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, 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 July 31, 1999, 654,507,815 shares of common stock were
outstanding.
-1-
FIRSTAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 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.................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.................................27
Item 5. Other Information.................................none
Item 6. Exhibits and Reports on Form 8-K....................27
Signatures..........................................................28
-2-
PART I. FINANCIAL INFORMATION
FIRSTAR CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
Second Quarter Year through June 30,
-------------------------------------- -----------------------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
------------ ------------ -------- ------------- ------------ ---------
Net income............................... $ 170,761 $ 148,674 14.9 % $ 340,348 $ 287,508 18.4 %
Per share:
Basic earnings per common share........ $ 0.26 $ 0.23 13.0 % $ 0.51 $ 0.45 13.3 %
Diluted earnings per common share...... 0.25 0.22 13.6 0.50 0.44 13.6
Common dividends declared.............. 0.10 0.08 25.0 0.20 0.16 25.0
Book value per common share............ 5.49 5.25 4.6 5.49 5.25 4.6
Market value per common share.......... 28.00 21.29 31.5 28.00 21.29 31.5
Average balances:
Total assets........................... $ 38,073,173 $ 36,053,142 5.6 % $ 38,159,633 $ 35,270,169 8.2 %
Earning assets......................... 33,491,919 32,402,054 3.4 33,612,299 31,732,972 5.9
Loans.................................. 26,674,219 24,729,681 7.9 26,421,224 24,465,791 8.0
Deposits............................... 27,522,407 26,463,588 4.0 27,675,612 25,934,415 6.7
Total shareholders' equity............. 3,712,896 3,349,037 10.9 3,684,834 3,210,646 14.8
Ratios:
Return on average assets............... 1.80 % 1.65 % 1.80 % 1.64 %
Return on average equity............... 18.45 17.81 18.63 18.06
Average total shareholders' equity
to average total assets.............. 9.75 9.29 9.66 9.10
Risk-based capital ratios:
Tier 1............................... 8.85 9.60 8.85 9.60
Total................................ 10.76 11.80 10.76 11.80
Leverage - average assets (a).......... 8.11 8.01 8.11 8.01
Net interest margin.................... 4.59 4.45 4.53 4.49
Noninterest expense to net revenue..... 51.79 55.09 50.96 55.05
Noninterest income as a percent
of net revenue....................... 38.22 36.99 37.74 36.55
Net income to net revenue.............. 27.50 25.99 27.90 25.71
Excluding Merger Related Charges:
Net income............................. $ 190,208 $ 148,674 27.9 % $ 369,480 $ 287,508 28.5 %
Noninterest expense.................... 291,508 315,160 (7.5) 576,677 615,555 (6.3)
Basic earnings per common share........ 0.29 0.23 26.1 0.56 0.45 24.4
Diluted earnings per common share...... 0.28 0.22 27.3 0.55 0.44 25.0
Return on average assets............... 2.00 % 1.65 % 1.95 % 1.64 %
Return on average common equity........ 20.55 17.81 20.22 18.06
Noninterest expense to net revenue..... 46.95 55.09 47.27 55.05
(a) - defined by regulatory authorities as tier 1 equity to the current quarter's adjusted
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)
June 30, December 31,
1999 1998
----------- ------------
ASSETS:
Cash and due from banks........................... $ 2,058,098 $ 2,349,532
Money market investments.......................... 225,850 75,524
Trading securities................................ -- 2,754
Investment securities:
Available-for-sale.............................. 5,258,784 6,220,902
Held-to-maturity (market value of $229,713 at
March 31, 1999 and $137,287 at December 31,
1998)......................................... 208,022 135,407
----------- -----------
Total securities................................ 5,466,806 6,356,309
Loans held for sale............................... 1,128,541 1,539,892
Loans:
Commercial loans................................ 9,643,024 9,264,143
Real estate loans............................... 8,833,376 9,110,524
Retail loans.................................... 8,211,110 7,493,390
----------- -----------
Total loans................................... 26,687,510 25,868,057
Allowance for loan losses............... 405,159 395,956
----------- -----------
Net loans..................................... 26,282,351 25,472,101
Premises and equipment............................ 620,020 629,464
Acceptances - customers' liability................ 23,600 29,916
Other assets...................................... 2,329,151 2,020,347
----------- -----------
Total assets.................................. $38,134,417 $38,475,839
----------- -----------
----------- -----------
LIABILITIES:
Deposits:
Noninterest-bearing deposits.................... $ 6,362,807 $ 6,649,199
Interest-bearing deposits....................... 21,787,292 22,201,566
----------- -----------
Total deposits.............................. 28,150,099 28,850,765
Short-term borrowings............................. 4,027,645 3,643,308
Long-term debt.................................... 1,667,574 1,708,869
Acceptances outstanding........................... 23,600 29,916
Other liabilities................................. 651,335 713,068
----------- -----------
Total liabilities............................. 34,520,253 34,945,926
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock:
Shares authorized - 800,000,000 at June 30,
1999 and December 31, 1998
Shares issued - 664,101,988 at June 30, 1999
and 658,291,470 at December 31, 1998.......... 6,641 6,583
Surplus........................................... 1,244,896 1,172,148
Retained earnings................................. 2,475,708 2,267,263
Treasury stock, at cost - 6,282,515 shares at
June 30, 1999 and 2,050,458 shares at December
31, 1998........................................ (134,348) (15,928)
Accumulated other comprehensive income............ 21,267 99,847
----------- -----------
Total shareholders' equity.................... 3,614,164 3,529,913
----------- -----------
Total liabilities and shareholders' equity.... $38,134,417 $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)
Second Quarter Six Months
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans............... $ 543,394 $ 534,839 $1,071,496 $1,058,922
Interest and fees on loans held for sale. 19,347 16,409 46,503 27,563
Interest on investment securities:
Taxable................................ 53,691 88,807 129,224 167,664
Non-taxable............................ 33,004 17,716 50,389 34,722
Interest on trading securities........... -- 28 11 54
Interest on money market investments..... 1,548 1,270 2,846 3,940
---------- ---------- ---------- ----------
Total interest income.................. 650,984 659,069 1,300,469 1,292,865
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits..................... 202,938 229,474 413,517 447,936
Interest on short-term borrowings........ 49,115 51,957 95,988 99,638
Interest on long-term debt............... 25,579 27,897 51,759 56,819
---------- ---------- ---------- ----------
Total interest expense................. 277,632 309,328 561,264 604,393
---------- ---------- ---------- ----------
Net interest income.................. 373,352 349,741 739,205 688,472
Provision for loan losses................ 35,360 24,450 71,270 53,095
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses.......... 337,992 325,291 667,935 635,377
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Trust income............................. 75,061 63,693 147,414 126,434
Mortgage banking income.................. 37,364 40,451 71,263 73,980
Retail deposit income.................... 24,383 22,866 46,494 44,479
Cash management income................... 24,438 20,726 47,466 40,768
Credit card income....................... 24,822 20,667 46,496 38,755
ATM Income............................... 7,303 7,301 13,964 13,320
Investment securities gains/(losses)-net. -- 467 (2) 796
All other income......................... 43,980 35,485 87,340 70,167
---------- ---------- ---------- ----------
Total noninterest income............... 237,351 211,656 460,435 408,699
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries................................. 119,136 133,695 235,903 261,441
Pension and other employee benefits...... 18,714 24,422 41,093 52,618
Equipment expense........................ 22,762 27,093 45,327 50,444
Occupancy expense - net.................. 23,696 24,309 49,911 48,662
All other expense........................ 107,200 105,641 204,443 202,390
---------- ---------- ---------- ----------
291,508 315,160 576,677 615,555
Merger related charges................... 30,100 -- 45,100 --
---------- ---------- ---------- ----------
Total noninterest expense.............. 321,608 315,160 621,777 615,555
---------- ---------- ---------- ----------
INCOME BEFORE TAX........................ 253,735 221,787 506,593 428,521
Income tax............................... 82,974 73,113 166,245 141,013
---------- ---------- ---------- ----------
NET INCOME............................... $ 170,761 $ 148,674 $ 340,348 $ 287,508
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE:
Basic earnings per common share......... $ 0.26 $ 0.23 $ 0.51 $ 0.45
Diluted earnings per common share....... 0.25 0.22 0.50 0.44
Common stock cash dividends declared.... 0.10 0.08 0.20 0.16
The accompanying notes are an integral part of these statements.
All per share data has been restated to reflect the three for one
stock split completed 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................. 287,508 287,508
Unrealized gain
on securities
available for sale........ 10,674 10,674
Reclassification adjustment
for gains realized
in net income............ (796) (796)
Income taxes............... (2,418) (2,418)
---------
Comprehensive income 294,968
Cash dividends declared
on common stock........... (112,013) (112,013)
Cash dividends declared
on preferred stock........ (83) (83)
Conversion of preferred
stock into common stock... (5,308) 4,723 493 64 (28)
Issuance of common stock
and treasury shares....... 200 314,487 12,507 173,074 500,268
Purchase of treasury
stock..................... (14,312) (14,312)
Shares reserved to meet
deferred compensation
obligations............... 2,199 (1,006) 1,193
Amortization of stock
awards.................... 355 355
ESOP debt reduction, net... 336 336
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
Balance, June 30, 1998......$ -- $ 6,528 $ 1,100,754 $ 2,283,855 $ (9,360) $ 40,308 $ (1,510) $ 3,420,575
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
-------- --------- ----------- ----------- --------- ---------- ---------- -----------
Balance, January 1, 1999....$ -- $ 6,583 $ 1,172,148 $ 2,267,263 $(15,928) $ 99,847 $ -- $ 3,529,913
Net income................. 340,348 340,348
Unrealized loss
on securities
available for sale........ (124,231) (124,231)
Reclassification adjustment
for losses realized
in net income............ 2 2
Income taxes............... 45,649 45,649
---------
Comprehensive income 261,768
Cash dividends declared
on common stock........... (131,903) (131,903)
Issuance of common stock
and treasury shares....... 58 68,666 50,127 118,851
Purchase of treasury
stock..................... (166,716) (166,716)
Shares reserved to meet
deferred compensation
obligations............... 1,831 (1,831) --
Amortization of stock
awards.................... 2,251 2,251
-------- --------- ----------- ----------- ---------- ---------- ---------- -----------
Balance, June 30, 1999......$ -- $ 6,641 $ 1,244,896 $ 2,475,708 $(134,348) $ 21,267 $ -- $ 3,614,164
-------- --------- ----------- ----------- ---------- ---------- ---------- -----------
-------- --------- ----------- ----------- ---------- ---------- ---------- -----------
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
1999 1998
------------ ------------
Cash Flows from Operating Activities:
Net Income $ 340,348 $ 287,508
Adjustments:
Depreciation and amortization 54,219 51,280
Intangible amortization 32,132 24,219
Provision for loan losses 71,270 53,095
Net (increase) decrease in trading securities 2,754 1,676
Provision for deferred taxes 61,508 31,430
(Gain) / loss on sale of premises and equipment - net 376 (424)
Loss on sale of securities - and other assets 128 298
Gain on sale of mortgage loans (54,052) (47,345)
Proceeds from sale of mortgage loans 4,354,706 3,277,627
Mortgage loans originated for sale on the secondary market (3,526,303) (3,615,861)
Net change in other assets and liabilities (60,378) (105,131)
------------ ------------
Total adjustments 1,016,360 (329,136)
------------ ------------
Net cash provided by/(used in) operating activities 1,356,708 (41,628)
------------ ------------
Cash Flows from Investing Activities:
Proceeds from maturities of held-to-maturity securities 35,359 248,157
Proceeds from maturities of available-for-sale securities 978,571 443,187
Proceeds from sales of available-for-sale securities 28,782 316,193
Purchase of held-to-maturity securities (19,978) (157,640)
Purchase of available-for-sale securities (193,080) (1,196,569)
Net increase in loans (1,724,328) (376,827)
Proceeds from sales of loans 76,415 101,564
Proceeds from sales of premises and equipment 896 195
Purchases of premises and equipment (62,776) (63,338)
Purchases of corporate owned life insurance 80,000 (75,000)
Acquisitions, net of cash acquired 0 (134,858)
Net change due to acquisitions of branch offices 0 816,978
------------ ------------
Net cash provided by/(used in) investing activities (960,139) (77,958)
------------ ------------
Cash Flows from Financing Activities:
Net (decrease)/increase in deposits (700,666) 291,793
Net increase in short-term borrowings 384,337 4,364
Principal payments on long-term debt (141,736) (503,408)
Proceeds from issuance of long-term debt 100,000 125,066
Proceeds from issuance of common stock 118,850 31,061
Purchase of treasury stock (166,717) (14,329)
Dividends paid (131,745) (107,123)
------------ ------------
Net cash provided by/(used in) financing activities (537,677) (172,576)
------------ ------------
Net decrease in cash and cash equivalents (141,108) (292,162)
Cash and cash equivalents at beginning of period 2,425,056 2,228,920
------------ ------------
Cash and cash equivalents at end of period $ 2,283,948 $ 1,936,758
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 580,416 $ 559,043
Income taxes 10,621 74,902
Transfer to foreclosed assets from loans $ 10,590 $ 8,713
-7-
Notes to Consolidated Financial Statements (Unaudited)
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, 1998, 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,
1999 and December 31, 1998. (dollars are in thousands)
June 30, 1999 December 31, 1998
------------------------------------------- -------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- --------- ---------- ---------- ------- --------- ----------
Held-to-Maturity
- ----------------
Mortgage-backed
securities $ 51,500 $ -- $ -- $ 51,500 $ 61,955 $ -- $ (448) $ 61,507
Obligations of state and
political subdivisions 156,447 6,567 (927) 162,087 73,452 2,951 (623) 75,780
Corporate debt securities 75 -- -- 75 -- -- -- --
---------- ------- --------- ---------- ---------- ------- --------- ----------
Total held-to-
maturity securities $ 208,022 $6,567 $ (927) $ 213,662 $ 135,407 $ 2,951 $ (1,071) $ 137,287
---------- ------- --------- ---------- ---------- ------- --------- ----------
---------- ------- --------- ---------- ---------- ------- --------- ----------
June 30, 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 $1,059,321 $21,688 $ (301) $1,080,708 $1,263,768 $53,076 $ (12) $1,316,832
Mortgage-backed
securities 2,503,256 22,836 (25,083) 2,501,009 3,042,011 66,666 (2,152) 3,106,525
Obligations of state and
political subdivisions 1,336,963 17,849 (3,590) 1,351,222 1,467,641 39,737 (346) 1,507,032
Other debt securities 39,338 -- (65) 39,273 8,176 1 (31) 8,146
Money market mutual funds 85,472 -- -- 85,472 47,492 -- -- 47,492
Federal Reserve/FHLB
stock and other
equity securities 201,100 -- -- 201,100 234,708 167 -- 234,875
---------- ------- --------- ---------- ---------- ------- --------- ----------
Total available-for-
sale securities $5,225,450 $62,373 $(29,039) $5,258,784 $6,063,796 $159,647 $ (2,541) $6,220,902
---------- ------- --------- ---------- ---------- ------- --------- ----------
---------- ------- --------- ---------- ---------- ------- --------- ----------
-8-
Note 3. Loans
- -------------
The following table summarizes the composition of the loan portfolio,
net of unearned interest, as of June 30, 1999 and December 31, 1998.
(dollars are in thousands)
June 30, December 31,
1999 1998
----------- ------------
Commercial loans:
Corporate loans $ 7,239,025 $ 6,889,149
Asset-based lending 828,182 860,024
Commercial leasing 1,366,255 1,204,549
Industrial revenue bonds 209,562 310,421
----------- -----------
Total commercial loans 9,643,024 9,264,143
----------- -----------
Real estate loans:
Residential mortgage 2,850,106 3,285,400
Commercial mortgage 4,826,428 4,611,442
Construction and land development 1,156,842 1,213,682
----------- -----------
Total real estate loans 8,833,376 9,110,524
----------- -----------
Retail loans:
Installment 5,438,879 4,907,715
Credit cards 1,225,301 1,220,240
Retail leasing 1,546,930 1,365,435
----------- -----------
Total retail loans 8,211,110 7,493,390
----------- -----------
Total loans $26,687,510 $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 June 30, 1999 and December 31, 1998.
(dollars are in thousands)
June 30, 1999 December 31, 1998
--------------------------- --------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ----------- ---------- ----------
Impaired Loans:
Valuation allowance required $ 53,022 $ 13,814 $ 44,096 $ 9,042
No valuation allowance required 56,463 -- 53,568 --
---------- ----------- ---------- ----------
Total impaired loans $ 109,485 $ 13,814 $ 97,664 $ 9,042
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The average recorded investment in impaired loans for the six months
ended June 30, 1999 was $99.7 million, compared to $84.6 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.
-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 are in thousands)
Six Months Ended Year Ended
------------------------- ------------
June 30, December 31,
-------------------------
1999 1998 1998
--------- --------- ------------
Balance - beginning of period $ 395,956 $ 372,933 $ 372,933
Loans charged-off (85,788) (74,398) (170,838)
Recoveries on loans previously charged-off 23,721 24,763 49,437
--------- --------- ---------
Net charge-offs (62,067) (49,635) (121,401)
Provision charged to earnings 71,270 53,095 113,636
Allowances of banks purchased -- 19,367 30,788
--------- --------- ---------
Balance - end of period $ 405,159 $ 395,760 $ 395,956
--------- --------- ---------
--------- --------- ---------
Note 6. Deposits
- -----------------
The following table summarizes the composition of deposits of Firstar
as of June 30, 1999 and December 31, 1998. (dollars are in thousands)
June 30, December 31,
1999 1998
----------- ------------
Noninterest-bearing deposits $ 6,362,807 $ 6,649,199
Interest-bearing deposits:
Savings 2,180,387 2,272,495
NOW accounts 3,631,298 3,848,752
Money market deposit accounts 6,096,156 5,959,710
Time deposits $100,000 and over - domestic 1,219,468 1,614,748
Foreign deposits $100,000 and over 568,188 343,574
All other deposits 8,091,795 8,162,287
----------- -----------
Total interest-bearing deposits 21,787,292 22,201,566
----------- -----------
Total deposits $28,150,099 $28,850,765
----------- -----------
----------- -----------
Note 7. Merger and Related Charges
- ----------------------------------
Firstar recorded merger and integration charges of $243.0 million in
1998 and $45.1 million in the first six months 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)
-10-
Note 7. (cont.)
- ---------------
First six months
1999 1998
---------------- --------
Severance and related costs $ 8,739 $ 86,576
Fixed asset write-downs 674 26,646
Lease termination charges 687 16,476
System conversions 33,575 34,026
Charitable contributions -- 23,000
Professional fees 1,317 45,700
Other merger-related expenses 108 10,546
-------- --------
Total $ 45,100 $242,970
-------- --------
-------- --------
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 45,100
Cash payments (92,454)
Noncash write-downs (32,767)
--------
Balance at June 30, 1999 $ 49,077
--------
--------
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 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 which was adopted by Firstar in 1997.
The fair value of capitalized mortgage servicing rights was $239.4
million on June 30, 1999 and $199.8 million on December 31, 1998. Firstar
serviced $15.6 billion of mortgage loans for other investors as of June 30,
1999 and $14.7 billion of mortgage loans for other investors as of December
31, 1998.
Changes in capitalized mortgage servicing rights at June 30, 1999 and
December 31, 1998 are summarized in the following table.
(dollars in thousands)
June 30, December 31,
1999 1998
Mortgage Servicing Assets: -------- ------------
Balance at beginning of year $182,692 $ 72,337
Amount added in acquisitions -- 51,731
Amount capitalized 89,682 152,070
Amortization (18,282) (28,586)
Sales (74,660) (64,630)
Valuation allowance -- (230)
-------- --------
Balance at end of period $179,851 $182,692
-------- --------
-------- --------
-11-
Note 9. 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 and six months ended June 30, 1999 and 1998. (dollars in thousands)
Three Months Six Months
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $170,761 $148,674 $340,348 $287,508
Dividends on preferred stock -- -- -- 83
-------- -------- -------- --------
Net income available to
common shareholders $170,761 $148,674 $340,348 $287,425
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares (000s):
Common shares 662,079 651,796 661,827 644,638
Options and stock plan 12,644 13,336 13,093 13,726
-------- -------- -------- --------
Weighted average diluted common shares 674,723 665,132 674,920 658,364
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ 0.26 $ 0.23 $ 0.51 $ 0.45
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ 0.25 $ 0.22 $ 0.50 $ 0.44
-------- -------- -------- --------
-------- -------- -------- --------
Note 10. 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 $74 billion. The
merger is expected to be completed in the third or fourth quarter of 1999,
subject to remaining regulatory approvals, and 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.
Six Months Ended Years Ended December 31,
June 30 1998 1997 1996
---------------- -------- -------- --------
(millions of dollars, except per share)
Total average assets $ 73,861 $ 71,096 $ 60,722 $ 54,565
Net interest revenue 1,309 2,517 2,350 2,201
Other operating revenue 713 1,402 1,126 989
Other operating expense 1,067 2,548 2,113 1,957
Net income 579 805 761 700
Diluted earnings per common share .58 .81 .82 .75
-12-
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 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 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 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.
-13-
For the quarter ended June 30, 1999
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 217,054 $ 97,968 $ 13,130 $ 55,443 $ 383,595 $ $ 383,595
Provision for loan losses 26,535 8,651 (244) 418 35,360 35,360
Noninterest income 124,276 28,272 76,416 8,387 237,351 237,351
Noninterest expense 211,844 28,731 48,976 1,957 291,508 30,100 321,608
Income taxes* 36,297 31,329 14,390 21,854 103,870 (10,653) 93,217
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 66,654 $ 57,529 $ 26,424 $ 39,601 $ 190,208 $ (19,447) $ 170,761
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $11,195,313 $12,018,822 $ 877,659 $ 2,582,425 $26,674,219
Total assets 13,924,371 13,466,893 1,276,145 9,405,764 38,073,173
Deposits 22,092,683 3,349,602 1,497,874 582,248 27,522,407
- ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
For the quarter ended June 30, 1998
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 202,725 $ 92,106 $ 15,592 $ 50,049 $ 360,472 $ $ 360,472
Provision for loan losses 17,902 5,517 146 885 24,450 24,450
Noninterest income 114,471 25,186 69,281 2,718 211,656 211,656
Noninterest expense 221,417 29,828 61,133 2,782 315,160 315,160
Income taxes* 28,082 29,549 8,508 17,705 83,844 83,844
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 49,795 $ 52,398 $ 15,086 $ 31,395 $ 148,674 $ $ 148,674
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $ 9,705,406 $10,979,208 $ 806,441 $ 3,238,626 $24,729,681
Total assets 12,120,617 12,105,519 1,157,283 10,669,723 36,053,142
Deposits 21,334,435 3,265,061 1,353,053 511,039 26,463,588
- ----------------------------------------------------------------------------------------------------------------------
*Taxable equivalent basis
For the six months ended June 30, 1999
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 432,138 $ 194,572 $ 26,192 $ 106,709 $ 759,611 $ $ 759,611
Provision for loan losses 49,089 17,478 319 4,384 71,270 71,270
Noninterest income 236,529 58,234 150,638 15,034 460,435 460,435
Noninterest expense 418,669 57,349 96,921 3,738 576,677 45,100 621,777
Income taxes* 71,130 63,012 28,178 40,299 202,619 (15,968) 186,651
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 129,779 $ 114,967 $ 51,412 $ 73,322 $ 369,480 $ (29,132) $ 340,348
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $10,992,303 $11,883,517 $ 875,172 $ 2,670,232 $26,421,224
Total assets 13,867,501 13,346,964 1,225,677 9,719,491 38,159,633
Deposits 22,135,475 3,433,894 1,517,748 588,495 27,675,612
- ----------------------------------------------------------------------------------------------------------------------
For the six months ended June 30, 1998
-------------------------------------------------------------------------------------------
Trust and Merger-
Consumer Wholesale Private Treasury/ Related
Banking Banking Banking Other Total Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Net interest income* $ 384,153 $ 182,415 $ 27,676 $ 115,169 $ 709,413 $ $ 709,413
Provision for loan losses 40,000 11,034 292 1,769 53,095 53,095
Noninterest income 214,449 50,752 136,274 7,224 408,699 408,699
Noninterest expense 425,482 57,902 125,941 6,230 615,555 615,555
Income taxes* 47,967 59,177 13,591 41,219 161,954 161,954
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 85,153 $ 105,054 $ 24,126 $ 73,175 $ 287,508 $ $ 287,508
- ----------------------------------------------------------------------------------------------------------------------
Average balances:
Loans $ 9,527,081 $10,694,946 $ 802,681 $ 3,441,083 $24,465,791
Total assets 11,750,675 11,828,746 1,154,780 10,535,968 35,270,169
Deposits 20,811,089 3,236,006 1,375,514 511,806 25,934,415
- ----------------------------------------------------------------------------------------------------------------------
*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, 1999 was $170.8 million, a 14.9% increase over the second quarter of
1998. Net income for the first six months of 1999 was $340.3 million a 18.4%
increase over the same period of 1998. Diluted earnings per common share were
$.25 for the second quarter of 1999, compared to $.22 for the same period of
the prior year, an increase of 13.6%. For the first half of 1999 diluted
earnings per share were $.50, a 13.6% increase over the same period of 1998.
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
second quarter of 1999, compared to 1.65% for the same period in 1998.
Return on average common equity was 18.45% compared to 17.81% in the second
quarter of last year. For the first six months of 1999 return on average
assets was 1.80% compared to 1.64% in 1998 while return on average equity was
18.63% compared to 18.06% a year earlier.
Included in the first six months of 1999 expenses were $45.1 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 $262.1 million have been
recognized through the end of the second quarter of this year.
Excluding the merger-related charges, net income for the second
quarter would have been $190.2 million, an increase of 27.9% over the second
quater of 1998. Net income before merger related charges for the first half
of 1999 was $369.5 million, an 28.5% increase over the same period of 1998.
Second quarter 1999 diluted earnings per common share, before merger-related
charges, were $.28 or a 27.3% increase over the same quarter of last year.
Diluted earnings per common share before merger-related charges for the first
six months of 1999 were $.55, a 25.0% increase over the same period of 1998.
Return on average assets was 2.00% and return on average common equity was
20.55% in the second quarter of 1999, excluding merger-related charges. For
the first half of 1999 return on average assets was 1.95% and return on average
equity was 20.22%, excluding merger-related charges.
The improvement in net income before merger-related charges for both
the quarter and first half of 1999 resulted from higher net interest revenue
and noninterest revenue together with lower operating costs. This was
partially offset by an increased loan loss provision.
Financial Condition
Total assets at June 30, 1999 were $38.13 billion, down $341 million
from the $38.48 billion level at December 31, 1998. Total loans increased
$819 million, or 3.2% from last year end to $26.69 billion at June 30, 1999.
Excluding the impact of the $363 million of residential mortgages transferred
to held for sale and the $88 million of municipal obligations moved to
investment securities in the first half of 1999, total loans have increased
by $1.27 billion, or 4.9%, from last year end. Retail loans increased by
$717.7 million, or 9.6%, to $8.21 billion at June 30, 1999. Strong growth in
retail installment loans and leases of 10.8% and 13.3%, respectively, were
achieved in the first half of this year. Commercial loans, including real
estate loans, were up $625.0 million, or 4.1%, from the December 31, 1998
levels after adjusting for the transfer of municipal obligations mentioned
above. Residential mortgages were reduced by $435.3 million reflecting the
transfer of certain loans to the held for sale category along with normal
amortization and prepayments. New originations are primarily classified as
held for sale assets.
-15-
Investment securities declined by $889.5 million during the first half
of 1999 to $5.47 billion as of June 30, 1999. Scheduled maturities of the
investment securities were used to fund in part the increase in loans during
the period. At June 30, 1999 the net unrealized gain on available for sale
securities was $33.3 million and the related after tax increase to
shareholders' equity was $21.3 million. Mortgage loans held for sale were
$1.13 billion at June 30, 1999, a reduction from the $1.54 billion level at
December 31, 1998.
Total deposits were $28.15 billion at June 30, 1999, a reduction of
$700.7 million, or 2.4%, from the December 31, 1998 level. Demand deposit
balances declined by $286.4 million to $6.36 billion at June 30, 1999
reflecting, in part, the tendency of commercial customers to maintain higher
cash balances at year ends. Interest-bearing deposits decreased by $414.3
million, or 1.9%, from year end levels. The shift in deposit preferences
continues with reductions in savings, NOW accounts, and small CDs,
collectively down by $380.1 million, being partially offset by the $136.4
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 $384.3 million, or 10.5%, since last
year end to a level of $4.03 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 $23.1 million, or 6.4% on a tax equivalent basis compared to the second
quarter of 1998. For the first half of 1999 net interest income on a tax
equivalent basis rose by $50.2 million, or 7.1%, compared to the same period of
last year. The increase was due to higher average earning asset balances along
with an improved net interest margin. Average earning assets for the first half
of the year were up $1.88 billion, or 5.9%, over the same period of 1998.
Average retail loans increased by $942 million, or 13.7%, while commercial
loans rose by $719 million, or 8.2%. Average loans held for sale increased
by $533 million, or 69.2%, due to the acquisition of a mortgage banking
business in the first quarter of last year, increased market activity this
year, and the transfer of residential mortgages from loans to held for sale
status. Average investment securities were reduced by $589 million, or 9.3%.
These increases in average earning assets along with a change in mix of
assets from lower yielding investment securities and residential mortgages to
higher yielding loans have contributed to the increase in net interest income.
This was partially offset by increased use of higher cost funding sources in
lieu of deposits.
-16-
The net interest margin increased by fourteen basis points to 4.59% in
the second quarter of 1999 compared to the second quarter of 1998. For the
first half of 1999 the net interest margin increased by four basis points to
4.53% compared to the same period of last year. An accrual adjustment to the
commercial leasing portfolio increased 1999's second quarter and first half
net interest margin by three basis points and two basis points, respectively.
The yield on total earning assets declined by 43 basis points to 7.90% for the
first half of 1999. The yield on total loans decreased by 56 basis points
reflecting generally market driven forces. The rate paid on interest bearing
liabilities declined by 58 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 fifteen basis points. The
contribution of interest free funds to net interest margin declined by eleven
basis points producing the net increase in margin of four 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. 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 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 0.6% from a base case, while an increasing rate
scenario would increase net interest revenue by 0.7%.
The loan loss provision charged to earnings increased by $10.9 million
to $35.4 million in the second quarter of 1999 from the second quarter of 1998.
For the first half of the year the provision for loan losses was $18.2 million
higher than the same period of 1998. Net loan charge-offs were $62.1 million
in the first half of 1999 compared to $49.6 a year earlier. In addition to
replacing loan charge-offs, loan growth during the period required an increased
loan loss provision to maintain adequate reserve levels.
Noninterest income is a growing source of revenue for Firstar,
representing 38.2% of tax equivalent net revenue in the second quarter of 1999
and 37.7% for the first half on 1999. This compares with 37.0% in the second
quarter of last year and 36.6% in the first half of last year. Noninterest
income increased by $25.7 million, or 12.1%, to a level of $237.4 million in
the second quarter of 1999 compared to the same quarter of last year. For the
first half of 1999 noninterest income increased by $51.7 million, or 12.7% to
a level of $460.4 million.
-17-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 1 AVERAGE BALANCE SHEETS AND AVERAGE RATES
(dollars in thousands)
Second Quarter, 1999 Second Quarter, 1998
--------------------------------- ---------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- -------- ----------- --------- --------
ASSETS:
Commercial loans................... $ 9,560,746 $ 184,099 7.72 % $ 9,007,762 $ 186,265 8.29 %
Real estate loans.................. 9,116,619 183,415 8.06 8,749,270 182,510 8.35
Retail loans....................... 7,996,854 177,461 8.90 6,972,649 168,219 9.67
----------- --------- ----------- ---------
Total loans................... 26,674,219 544,975 8.19 24,729,681 536,994 8.70
Loans held for sale................ 1,112,837 19,347 6.95 904,879 16,409 7.25
Taxable investment securities...... 5,575,835 95,357 6.84 6,673,499 115,099 6.90
Money market investments........... 129,028 1,548 4.81 93,995 1,298 5.54
----------- --------- ----------- ---------
Total interest-earning assets. 33,941,919 $ 661,227 7.91 % 32,402,054 $ 669,800 8.28 %
--------- -------- --------- --------
--------- -------- --------- --------
Cash and due from banks............ 1,969,119 1,664,975
Allowance for loan losses.......... (405,549) (393,590)
Other assets....................... 3,017,684 2,379,703
----------- -----------
Total assets.................. $38,073,173 $36,053,142
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.................... $ 5,916,345 $ 26,082 1.77 % $ 5,694,915 $ 31,126 2.19 %
Money market deposit accounts...... 6,117,394 59,642 3.91 4,879,774 54,350 4.47
Time deposits...................... 9,534,521 117,214 4.93 10,486,205 143,998 5.51
Short-term borrowings.............. 4,481,906 49,115 4.40 4,011,296 51,957 5.20
Long-term debt..................... 1,674,582 25,579 6.11 1,698,328 27,897 6.56
----------- --------- ----------- ---------
Total interest-bearing
liabilities................ 27,724,748 $ 277,632 4.02 % 26,770,518 $ 309,328 4.63 %
--------- -------- --------- --------
--------- -------- --------- --------
Noninterest-bearing deposits....... 5,954,147 5,402,694
Other liabilities.................. 681,382 530,893
Shareholders' equity............... 3,712,896 3,349,037
----------- -----------
Total liabilities and
shareholders' equity........ $38,073,173 $36,053,142
----------- -----------
----------- -----------
Net interest revenue/margin........ $ 383,595 4.59 % $ 360,472 4.45 %
Interest rate spread............... 3.89 3.65
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, 1999 Year through June 30, 1998
--------------------------------- ---------------------------------
Daily Average Daily Average
Average Interest Rate Average Interest Rate
----------- --------- -------- ----------- --------- --------
ASSETS:
Commercial loans................... $ 9,503,161 $ 361,570 7.66 % $ 8,784,348 $ 364,014 8.35 %
Real estate loans.................. 9,098,268 364,318 8.05 8,804,007 367,536 8.39
Retail loans....................... 7,819,795 349,236 9.00 6,877,436 331,438 9.71
----------- --------- ----------- ---------
Total loans................... 26,421,224 1,075,124 8.19 24,465,791 1,062,988 8.75
Loans held for sale................ 1,303,389 46,503 7.14 770,468 27,563 7.15
Taxable investment securities...... 5,764,542 196,392 6.83 6,353,767 219,261 6.92
Money market investments........... 123,144 2,856 4.68 142,946 3,994 5.63
----------- --------- ----------- ---------
Total interest-earning assets. 33,612,299 $1,320,875 7.90 % 31,732,972 $1,313,806 8.33 %
--------- -------- --------- --------
--------- -------- --------- --------
Cash and due from banks............ 1,934,417 1,649,701
Allowance for loan losses.......... (401,599) (388,561)
Other assets....................... 3,014,516 2,276,057
----------- -----------
Total assets.................. $38,159,633 $35,270,169
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and NOW.................... $ 5,939,861 $ 53,173 1.81 % $ 5,627,662 $ 60,849 2.18 %
Money market deposit accounts...... 6,058,535 118,981 3.96 4,699,985 104,181 4.47
Time deposits...................... 9,665,224 241,363 5.04 10,278,677 282,906 5.55
Short-term borrowings.............. 4,404,039 95,988 4.40 3,856,239 99,638 5.21
Long-term debt..................... 1,690,812 51,759 6.13 1,719,256 56,819 6.62
----------- --------- ----------- ---------
Total interest-bearing
liabilities................ 27,758,471 $ 561,264 4.07 % 26,181,819 $ 604,393 4.65 %
--------- -------- --------- --------
--------- -------- --------- --------
Noninterest-bearing deposits....... 6,011,992 5,328,091
Other liabilities.................. 704,336 549,613
Shareholders' equity............... 3,684,834 3,210,646
----------- -----------
Total liabilities and
shareholders' equity........ $38,159,633 $35,270,169
----------- -----------
----------- -----------
Net interest margin................ 4.53 % 4.49 %
Interest rate spread............... 3.83 3.68
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 non accruing loans is included in average
amounts outstanding.
-19-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 3 NONINTEREST INCOME
(dollars in thousands)
% Increase/ % Increase/
Second Quarter (decrease) Year Through June 30 (decrease)
-------------------- --------------------
1999 1998 1999/1998 1999 1998 1999/1998
--------- --------- ----------- --------- --------- -----------
Trust income $ 75,061 $ 63,693 17.8 % $ 147,414 $ 126,434 16.6 %
Mortgage banking 37,364 40,451 (7.6) 71,263 73,980 (3.7)
Cash management income 24,438 20,726 17.9 47,466 40,768 16.4
Retail deposit fees 24,383 22,866 6.6 46,494 44,479 4.5
Credit card income 24,822 20,667 20.1 46,496 38,755 20.0
ATM income 7,303 7,301 0.0 13,964 13,320 4.8
Insurance commissions 4,548 5,994 (24.1) 11,099 9,886 12.3
International income 5,253 4,325 21.5 10,186 8,338 22.2
Corporate owned life insurance 5,817 3,488 66.8 10,612 6,699 58.4
Brokerage revenue 3,774 6,269 (39.8) 6,395 11,231 (43.1)
All other income 24,588 15,409 59.6 49,048 34,013 44.2
--------- --------- ----------- --------- --------- -----------
237,351 211,189 12.4 460,437 407,903 12.9
Investment securities gains/(losses)--net -- 467 n/m (2) 796 n/m
--------- --------- ----------- --------- --------- -----------
Total noninterest income $ 237,351 $ 211,656 12.1 % $ 460,435 $ 408,699 12.7 %
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
n/m = not meaningful
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 4 NONINTEREST EXPENSE
(dollars in thousands)
% Increase/ % Increase/
Second Quarter (decrease) Year Through June 30 (decrease)
-------------------- --------------------
1999 1998 1999/1998 1999 1998 1999/1998
--------- --------- ----------- --------- --------- -----------
Salaries $ 119,136 $ 133,695 (10.9)% $ 235,903 $ 261,441 (9.8)%
Pension and other
employee benefits 18,714 24,422 (23.4) 41,093 52,618 (21.9)
Equipment expense 22,762 27,093 (16.0) 45,327 50,444 (10.1)
Occupancy expense--net 23,696 24,309 (2.5) 49,911 48,662 2.6
Amortization of goodwill
and other intangible assets 16,141 12,919 24.9 32,132 24,220 32.7
Outside services 20,973 17,853 17.5 36,693 33,696 8.9
Postage and courier 10,613 9,231 15.0 20,810 17,570 18.4
Marketing expense 6,934 8,334 (16.8) 13,599 17,659 (23.0)
Professional services 4,551 6,187 (26.4) 7,963 12,534 (36.5)
Travel and entertainment 4,249 4,631 (8.2) 7,699 8,076 (4.7)
Stationery and supplies 6,253 7,259 (13.9) 11,357 13,618 (16.6)
All other noninterest expense 37,486 39,226 (4.4) 74,190 75,017 (1.1)
--------- --------- ----------- --------- --------- -----------
291,508 315,159 (7.5) 576,677 615,555 (6.3)
Merger related expenses 30,100 -- n/m 45,100 -- n/m
--------- --------- ----------- --------- --------- -----------
Total noninterest expense $ 321,608 $ 315,159 2.0 % $ 621,777 $ 615,555 1.0 %
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
n/m = not meaningful
-20-
Trust income for the first half of 1999 increased $21.0 million, or 16.6%, due
to new business in all product lines and market segments as well as higher stock
market values. Additionally, this year's trust income benefited from the
transfer of Firstar managed Stellar Funds to in-house processing. Mortgage
banking revenue was down by 3.7% 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 $6.7 million, or 16.4%, due to new business
development, an expanded product line and higher customer transaction volumes.
Credit card revenue rose $7.7 million, or 20.0%, due to an expanded customer
base, increased merchant activity and card usage. Corporate owned life insurance
increased by $3.9 million, or 58.4%, with the purchase of additional policies.
Brokerage revenue declined as a result of the outsourcing of that product to a
third party broker. All other income increased by $15.0 million, or 44.2%, and
included leasing related revenues from a recently acquired leasing company and
a $3.1 million gain on the sale of credit card merchant processing in the second
quarter of 1999. Table 3 shows the components of noninterest income.
Noninterest expense, excluding merger-related expenses, totaled $291.5
million, a decrease of $23.7 million, or 7.5%, from the second quarter of 1998.
For the first half of 1999 noninterest expense, excluding merger-related
charges, totaled $576.7 million, a decrease of $38.9 million, or 6.3%, from
the same period of last year. Salary expense for the first half of 1999
decreased $25.5 million, or 9.8%. 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,
staff additions for new branches and an expanded incentive compensation
program. Fringe benefits also declined as a result of conforming the
separate companies' plans and the excess funding of the pension plan made at
year-end 1998. Equipment expense declined by $5.1 million, or 10.1%, due to
savings resulting from the merger. Occupancy expense increased $1.2 million, or
2.6%, due to both the opening of new branches and acquisitions. Amortization of
intangible assets increased $7.9 million, or 32.7%, due to new acquisitions.
All other operating expenses declined an aggregate $5.9 million, or 3.3%,
reflecting various cost saving initiatives. Table 4 shows the components of
noninterest expenses.
Before merger-related costs, Firstar's efficiency ratio was 46.95% in
the second quarter of 1999, a significant improvement over the 55.09% of the
second quarter of last year. For the first half of 1999 the efficiency ratio
was 47.27% compared to 55.05% in the same period of last year.
Asset Quality
As of June 30, 1999, the allowance for loan losses was $405.2 million,
or 1.52% 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 293% at June 30, 1999 compared to 318% at December 31,
1998 and 361% a year earlier. Table 5 provides a summary of activity in the
allowance for loan losses by type of loan. Net charge-offs totaled $32.1
million in the second quarter of 1999 compared with $22.6 million in the same
period of last year. For the first half of 1999 net charge offs were $62.1
million compared to $49.6 million a year earlier. Annualized net charge-offs
as a percent of average loans increased from .37% in the second quarter of
1998 to .48% in the second quarter of this year. For the first half of this
year annualized net charge-offs were .47% compared to .41% last year. Credit
card net charge-offs increased from 4.49% of average outstandings in the first
half of 1998 to 5.15% in the current period. Commercial loan net charge-offs
increased from an unrepresentively low level of .24% of loans in the first half
of 1998 to .32% in the same period of 1999. Other retail lending net
charge-offs declined from .47% of average outstandings in the first half of
1998 to .33% in the current period. Management anticipates the level of net
charge-offs to trend higher over the remainder of 1999.
-21-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 5 SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)
Second Quarter Six Months
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Average loans..................... $ 26,674,219 $ 24,729,681 $ 26,421,224 $ 24,465,791
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Allowance for loan losses:
Balance - beginning of period... $ 401,943 $ 392,947 $ 395,956 $ 372,933
Charge-offs:
Commercial.................... (12,371) (7,561) (23,634) (20,498)
Commercial real estate........ (2,122) (788) (3,177) (1,264)
Residential real estate....... (1,754) (716) (4,214) (1,127)
Credit card................... (18,260) (14,822) (35,610) (29,985)
Other retail.................. (9,300) (10,350) (19,153) (21,524)
------------ ------------ ------------ ------------
Total charge-offs........... (43,807) (34,237) (85,788) (74,398)
------------ ------------ ------------ ------------
Recoveries:
Commercial.................... 4,427 4,245 8,463 10,085
Commercial real estate........ 1,246 643 2,046 1,686
Residential real estate....... 36 37 37 252
Credit card................... 2,934 2,114 4,956 4,547
Other retail.................. 3,020 4,561 8,219 8,193
------------ ------------ ------------ ------------
Total recoveries............ 11,663 11,600 23,721 24,763
------------ ------------ ------------ ------------
Net charge-offs........... (32,144) (22,637) (62,067) (49,635)
Provision charged to earnings... 35,360 24,450 71,270 53,095
Allowances of banks purchased... -- 1,000 -- 19,367
------------ ------------ ------------ ------------
Balance - end of period......... $ 405,159 $ 395,760 $ 405,159 $ 395,760
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Ratio of net charge-offs to average
loans:
Commercial.................... 0.33% 0.15% 0.32% 0.24%
Commercial real estate........ 0.06% 0.01% 0.04% (0.02%)
Residential real estate....... 0.23% 0.07% 0.27% 0.04%
Credit card................... 5.10% 4.46% 5.15% 4.49%
Other Retail.................. 0.37% 0.40% 0.33% 0.47%
Total loans..................... 0.48% 0.37% 0.47% 0.41%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-22-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 6 NONPERFORMING ASSETS
(dollars in thousands)
June 30, December 31, June 30,
1999 1998 1998
------------ ------------- -------------
Loans on nonaccrual status:
Commercial........................ $ 81,332 $ 60,587 $ 54,054
Residential mortgage.............. 18,138 20,717 24,047
Commercial mortgage............... 23,958 28,942 22,160
Construction and land development. 4,150 7,766 3,508
Retail loans...................... 8,938 6,463 5,356
------------ ------------- -------------
Total nonaccrual loans.......... 136,516 124,475 109,125
Loans which have been
renegotiated...................... 1,644 48 609
------------ ------------- -------------
Total nonperforming loans....... 138,160 124,523 109,734
Other real estate owned............. 10,239 11,852 14,107
------------ ------------- -------------
Total nonperforming assets...... $ 148,399 $ 136,375 $ 123,841
------------ ------------- -------------
------------ ------------- -------------
Percentage of nonperforming
loans to loans.................... 0.52% 0.48% 0.44%
------------ ------------- -------------
------------ ------------- -------------
Percentage of nonperforming
assets to loans and other
real estate owned................. 0.56% 0.53% 0.50%
------------ ------------- -------------
------------ ------------- -------------
Loans past due 90 days
or more........................... $ 72,092 $ 75,094 $ 86,650
------------ ------------- -------------
------------ ------------- -------------
-23-
FIRSTAR CORPORATION AND SUBSIDIARIES
TABLE 6 COMPOSITION OF NONPERFORMING LOANS
(dollars in thousands)
June 30, 1999
---------------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------
Non- Restruc- Percentage or More
accrual tured Total of Loans Past Due
-------- --------- --------- ----------- --------
Commercial loans:
Corporate.............. $ 67,452 $ 45 $ 67,497 0.82 % $ 9,639
Commercial leasing..... 13,880 -- 13,880 1.02 1,059
-------- ------- -------- -------
Total commercial loans 81,332 45 81,377 0.84 10,698
-------- ------- -------- -------
Real estate loans:
Residential............ 18,138 -- 18,138 0.64 11,688
Commercial mortgage.... 23,958 -- 23,958 0.50 11,691
Construction/land
development.......... 4,150 -- 4,150 0.36 5,393
-------- ------ -------- -------
Total real estate loans 46,246 -- 46,246 0.52 28,772
-------- ------ -------- -------
Retail loans:
Other retail........... 4,503 1,599 6,102 0.11 11,104
Credit cards........... 3,880 -- 3,880 0.32 20,714
Retail leasing......... 555 -- 555 0.04 805
-------- ------ -------- -------
Total retail loans... 8,938 1,599 10,537 0.13 32,623
-------- ------ -------- -------
Total loans.......... $136,516 $1,599 $138,160 0.52 % $70,092
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
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
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
June 30, 1998
---------------------------------------------------------
Nonperforming Loans 90 Days
----------------------------------------------
Non- Restruc- Percentage or More
accrual tured Total of Loans Past Due
-------- --------- --------- ----------- --------
Commercial loans:
Corporate.............. $ 53,929 $ 566 $ 54,495 0.69 % $33,993
Commercial leasing..... 125 -- 125 0.02 --
-------- ------ -------- -------
Total commercial loans 54,054 566 54,620 0.64 33,993
-------- ------ -------- -------
Real estate loans:
Residential............ 24,047 -- 22,047 0.66 9,374
Commercial mortgage.... 22,160 -- 22,160 0.49 16,360
Construction/land
development.......... 3,508 -- 3,508 0.32 --
-------- ------ -------- -------
Total real estate loans 49,715 -- 49,715 0.54 25,734
-------- ------ -------- -------
Retail loans:
Other retail........... 2,310 43 2,353 0.05 11,953
Credit cards........... 2,564 -- 2,564 0.22 13,900
Retail leasing......... 482 -- 482 0.04 1,070
-------- ------ -------- -------
Total retail loans... 5,356 43 5,399 0.08 26,923
-------- ------ -------- -------
Total loans.......... $109,125 $ 609 $109,734 0.44 % $86,650
-------- ------ -------- ------- -------
-------- ------ -------- ------- -------
-24-
Nonperforming assets, as shown in Tables 6 and 7, were $148.4 million at
June 30, 1999. This is an increase of $12.0 million from December 31,
1998 and $24.6 million from a year earlier. Measured as a percent of
loans and other real estate, nonperforming assets have increased from
.50% at June 30, 1998 and .53% at December 31, 1998 to .56% at June 30,
1999. The placement of one large commercial loan into nonaccrual status
during the second quarter added $16.5 million to nonperforming assets.
Capital Resources
Total shareholders' equity was $3.61 billion at June 30, 1999,
an increase of $84.3 million from December 31, 1998 and $193.6 million
from a year earlier. The ratio of shareholders' equity to assets was
9.48% at June 30, 1999, compared to 9.17% at December 31, 1998 and 9.23%
at June 30, 1998.
Banking industry regulators define minimum capital requirements
for bank holding companies. Firstar's tier 1 and total risk-based
capital ratios as of June 30, 1999 amounted to 8.85% and 10.76%,
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 minimum leverage
ratio of 3.00%, which is defined as tier 1 equity to average quarterly
assets. At June 30, 1999, Firstar's leverage ratio was 8.11%, 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 June 30, 1999, 5,772,500 shares have been repurchased.
-25-
- -
Year 2000
Firstar's Year 2000 ("Y2K") project is directed by a committee
that provides 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 100% of its mission critical applications. 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.
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 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 $6 in the first half
of 1999.
-26-
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.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matter to a Vote of Security Holders
A special Meeting of Firstar Corporation Shareholders was held on
July 28, 1999 to vote on the Agreement and Plan of Merger, dated April 30,
1999, as amended, by and between Firstar and Mercantile Bancoporation Inc.
The shareholders approved the merger. The vote was as follows:
For: 438,892,204
Against: 4,518,417
Abstain: 17,594,760
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits filed:
Exhibit 27 Financial Data Schedule
(B) Reports on Form 8-K
A Form 8-K filed on May 19, 1999 included financial statements of
Mercantile Bancorporation. Firstar Corporation and Mercantile Bancorporation
previously reported the announcement of a plan of merger.
A Form 8-K filed on May 20, 1999 included the effect of Firstar
Corporation's three for one stock split as of March 31, 1999 on previously
reported earnings per share.
A Form 8-K filed on July 13, 1999 and July 19, 1999 related to the
issuance of $400 million of medium term notes.
A Form 8-K filed on July 20, 1999 included an exhibit setting forth
the computation of various ratios of earnings to fixed charges in conjunction
with a debt offering.
-27-
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 16, 1999 /s/ Jerry A. Grundhoffer
- ------------------ ---------------------------------
Date Jerry A. Grundhoffer
President and Chief Executive
Officer
August 16, 1999 /s/ David M. Moffett
- ------------------ ---------------------------------
Date David M. Moffett
Vice Chairman
and Chief Financial Officer
August 16, 1999 /s/ James D. Hogan
- ------------------ ---------------------------------
Date James D. Hogan
Senior Vice President and
Controller
-28-