merger. Occupancy expense
increased $1.9 million, or 7.6%, due to both the opening of
new branches and acquisitions. Amortization of intangible
assets increased $4.7 million, or 41.5%, due to new
acquisitions. All other operating expenses declined an
aggregate $3.4 million, or
-19-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 2 NONINTEREST INCOME
(dollars in thousands)
% Increase/
First Quarter (decrease)
--------------------
1999 1998 1999/1998
-----------------------------------
Trust income $ 72,353 $ 62,741 15.3 %
Mortgage banking 33,899 33,529 1.1
Cash management income 23,028 20,042 14.9
Retail deposit fees 22,111 21,613 2.3
Credit card income 21,674 18,088 19.8
ATM income 6,661 6,019 10.7
Insurance commissions 6,551 3,892 68.3
International income 4,933 4,013 22.9
Corporate owned life insurance 4,795 3,211 49.3
Brokerage revenue 2,621 4,962 (47.2)
All other income 24,460 18,604 31.5
--------- --------- ------
223,086 196,714 13.4
Investment securities gains/(losses)--net (2) 329 n/m
--------- --------- ------
Total noninterest income $ 223,084 $ 197,043 13.2 %
--------- --------- ------
--------- --------- ------
n/m = not meaningful
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 3 NONINTEREST EXPENSE
(dollars in thousands)
% Increase/
First Quarter (decrease)
--------------------
1999 1998 1999/1998
-----------------------------------
Salaries $ 116,767 $ 127,746 (8.6)%
Pension and other
employee benefits 22,379 28,196 (20.6)
Equipment expense 21,742 23,351 (6.9)
Occupancy expense--net 26,215 24,353 7.6
Amortization of goodwill
and other intangible assets 15,991 11,301 41.5
Outside services 15,720 15,843 (0.8)
Postage and courier 10,197 8,339 22.3
Marketing expense 6,665 9,325 (28.5)
Professional services 3,412 6,347 (46.2)
Travel and entertainment 3,450 3,445 0.1
Stationery and supplies 5,104 6,359 (19.7)
All other noninterest expense 37,527 35,790 4.9
--------- --------- ------
285,169 300,395 (5.1)
Merger related expenses 15,000 n/m
--------- --------- ------
Total noninterest expense $ 300,169 $ 300,395 (0.1)%
--------- --------- ------
--------- --------- ------
n/m = not meaningful
-20-
3.9%, reflecting various cost saving initiatives. Table 3
shows the components of noninterest expenses.
Before merger related costs, Firstar's efficiency ratio
was 47.60% in the first quarter of 1999, a significant
improvement over the 55.02% of the first quarter of last year.
Asset Quality
As of March 31,1999, the allowance for loan losses was $401.9
million, or 1.53% of loans outstanding compared to 1.53% at
December 31, 1998 and 1.60% 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. A more aggressive charge-
off policy has been adopted. The allowance as a percentage of
nonperforming loans was 330% at March 31, 1999 compared to 318%
at December 31, 1998 and 317% a year earlier. Table 4 provides a
summary of activity in the allowance for loan losses by type of
loan. Net charge-offs totaled $29.9 million in the first quarter
of 1999 compared with $27.0 million in the same period of last
year. Annualized net charge-offs as a percent of average loans
remained essentially level from period to period. Credit card
net charge-offs increased from 4.52% of average outstandings in
the first quarter of 1998 to 5.19% in the current quarter. Lower
charge-off levels in other retail lending and in commercial loans
partially offset the increase in credit card losses. Other retail
lending net charge-offs declined from .54% of average outstandings
in the first quarter on 1998 to .29% in the current quarter, while
commercial loans charge-offs declined from .34% to .31%.
Nonperforming assets, as shown in Tables 5 and 6, were $136.7
million at March 31, 1999. This level is unchanged from
December 31, 1998 and down slightly from a year earlier.
Measured as a percent of loans and other real estate,
nonperforming assets have declined from .56% at March 31, 1998
to .52% on March 31, 1999. Nonperforming loans are currently
at historically low levels and it can be expected that they
may increase in future periods.
Capital Resources
Total shareholders' equity was $3.68 billion at March 31,
1999, an increase of $148.3 million from December 31, 1998
and $361.2 million from a year earlier. The ratio of
shareholders' equity to assets was 9.69% at March 31, 1999,
compared to 9.17% at December 31, 1998 and 9.11% at March
31, 1998.
Banking industry regulators define minimum capital
requirements for bank holding companies. Firstar's tier 1
and total risk-based capital ratios as of March 31, 1999
amounted to 9.29% and 11.29%, respectively, well above the
minimum requirements of 4.00% for tier 1 and 8.00% for
total risk-based capital. This compares to tier 1 and
total risk-based capital ratios of 8.92% and 11.01% at
December 31, 1998. Regulatory authorities have also
established a
-21-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 4 SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
First Quarter
-------------------------
1999 1998
---------- ----------
Average loans..................... $ 26,170,012 $ 24,198,975
---------- ----------
---------- ----------
Allowance for loan losses:
Balance - beginning of period... $ 395,956 $ 372,933
Charge-offs:
Commercial.................... (11,263) (12,937)
Commercial real estate........ (1,055) (476)
Residential real estate....... (2,460) (411)
Credit card................... (17,350) (15,163)
Other retail.................. (9,853) (11,174)
---------- ----------
Total charge-offs........... (41,981) (40,161)
---------- ----------
Recoveries:
Commercial.................... 4,036 5,840
Commercial real estate........ 800 1,043
Residential real estate....... 1 215
Credit card................... 2,022 2,432
Other retail.................. 5,199 3,633
---------- ----------
Total recoveries............ 12,058 13,163
---------- ----------
Net charge-offs........... (29,923) (26,998)
Provision charged to earnings... 35,910 28,645
Allowances of banks purchased... -- 18,367
---------- ----------
Balance - end of period......... $ 401,943 $ 392,947
---------- ----------
---------- ----------
Ratio of net charge-offs to average
loans:
Commercial.................... 0.31% 0.34%
Commercial real estate........ 0.02% (0.05%)
Residential real estate....... 0.30% 0.02%
Credit card................... 5.19% 4.52%
Other Retail.................. 0.29% 0.54%
Total loans..................... 0.46% 0.45%
------ ------
------ ------
-22-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 5 NONPERFORMING ASSETS
(Dollars in thousands)
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ -----------
Loans on nonaccrual status:
Commercial........................$ 59,887 $ 60,587 $ 65,653
Residential mortgage.............. 20,352 20,717 26,958
Commercial mortgage............... 25,677 28,942 21,556
Construction and land development. 6,337 7,766 3,553
Retail loans...................... 8,070 6,463 5,537
------- ------- -------
Total nonaccrual loans.......... 120,323 124,475 123,257
Loans which have been
renegotiated...................... 1,455 48 894
------- ------- -------
Total nonperforming loans....... 121,778 124,523 124,151
Other real estate owned............. 14,880 11,852 13,327
------- ------- -------
Total nonperforming assets......$ 136,658 $ 136,375 $ 137,478
------- ------- -------
------- ------- -------
Percentage of nonperforming
loans to loans.................... 0.46% 0.48% 0.51%
------- ------- -------
------- ------- -------
Percentage of nonperforming
assets to loans and other
real estate owned................. 0.52% 0.53% 0.56%
------- ------- -------
------- ------- -------
Loans past due 90 days
or more...........................$ 70,928 $ 75,094 $ 76,896
------- ------- -------
------- ------- -------
-23-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 6 COMPOSITION OF NONPERFORMING LOANS
(dollars in thousands)
March 31, 1999
---------------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------
Non- Restruc- Percentage or More
accrual tured Total of Loans Past Due
-------- --------- --------- ----------- --------
Commercial loans:
Corporate.............. $ 48,526 $ 5 $ 48,531 0.61 % $12,190
Commercial leasing..... 11,361 -- 11,361 0.87 629
-------- ------- -------- -------
Total commercial loans 59,887 5 59,892 0.65 12,819
-------- ------- -------- -------
Real estate loans:
Residential............ 20,352 -- 20,352 0.63 11,914
Commercial mortgage.... 25,677 -- 25,677 0.53 7,192
Construction/land
development.......... 6,337 -- 6,337 0.53 4,050
-------- ------ -------- -------
Total real estate loans 52,366 -- 52,366 0.56 23,156
-------- ------ -------- -------
Retail loans:
Other retail........... 5,572 1373 6,945 0.14 12,192
Credit cards........... 2,042 -- 2,042 0.17 20,983
Retail leasing......... 456 77 533 0.03 1,778
-------- ------ -------- -------
Total retail loans... 8,070 1450 9,520 0.10 34,953
-------- ------ -------- -------
Total loans.......... $120,323 $1,455 $121,778 0.46 % $70,928
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
December 31, 1998
---------------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------
Non- Restruc- Percentage or More
accrual tured Total of Loans Past Due
-------- --------- --------- ----------- --------
Commercial loans:
Corporate.............. $ 54,171 $ 6 $ 54,177 0.67 % $14,137
Commercial leasing..... 6,416 -- 6,416 0.53 --
-------- ------ -------- -------
Total commercial loans 60,587 6 60,593 0.65 14,137
-------- ------ -------- -------
Real estate loans:
Residential............ 20,717 -- 20,717 0.63 16,473
Commercial mortgage.... 28,942 42 28,984 0.75 8,823
Construction/land
development.......... 7,766 -- 7,766 0.17 2,979
-------- ------ -------- -------
Total real estate loans 57,425 42 57,467 0.63 28,275
-------- ------ -------- -------
Retail loans:
Other retail........... 3,344 -- 3,344 0.07 13,604
Credit cards........... 2,629 -- 2,629 0.22 17,608
Retail leasing......... 490 -- 490 0.04 1,470
-------- ------ -------- -------
Total retail loans... 6,463 -- 6,463 0.09 32,682
-------- ------ -------- -------
Total loans.......... $124,475 $ 48 $124,523 0.48 % $75,094
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
March 31, 1998
---------------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------
Non- Restruc- Percentage or More
accrual tured Total of Loans Past Due
-------- --------- --------- ----------- --------
Commercial loans:
Corporate.............. $ 65,338 $ 632 $ 65,970 0.85 % $26,221
Commercial leasing..... 315 -- 315 0.06 --
-------- ------ -------- -------
Total commercial loans 65,653 632 66,285 0.80 26,221
-------- ------ -------- -------
Real estate loans:
Residential............ 26,958 -- 26,958 0.71 7,799
Commercial mortgage.... 21,556 -- 21,556 0.48 16,067
Construction/land
development.......... 3,553 -- 3,553 0.33 --
-------- ------ -------- -------
Total real estate loans 52,067 -- 52,067 0.56 23,866
-------- ------ -------- -------
Retail loans:
Other retail........... 2,623 262 2,885 0.06 11,085
Credit cards........... 2,328 -- 2,328 0.21 15,222
Retail leasing......... 586 -- 586 0.05 502
-------- ------ -------- -------
Total retail loans... 5,537 262 5,799 0.08 26,809
-------- ------ -------- -------
Total loans.......... $123,257 $ 894 $124,151 0.51 % $76,896
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
-24-
minimum leverage ratio of 3.00%, which is defined as
tier 1 equity to average quarterly assets. At March
31, 1999, Firstar's leverage ratio was 8.07%,
compared to 7.52% at December 31, 1998.
In March 1999, the Board of Directors approved a
three-for-one stock split and a stock buyback plan.
The stock split was completed on April 15, 1999 to all
shareholders of record on March 31, 1999. All stock
and per share amounts included in these financial
statements have been restated to reflect the split.
The stock buyback program authorizes the repurchase
of up to fifteen million shares periodically over
the next two years. The repurchased shares will be
held as treasury shares for reissue for various
corporate purposes, including stock option plans.
Through March 31, 1999, 793,800 shares have been
repurchased.
Year 2000
Firstar's Year 2000 ("Y2K") project is directed by
a committee that provides direct oversight of the Y2K
initiative. Firstar has completed its assessment
of Y2K issues, developed a plan, and arranged resources
to complete the necessary remediation efforts. Firstar
is utilizing both internal and external resources to
reprogram, or replace, and test the software and
hardware for Y2K modifications. Currently Firstar
has remediated and tested 99% of its mission critical
applications. The remaining significant applications
are expected to be completed by June 30, 1999. A
separate test environment has been established to
accommodate testing activity and the anticipated need
to test with customers and other third parties during
the remainder of the year.
Firstar relies on several third party service
providers for key business processes and works closely
to monitor their Y2K efforts. Firstar has obtained written
and verbal verification from significant third party
service providers and vendors of their Y2K readiness.
While Firstar continues to discuss, obtain written
certification from, and test the systems of critical
vendors and third party service providers as to Y2K
compliance, no assurance exists that any impact associated
with incompatible systems after December 31, 1999 will
not have a material adverse effect on Firstar's business,
financial condition or results of operations.
Firstar previously established business continuity
plans for its various lines of business and is assessing
these plans for the possible impact of Y2K anticipated
failures. Existing business continuity plans will be
adjusted where appropriate for those scenarios that may
have the most severe impact on its operations. This
activity is expected to be completed by June 30, 1999.
Major risks associated with the Y2K issue as it applies
to external parties include, but are not limited to,
failure of voice and data communications systems due to
loss of satellites or problems at communication companies;
ATM shutdowns; non-availability or delays in cash
-25-
couriers/shipments; failure of government systems; and
shutdown of government facilities or power companies.
Major risks associated with internal systems include,
but are not limited to, inability to complete transactions
or properly process customer data; inability to process
electronic transactions; failure of time locks or security
systems and inability to meet customer demands for cash.
The costs of the Y2K project are primarily staff related
and are expensed as incurred. Currently, Firstar estimates
that the total cost of the Y2K project will be approximately
$32 million of which $5 million was expensed in 1997; $18
million in 1998; and $3 million in the first quarter of 1999.
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 reduces 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-
Item 5. Other Information
Unaudited Pro Forma Condensed Combined Financial Information
The following unaudited Pro Forma Condensed Combined
Financial Information and Notes are presented to show the
impact on the historical financial position and the
results of operations of the combined company for the
proposed merger of Firstar Corporation and Mercantile
Bancorporation Inc. This pro forma information should
be read in conjunction with the consolidated financial
statements, including notes thereto, of Firstar
Corporation and Mercantile Bancorporation Inc. The
unaudited Pro Forma Condensed Combined Financial
Information is presented for illustration purposes only
in accordance with the assumptions set forth below, and
is not necessarily indicative of the operating reults or
financial position that would have occurred if the merger
had been consummated nor is it necessarily indicative of
future operating results or financial position of the
combined company.
The unaudited Pro Forma Condensed Combined Balance Sheet
as March 31, 1999 combines the historical consolidated
balance sheets of Firstar Corporation and Mercantile
Bancorporation Inc, as if the merger had been effective
on that date. The unaudited Pro Forma Condensed Combined
Income Statements for the quarter ended March 31, 1999 and
the years ended December 31, 1998, 1997 and 1996 present
the combined results of operations of Firstar Corporation
and Mercantile Bancorporation Inc. as if the merger had
been effective at January 1, 1996. This pro forma
financial information reflects the application of the
pooling of interests method of accounting for the merger.
Under this method of accounting, the recorded asset,
liabilities, shareholders' equity, income and expenses
of both companies are combined and reflected at their
historical amounts.
The combined company expects to achieve substantial
merger benefits including operating cost savings.
The pro forma earnings do not reflect any financial
benefits which are expected to result from the
consolidation of operations and are not indicative of
the results of future operations. No assurances can
be given with respect to the ultimate level of
financial benefits to be realized.
-27-
Firstar/Mercantile
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 1999
(amounts in thousands)
Mercantile Pro Forma
Firstar Bancorporation Pro Forma Firstar
Corporation Inc. Ajustments Corporation
------------- ------------- ------------- -------------
ASSETS:
Cash and due from banks..............$ 2,069,888 $ 1,210,972 $ $ 3,280,860
Money market investments............. 86,220 657,831 744,051
Trading securities................... 0 188,069 188,069
Investment securities:
Available-for-sale................. 5,720,607 9,308,727 15,029,334
Held-to-maturity................... 219,007 81,906 300,913
------------- ------------- ------------- -------------
Total securities................... 5,939,614 9,390,633 0 15,330,247
Loans:
Commercial loans................... 9,284,217 6,498,961 15,783,178
Real estate loans.................. 9,269,501 12,438,037 21,707,538
Retail loans....................... 7,773,591 3,363,951 11,137,542
------------- ------------- ------------- -------------
Total loans...................... 26,327,309 22,300,949 0 48,628,258
Allowance for loan losses.. 401,943 309,048 710,991
------------- ------------- ------------- -------------
Net loans........................ 25,925,366 21,991,901 0 47,917,267
Loans held for sale.................. 1,179,985 176,050 1,356,035
Premises and equipment............... 609,377 533,807 (24,000) 1,119,184
Intangible assets.................... 1,085,725 765,560 1,851,285
Other assets......................... 1,055,675 663,996 1,719,671
------------- ------------- ------------- -------------
Total assets.....................$ 37,951,850 $ 35,578,819 $ (24,000) $ 73,506,669
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES:
Deposits:
Noninterest-bearing deposits.......$ 5,982,868 $ 3,901,014 $ $ 9,883,882
Interest-bearing deposits........... 21,884,893 20,821,383 42,706,276
------------- ------------- ------------- -------------
Total deposits................. 27,867,761 24,722,397 0 52,590,158
Short-term borrowings................ 3,913,666 2,730,375 6,644,041
Long-term debt....................... 1,687,599 4,406,070 6,093,669
Other liabilities.................... 804,570 618,514 262,000 1,685,084
------------- ------------- ------------- -------------
Total liabilities................ 34,273,596 32,477,356 262,000 67,012,952
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY:
Common stock......................... 6,641 1,578 1,695 9,914
Surplus.............................. 1,266,731 1,009,106 (3,848) 2,271,989
Retained earnings.................... 2,370,742 2,099,532 (286,000) 4,184,274
Treasury stock, at cost.............. (41,720) (2,153) 2,153 (41,720)
Accumulated other comprehensive
income.............................. 75,860 (6,600) 69,260
------------- ------------- ------------- -------------
Total shareholders' equity....... 3,678,254 3,101,463 (286,000) 6,493,717
------------- ------------- ------------- -------------
Total liabilities and
shareholders' equity..........$ 37,951,850 $ 35,578,819 $ (24,000) $ 73,506,669
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
-28-
Firstar/Mercantile
Unaudited Pro Forma Condensed Combined Income Statement
For the Three Months Ended March 31, 1999
(amounts in thousands, except per share amounts)
Mercantile Pro Forma
Firstar Bancorporation Pro Forma Firstar
Corporation Inc. Ajustments Corporation
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans.................$ 528,102 $ 431,903 $ $ 960,005
Interest and fees on loans held for sale... 27,156 27,156
Interest on investment securities.......... 92,918 145,756 238,674
Interest on trading securities............. 11 2,579 2,590
Interest on money market investments....... 1,298 6,700 7,998
----------- ----------- ----------- -----------
Total interest income.................... 649,485 586,938 0 1,236,423
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits....................... 210,579 216,638 427,217
Interest on short-term borrowings.......... 46,873 30,857 77,730
Interest on long-term debt................. 26,180 55,214 81,394
----------- ----------- ----------- -----------
Total interest expense................... 283,632 302,709 0 586,341
----------- ----------- ----------- -----------
Net interest income.................... 365,853 284,229 0 650,082
Provision for loan losses.................. 35,910 7,479 43,389
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses............ 329,943 276,750 0 606,693
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income............................... 72,353 29,142 101,495
Mortgage banking income.................... 33,899 6,199 40,098
Service charges on deposits................ 45,139 29,640 74,779
Credit card income......................... 21,674 3,503 25,177
ATM Income................................. 6,661 3,772 10,433
All other income........................... 43,360 41,225 84,585
----------- ----------- ----------- -----------
223,086 113,481 0 336,567
Investment securities gains/(losses) - net. (2) 12,963 12,961
----------- ----------- ----------- -----------
Total noninterest income................. 223,084 126,444 0 349,528
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries................................... 116,767 101,687 218,454
Pension and other employee benefits........ 22,379 21,652 44,031
Equipment expense.......................... 21,742 23,689 45,431
Occupancy expense - net.................... 26,215 17,191 43,406
All other expense.......................... 98,066 61,135 159,201
----------- ----------- ----------- -----------
285,169 225,354 0 510,523
Merger and retructuring expenses........... 15,000 15,000
----------- ----------- ----------- -----------
Total noninterest expense................ 300,169 225,354 0 525,523
----------- ----------- ----------- -----------
INCOME BEFORE TAX.......................... 252,858 177,840 0 430,698
Income tax................................. 83,271 59,803 143,074
----------- ----------- ----------- -----------
NET INCOME.................................$ 169,587 $ 118,037 $ 0 $ 287,624
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share............$ 0.26 $ 0.75 $ 0.29
Diluted earnings per common share.......... 0.25 0.74 0.29
Average common shares - basic.............. 661,572 157,633 991,182
Average common shares - diluted............ 675,118 159,602 1,008,845
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
-29-
Firstar/Mercantile
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended December 31, 1998
(amounts in thousands, except per share amounts)
Mercantile Pro Forma
Firstar Bancorporation Pro Forma Firstar
Corporation Inc. Ajustments Corporation
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans.................$ 2,152,359 $ 1,771,235 $ $ 3,923,594
Interest and fees on loans held for sale... 70,808 70,808
Interest on investment securities.......... 412,212 581,865 994,077
Interest on trading securities............. 73 8,821 8,894
Interest on money market investments....... 6,036 30,197 36,233
----------- ----------- ----------- -----------
Total interest income.................... 2,641,488 2,392,118 0 5,033,606
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits....................... 911,958 931,716 1,843,674
Interest on short-term borrowings.......... 207,650 174,335 381,985
Interest on long-term debt................. 109,101 181,807 290,908
----------- ----------- ----------- -----------
Total interest expense................... 1,228,709 1,287,858 0 2,516,567
----------- ----------- ----------- -----------
Net interest income.................... 1,412,779 1,104,260 0 2,517,039
Provision for loan losses.................. 113,636 51,154 164,790
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses............ 1,299,143 1,053,106 0 2,352,249
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income............................... 262,259 112,999 375,258
Mortgage banking income.................... 151,096 54,455 205,551
Service charges on deposits................ 177,008 119,277 296,285
Credit card income......................... 84,853 12,556 97,409
ATM Income................................. 28,672 15,556 44,228
All other income........................... 155,165 163,589 318,754
----------- ----------- ----------- -----------
859,053 478,432 0 1,337,485
Investment securities gains/(losses) - net. 1,095 15,435 16,530
Gain on sale of subsidiaries............... 48,051 48,051
----------- ----------- ----------- -----------
Total noninterest income................. 860,148 541,918 0 1,402,066
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries................................... 540,977 418,351 959,328
Pension and other employee benefits........ 97,025 77,608 174,633
Equipment expense.......................... 103,713 85,426 189,139
Occupancy expense - net.................... 102,464 67,003 169,467
All other expense.......................... 434,043 244,047 678,090
----------- ----------- ----------- -----------
1,278,222 892,435 0 2,170,657
Merger and retructuring expenses........... 242,970 134,322 377,292
----------- ----------- ----------- -----------
Total noninterest expense................ 1,521,192 1,026,757 0 2,547,949
----------- ----------- ----------- -----------
INCOME BEFORE TAX.......................... 638,099 568,267 0 1,206,366
Income tax................................. 207,952 192,964 400,916
----------- ----------- ----------- -----------
NET INCOME................................$ 430,147 $ 375,303 $ 0 $ 805,450
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share............$ 0.66 $ 2.45 $ 0.83
Diluted earnings per common share.......... 0.65 2.41 0.81
Average common shares - basic.............. 649,530 153,462 970,420
Average common shares - diluted............ 663,054 155,921 989,085
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
-30-
Firstar/Mercantile
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended December 31, 1997
(amounts in thousands, except per share amounts)
Mercantile Pro Forma
Firstar Bancorporation Pro Forma Firstar
Corporation Inc. Ajustments Corporation
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans.................$ 1,982,684 $ 1,651,816 $ $ 3,634,500
Interest and fees on loans held for sale... 20,878 20,878
Interest on investment securities.......... 362,224 432,460 794,684
Interest on trading securities............. 131 7,077 7,208
Interest on money market investments....... 11,182 27,325 38,507
----------- ----------- ----------- -----------
Total interest income.................... 2,377,099 2,118,678 0 4,495,777
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits....................... 804,406 842,949 1,647,355
Interest on short-term borrowings.......... 183,642 159,013 342,655
Interest on long-term debt................. 86,884 68,978 155,862
----------- ----------- ----------- -----------
Total interest expense................... 1,074,932 1,070,940 0 2,145,872
----------- ----------- ----------- -----------
Net interest income.................... 1,302,167 1,047,738 0 2,349,905
Provision for loan losses.................. 117,772 86,355 204,127
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses............ 1,184,395 961,383 0 2,145,778
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income............................... 234,195 103,928 338,123
Mortgage banking income.................... 70,644 26,625 97,269
Service charges on deposits................ 152,410 109,058 261,468
Credit card income......................... 88,615 21,169 109,784
ATM Income................................. 22,397 13,271 35,668
All other income........................... 124,877 132,493 257,370
----------- ----------- ----------- -----------
693,138 406,544 0 1,099,682
Investment securities gains/(losses) - net. (3,916) 7,649 3,733
Gain on sale of merchant processing........ 22,821 22,821
----------- ----------- ----------- -----------
Total noninterest income................. 712,043 414,193 0 1,126,236
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries................................... 478,159 381,942 860,101
Pension and other employee benefits........ 91,114 85,048 176,162
Equipment expense.......................... 94,369 70,272 164,641
Occupancy expense - net.................... 91,348 61,697 153,045
All other expense.......................... 371,516 216,026 587,542
----------- ----------- ----------- -----------
1,126,506 814,985 0 1,941,491
Loss on sale of credit card loans.......... 50,000 50,000
Merger and retructuring expenses........... 121,393 121,393
----------- ----------- ----------- -----------
Total noninterest expense................ 1,126,506 986,378 0 2,112,884
----------- ----------- ----------- -----------
INCOME BEFORE TAX.......................... 769,932 389,198 0 1,159,130
Income tax................................. 256,038 142,376 398,414
----------- ----------- ----------- -----------
NET INCOME.................................$ 513,894 $ 246,822 $ 0 $ 760,716
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share............$ 0.83 $ 1.76 $ 0.83
Diluted earnings per common share.......... 0.81 1.73 0.82
Average common shares - basic.............. 620,283 140,009 913,042
Average common shares - diluted............ 634,149 142,639 932,407
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
-31-
Firstar/Mercantile
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended December 31, 1996
(amounts in thousands, except per share amounts)
Mercantile Pro Forma
Firstar Bancorporation Pro Forma Firstar
Corporation Inc. Ajustments Corporation
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans.................$ 1,869,407 $ 1,404,809 $ $ 3,274,216
Interest and fees on loans held for sale... 20,454 20,454
Interest on investment securities.......... 378,408 343,375 721,783
Interest on trading securities............. 344 3,630 3,974
Interest on money market investments....... 7,062 19,306 26,368
----------- ----------- ----------- -----------
Total interest income.................... 2,275,675 1,771,120 0 4,046,795
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits....................... 788,023 692,138 1,480,161
Interest on short-term borrowings.......... 171,694 89,676 261,370
Interest on long-term debt................. 63,687 40,343 104,030
----------- ----------- ----------- -----------
Total interest expense................... 1,023,404 822,157 0 1,845,561
----------- ----------- ----------- -----------
Net interest income.................... 1,252,271 948,963 0 2,201,234
Provision for loan losses.................. 97,334 78,766 176,100
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses............ 1,154,937 870,197 0 2,025,134
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Trust income............................... 196,891 93,704 290,595
Mortgage banking income.................... 64,811 13,518 78,329
Service charges on deposits................ 147,424 98,908 246,332
Credit card income......................... 81,622 28,415 110,037
ATM Income................................. 15,547 8,450 23,997
All other income........................... 117,485 124,723 242,208
----------- ----------- ----------- -----------
623,780 367,718 0 991,498
Investment securities gains/(losses) - net. (2,365) 292 (2,073)
----------- ----------- ----------- -----------
Total noninterest income................. 621,415 368,010 0 989,425
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries................................... 466,133 335,803 801,936
Pension and other employee benefits........ 97,089 77,437 174,526
Equipment expense.......................... 86,952 60,605 147,557
Occupancy expense - net.................... 91,460 55,489 146,949
All other expense.......................... 341,829 212,397 554,226
----------- ----------- ----------- -----------
1,083,463 741,731 0 1,825,194
SAIF assessments........................... 15,522 12,385 27,907
Merger and retructuring expenses........... 53,267 51,071 104,338
----------- ----------- ----------- -----------
Total noninterest expense................ 1,152,252 805,187 0 1,957,439
INCOME BEFORE TAX.......................... 624,100 433,020 0 1,057,120
Income tax................................. 208,682 148,567 357,249
----------- ----------- ----------- -----------
NET INCOME.................................$ 415,418 $ 284,453 $ 0 $ 699,871
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE:
Basic earnings per common share............$ 0.65 $ 2.12 $ 0.77
Diluted earnings per common share.......... 0.64 2.09 0.75
Average common shares - basic.............. 633,858 133,926 913,897
Average common shares - diluted............ 644,640 135,996 929,008
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
-32-
Firstar Corporation/Mercantile Bancorporation Inc.
Notes to the Unaudited Pro Forma
Condensed Combined Financial Information
Note 1 - Basis of Presentation
On April 30, 1999 Firstar Corporation announced that
it had signed a definitive agreement to acquire Mercantile
Bancorporation Inc. through an exchange of shares.
The unaudited Pro Forma Condensed Combined Financial
Information has been prepared assuming that the merger will
be accounted for under the pooling of interests method
and is based on the historical consolidated financial
statements of the two companies. A review of each company's
respective accounting policies has not been completed. As a
result of this review, it might be necessary to restate
certain amounts in the financial statements of the combined
company to conform to those accounting policies that are most
appropriate. Any such restatements are not expected to be
material.
Note 2 - Shareholders' Equity
Under the terms of the agreement, Mercantile shareholders
will receive 2.091 shares of Firstar common stock for each
share of Mercantile common stock owned. Mercantile had
157,869,000 shares of common stock outstanding at March 31,
1999 which will be exchanged for approximately 330,104,000
shares of Firstar common stock. The combined company will
have approximately 991,318,000 shares outstanding after the
merger. The common stock in the unaudited Pro Forma
Condensed Combined Balance Sheet has been adjusted to
reflect the par value amount of shares of the combined
company. Pro Forma retained earnings reflects an adjustment
for estimated merger related charges as described in
Note 3 below.
Note 3 - Merger Related Charges
In connection with the merger, Firstar and Mercantile
expect the combined company to incur pre-tax merge
related charges of approximately $428 million. The
are expected to include approximately $159 million in
employee related payments, $94 million in direct
conversion costs, $60 million in charges related to
consolidation of systems and operations, $24 million in
occupancy and equipment charges (elimination of duplicate
facilities and write-off of equipment) and $91 million
in other merger related costs ( including legal and
investment banking fees).
The merger related charges and related tax effect have
been reflected in the unaudited Pro Forma Condensed
Combined Balance Sheet as of March 31, 1999, and have not
been reflected in the unaudited Pro Forma Condensed
Combined Income Statements as they are not expected to
have a continuing impact on the operations of the
combined company.
-33-
PART II. OTHER INFORMATION
- --------------------------
ITEM 6. Exhibits and Reports on Form 8-K
- -------
(A) Exhibits filed:
Exhibit 2. Agreement and Plan of Merger by and
between Mercantile Bancorporation Inc. and
Firstar Corporation.
Exhibit 27. Financial Data Schedule
Exhibit 99.1 Stock Option Agreement between
Mercantile Bancorporation Inc. (Issuer),
and Firstar Corporation (Grantee).
Exhibit 99.2 Stock Option Agreement between
Firstar Corporation (Issuer), and
and Mercantile Bancorporation Inc. (Grantee).
(B) A Form 8-K dated March 9, 1999 was filed relating
to the change of Firstar's independent public
accountants, the announcement of a three-for-one
stock split and the announcement of stock buyback
plan.
A Form 8-K dated April 30, 1999 reported the
announcement of a plan of merger between Mercantile
Bancorporation Inc. and Firstar Corporation.
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
May 14, 1999 /s/ Jerry A. Grundhoffer
- --------------------- -----------------------------
Date Jerry A. Grundhoffer
President and Chief
Executive Officer
May 14, 1999
- --------------------- /s/ David M. Moffett
Date -----------------------------
David M. Moffett
Vice Chairman
and Chief Financial Officer
May 14, 1999 /s/ James D. Hogan
- --------------------- -----------------------------
Date James D. Hogan
Senior Vice President and
Controller
-34-