-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HV7NcFkrlX/uYtrxWLvYWULpV76F9KEXIB0d349YmwCWzWR1W3jlvA3qiJZ2wgvk EG85YV5wpPVIO3PtEp8vgw== 0000950124-98-001294.txt : 19980317 0000950124-98-001294.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950124-98-001294 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: CSX SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTAR CORP /WI/ CENTRAL INDEX KEY: 0000037076 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 390711710 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-28711 FILM NUMBER: 98564945 BUSINESS ADDRESS: STREET 1: 777 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147655977 MAIL ADDRESS: STREET 1: 777 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WISCONSIN CORP DATE OF NAME CHANGE: 19890124 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WISCONSIN BANKSHARES CORP DATE OF NAME CHANGE: 19750204 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 1-2981 FIRSTAR CORPORATION WISCONSIN 39-0711710 (State of Incorporation) (I.R.S. Employer Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 Telephone Number (414) 765-4321 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, $1.25 par value New York Stock Exchange, Inc. Chicago Stock Exchange, Inc. Preferred Stock, Series D Nasdaq Preferred Share Purchase Rights New York Stock Exchange, Inc. Chicago Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes _ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. - ---- As of February 27, 1998, 145,074,999 shares of common stock were outstanding, and the aggregate market value of the shares (based upon the closing price) held by nonaffiliates was approximately $5.4 billion. Documents Incorporated by Reference: Portions of the 1998 Notice of Annual Meeting and Proxy Statement are incorporated by reference into Part III of the Form 10-K. ================================================================================ 2 FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1 - Business.................................................... 2 Item 2 - Properties.................................................. 5 Item 3 - Legal Proceedings........................................... 5 Item 4 - Submission of Matters to a Vote of Security Holders......... 5 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 5 Item 6 - Selected Financial Data..................................... 6 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 7 Item 7A - Quantitative and Qualitative Disclosures About Market Risk........................................................ 21-23, 31-32 Item 8 - Financial Statements and Supplementary Data................. 26 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 57 PART III Item 10 - Directors and Executive Officers of the Registrant.......... 57 Item 11 - Executive Compensation...................................... 57 Item 12 - Security Ownership of Certain Beneficial Owners and Management.................................................. 57 Item 13 - Certain Relationships and Related Transactions.............. 57 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 57 Signatures............................................................. 59
1 3 PART I ITEM 1. BUSINESS GENERAL Firstar Corporation is a registered bank holding company incorporated in Wisconsin in 1929. Firstar Corporation ("Firstar") is the largest bank holding company headquartered in Wisconsin. Firstar's two bank subsidiaries in Wisconsin had total assets of $10.5 billion at December 31, 1997. Its one bank in Iowa, one Illinois bank and one Minnesota bank had total assets of approximately $2.7 billion, $2.7 billion and $2.5 billion, respectively, as of December 31, 1997. Firstar has one bank in Phoenix, Arizona with total assets of $184 million. Firstar's principal subsidiary, Firstar Bank Milwaukee, N.A., had total assets of $6.6 billion which represented 33 percent of Firstar's consolidated assets at December 31, 1997. Subsidiary asset totals are net of intercompany balances. Firstar provides banking services throughout Wisconsin and Iowa and in the Chicago, Minneapolis-St. Paul and Phoenix metropolitan areas. Its Wisconsin bank subsidiaries operate in 116 locations, with offices in eight of the ten largest metropolitan population centers of the state, including 41 offices in the Milwaukee metropolitan area. Its Iowa bank subsidiary operates in 50 locations; its Illinois bank subsidiary in 40 locations; its Minnesota bank subsidiary in 30 locations; and its Arizona bank in four locations. Firstar also provides trust services in its five-state banking locations and in Florida at one location. Firstar's bank subsidiaries provide a broad range of financial services for companies based in Wisconsin, Iowa, Illinois and Minnesota, national business organizations, governmental entities and individuals. These commercial and consumer banking activities include accepting demand, time and savings deposits; making both secured and unsecured business and personal loans; and issuing and servicing credit cards. The bank subsidiaries also engage in correspondent banking and provide trust and investment management services to individual and corporate customers. Firstar Bank Milwaukee, N.A. also conducts international banking services consisting of foreign trade financing, issuance and confirmation of letters of credit, funds collection and foreign exchange transactions. Nonbank subsidiaries provide retail brokerage services, trust and investment management services, residential mortgage banking activities, title insurance, business insurance, consumer and credit related insurance, and corporate computer and operational services. COMPETITION Banking and bank-related services is a highly competitive business. Firstar's subsidiaries compete primarily in Wisconsin, Iowa, Illinois and Minnesota. Firstar and its subsidiaries have numerous competitors, some of which are larger and have greater financial resources. Firstar competes with other commercial banks and financial intermediaries, such as savings banks, savings and loan associations, credit unions, mortgage companies, leasing companies and a variety of financial services and advisory companies located throughout the country. SUPERVISION Firstar's business activities as a bank holding company are regulated by the Federal Reserve Board under the Bank Holding Company Act of 1956 which imposes various requirements and restrictions on its operations. The activities of Firstar and those of its banking and nonbanking subsidiaries are limited to the business of banking and activities closely related or incidental to banking. The business of banking is highly regulated, and there are various requirements and restrictions in the laws of the United States and the states in which the subsidiary banks operate including the requirement to maintain reserves against deposits and adequate capital to support their operations, restrictions on the nature and amount of loans which may be made by the banks, restrictions relating to investment (including loans to and investments in affiliates), branching and other activities of the banks. Firstar's subsidiary banks with a national charter are supervised and examined by the Comptroller of the Currency. The subsidiary banks with a state charter are supervised and examined by their respective state banking agency and either by the Federal Reserve if a member bank of the Federal Reserve or by the FDIC if 2 4 a nonmember. All of the Firstar subsidiary banks are also subject to examination by the Federal Deposit Insurance Corporation. In recent years Congress has enacted significant legislation which has substantially changed the federal deposit insurance system and the regulatory environment in which depository institutions and their holding companies operate. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") have significantly increased the enforcement powers of the federal regulatory agencies having supervisory authority over Firstar and its subsidiaries. Certain parts of such legislation, most notably those which increase deposit insurance assessments and authorize further increases to recapitalize the bank deposit insurance fund, increase the cost of doing business for depository institutions and their holding companies. FIRREA also provides that all commonly controlled FDIC insured depository institutions may be held liable for any loss incurred by the FDIC resulting from a failure of, or any assistance given by the FDIC, to any of such commonly controlled institutions. Federal regulatory agencies have implemented provisions of FDICIA with respect to taking prompt corrective action when a depository institution's capital falls to certain levels. Under the rules, five capital categories have been established which range from "critically undercapitalized" to "well capitalized". Failure of a depository institution to maintain a capital level within the top two categories will result in specific actions from the federal regulatory agencies. These actions could include the inability to pay dividends, restricting new business activity, prohibiting bank acquisitions, asset growth limitations and other restrictions on a case by case basis. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. Changes to such monetary policies have had a significant effect on operating results of financial institutions in the past and are expected to have such an effect in the future; however, the effect of possible future changes in such policies on the business and operations of Firstar cannot be determined. 3 5 EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all the executive officers (14) of Firstar as of December 31, 1997. All of these officers are elected annually by their respective boards of directors. All of the officers have been employed by Firstar and/or one or more of its subsidiaries during the past five years. There are no family relationships between any of the executive officers.
NAME AGE POSITION ---- --- -------- Roger L. Fitzsimonds...................... 59 Chairman of the Board and Chief Executive Officer of Firstar (Since February 1991) John A. Becker............................ 55 President and Chief Operating Officer of Firstar (Since January 1990) Chris M. Bauer............................ 49 Senior Executive Vice President of Firstar (Since January 1996) Richard W. Schoenke....................... 54 Senior Executive Vice President of Firstar (Since January 1996) Steven R. Parish.......................... 40 Executive Vice President of Firstar (Since April 1996) Jay B. Williams........................... 46 President of Firstar Bank Illinois (Since January 1995) Michael J. Schmitz........................ 63 Executive Vice President of Firstar (Since September 1990) Jon H. Stowe.............................. 53 Executive Vice President of Firstar (Since January 1995) Dennis R. Fredrickson..................... 53 Senior Vice President of Firstar (Since October 1988) Larry A. Greves........................... 50 Senior Vice President of Firstar (Since January 1992) John R. Heistad........................... 51 Senior Vice President and Chief Credit Officer of Firstar (Since January 1992) Howard H. Hopwood III..................... 52 Senior Vice President and General Counsel of Firstar (Since January 1986) Ronald E. Roder........................... 49 Senior Vice President of Firstar Bank Milwaukee (Since December 1988) Jeffrey B. Weeden......................... 41 Senior Vice President -- Finance and Chief Financial Officer of Firstar (Since April 1996)
4 6 ITEM 2. PROPERTIES On December 31, 1997, Firstar had 241 banking locations, of which 162 were owned and 79 were leased. All of these offices are considered by management to be well maintained and adequate for the purpose intended. See Note 6 of the Notes to Consolidated Financial Statements included under Item 8 of this document for further information on properties. ITEM 3. LEGAL PROCEEDINGS Firstar and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which involve substantial claims for compensatory or punitive damages. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of Firstar. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See Item 6 of this document for information on stock price ranges and dividends. The principal markets for the quotations of stock prices are the New York Stock Exchange and Chicago Stock Exchange. There were 11,972 holders of record of Firstar's $1.25 par value Common Stock on February 27, 1998. 5 7 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31 ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands of dollars, except per share) EARNINGS AND DIVIDENDS Net interest revenue...................... $750,385 $749,886 $725,947 $698,838 $659,939 Provision for loan losses................. 54,658 42,647 36,756 23,891 29,090 Other operating revenue................... 491,139 440,452 392,197 370,619 392,918 Other operating expense................... 744,018 773,330 734,122 706,185 689,274 Net income................................ 295,209 250,177 228,913 226,673 227,938 Per common share: Net income.............................. 2.03 1.68 1.50 1.49 1.50 Net income assuming dilution............ 2.00 1.66 1.48 1.47 1.49 Dividends............................... .82 .74 .66 .58 .50 Stockholders' equity.................... 11.65 11.26 10.31 9.73 8.89 Average common shares (000s).............. 145,143 148,061 151,432 150,391 148,262 Average common shares -- assuming dilution (000's)................................. 147,306 150,436 154,856 154,489 152,930 - ------------------------------------------------------------------------------------------------ PERFORMANCE RATIOS Return on average assets.................. 1.53% 1.31% 1.26% 1.37% 1.49% Return on average common equity........... 18.41 15.95 15.11 15.96 17.81 Equity to assets.......................... 8.53 8.62 7.95 8.41 8.28 Total risk-based capital.................. 11.71 13.47 12.45 13.18 13.17 Net loan charge-offs as a percentage of average loans........................... .37 .30 .27 .25 .25 Nonperforming assets as a percentage of loans and foreclosed assets............. .52 .72 .77 .69 .81 Net interest margin....................... 4.47 4.51 4.55 4.89 5.04 Efficiency ratio.......................... 59.34* 58.17* 61.43* 61.75* 63.53 Fee revenue as a percentage of average assets.................................. 2.42* 2.30 2.18 2.26 2.56 - ------------------------------------------------------------------------------------------------ (millions of dollars) BALANCE SHEET AT DECEMBER 31 Total assets.............................. $ 19,844 $ 19,767 $ 19,168 $ 17,994 $ 16,412 Securities................................ 4,160 4,217 4,475 3,974 3,360 Loans: Commercial loans........................ 7,721 7,312 6,966 6,710 5,996 Consumer loans.......................... 3,464 3,224 2,944 2,813 2,561 Consumer mortgage loans................. 2,384 2,660 2,723 2,383 2,268 Total loans.......................... 13,569 13,196 12,633 11,906 10,825 Earning assets............................ 17,819 17,626 17,233 16,293 14,551 Deposits: Core deposits........................... 14,043 14,369 13,403 12,818 12,689 Other deposits.......................... 671 845 909 591 444 Total deposits....................... 14,714 15,214 14,312 13,409 13,133 Short-term borrowed funds................. 2,121 1,869 2,303 2,196 1,178 Long-term debt............................ 1,058 697 734 574 486 Stockholders' equity...................... 1,693 1,704 1,525 1,513 1,359 - ------------------------------------------------------------------------------------------------ STOCK PRICE INFORMATION High...................................... $ 43 11/16 $ 26 7/8 $ 20 1/2 $ 17 11/16 $ 18 5/8 Low....................................... 25 9/16 18 5/16 13 1/8 12 9/16 14 11/16 Close..................................... 42 7/16 26 1/4 19 13/16 13 7/16 15 3/8 - ------------------------------------------------------------------------------------------------
* The calculation excludes certain gains and/or expenses. 6 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION This review contains certain forward looking statements concerning Firstar's business results that are based on estimates. Actual results could differ materially due to factors such as changes in economic conditions, compression of net interest revenue due to unanticipated declines in net interest margins and outstanding loan balances, unanticipated delays in cost reduction and revenue enhancements, and the ability of the company to attract and retain qualified personnel. Therefore, there can be no assurances that actual results will correspond to these forward-looking statements. HIGHLIGHTS Firstar recorded net income in 1997 of $295.2 million, an 18.0% increase over the $250.2 million earned in 1996. Earnings per common share, on a diluted basis, were $2.00 in 1997, an increase of 20.5% over the $1.66 earned in 1996. In 1995, net income was $228.9 million, or $1.48 per common share, on a diluted basis. Return on average common equity was 18.41% in 1997 compared with 15.95% in 1996 and 15.11% in 1995. Return on average assets for 1997 was 1.53% compared with 1.31% in 1996 and 1.26% in 1995. Major factors affecting underlying earning trends during the past three years were: - Net interest revenue during 1997, on a taxable-equivalent basis, was essentially level with 1996, increasing only 0.3%. This compares to the 3.2% increase during 1996. Increased average earning asset balances during these periods contributed to higher net interest revenue. - Net interest margins declined modestly, with the 1997 margin at 4.47% compared with 4.51% in 1996 and 4.55% in 1995, thus reducing the impact of the higher average earning asset balances. - Growth in several fee revenue businesses continued, with trust and investment management fees up 18.2% in 1997 and 10.2% in 1996. Overall, fee revenue grew by 6.2% in 1997, excluding securities transactions and a gain on the formation of a joint venture to provide credit card processing services to merchants. This follows the 10.7% growth in fee revenues realized in 1996. - The provision for loan losses increased to $54.7 million in 1997 from $42.6 million in 1996 and $36.8 million in 1995. Higher consumer loan charge-offs were a factor in the increased loan loss provisions. - Operating expenses increased by 4.5%, excluding certain restructuring charges and other expenses incurred in 1996. This compares to an increase of 0.2% during 1996. Total nonperforming assets were $70.4 million at the end of the year, a decrease of $24.7 million from the prior year end. Nonperforming assets as a percent of loans and foreclosed assets were .52% at December 31, 1997 compared to .72% a year earlier. This represents a historically low level for the company. Stockholders' equity stood at $1.7 billion at the end of 1997. Market capitalization was $6.1 billion, an increase of 56% from a year earlier. Capital strength, by all measures, remains strong. NET INTEREST REVENUE Net interest revenue, which comprises interest revenue and loan-related fees less interest expense, is the principal source of earnings for Firstar. Net interest revenue is affected by a number of factors including the level, pricing and maturity of earning assets and interest-bearing liabilities, interest rate fluctuations and asset quality. The net interest margin is net interest revenue expressed as a percentage of average earning assets. To permit comparisons, net interest revenue and margins in the accompanying discussion and tables have been adjusted to show tax-exempt income, such as interest on municipal securities and loans, on a 7 9 taxable-equivalent basis. Table 1 shows the components of net interest revenue, net income and net interest margin for the last three years. TABLE 1 CONDENSED INCOME STATEMENTS -- TAXABLE-EQUIVALENT BASIS
CHANGE FROM PRIOR YEAR -------------------------------------- 1997 VS 1996 1996 VS 1995 ---------------- ---------------- 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- ------ ------- ------ ------- (millions of dollars) Interest revenue..................... $1,401.5 $1,382.9 $1,347.8 $18.6 1.3% $35.1 2.6% Taxable-equivalent adjustment........ 35.8 34.1 33.4 1.7 5.0 .7 2.1 -------- -------- -------- ------ ------ Interest revenue -- taxable-equivalent................. 1,437.3 1,417.0 1,381.2 20.3 1.4 35.8 2.6 Interest expense................... 651.1 633.0 621.8 18.1 2.9 11.2 1.8 -------- -------- -------- ------ ------ Net interest revenue -- taxable-equivalent............... 786.2 784.0 759.4 2.2 .3 24.6 3.2 Provision for loan losses............ 54.7 42.6 36.8 12.1 28.4 5.8 15.8 Other operating revenue.............. 491.1 440.4 392.2 50.7 11.5 48.2 12.3 Other operating expense.............. 744.0 773.3 734.1 (29.3) (3.8) 39.2 5.3 -------- -------- -------- ------ ------ Income before income taxes......... 478.6 408.5 380.7 70.1 17.2 27.8 7.3 Provision for income taxes........... 147.6 124.2 118.4 23.4 5.8 Taxable-equivalent adjustment........ 35.8 34.1 33.4 1.7 .7 -------- -------- -------- ------ ------ Net income......................... $ 295.2 $ 250.2 $ 228.9 $45.0 18.0 $21.3 9.3 ======== ======== ======== ====== ====== Yield on earning assets.............. 8.17% 8.14% 8.28% .03% (.14)% Cost of interest-bearing liabilities........................ 4.57 4.48 4.59 .09 (.11) -------- -------- -------- ------ ------ Interest spread...................... 3.60 3.66 3.69 (.06) (.03) Impact of interest-free funds........ .87 .85 .86 .02 (.01) -------- -------- -------- ------ ------ Net interest margin................ 4.47% 4.51% 4.55% (.04)% (.04)% ======== ======== ======== ====== ======
During 1997, net interest revenue increased 0.3% to $786.2 million. This follows a growth of 3.2% in 1996. The growth in both years resulted from higher average earning asset balances. Average earning assets rose by 1.1% during 1997 and by 4.2% in 1996. A portion of this growth in earning assets was attributable to a bank acquisition completed in 1996. This positive impact was somewhat offset by a reduction in the net interest margin in both years. The net interest margin for 1997 was 4.47% compared with 4.51% in 1996 and 4.55% in 1995. The margin has shown modest declines during the past two years. Competitive pricing pressures on loan and deposit rates and a shift in the funding mix to higher cost deposits and borrowed funds has and will continue to impact the net interest margin. The interest rate earned on average earning assets rose slightly in 1997 by .03% to 8.17% from 8.14% in 1996. The corresponding increase in the cost of funds rate was .09%, resulting in the decline in the net interest margin in 1997. The rate earned on average earning assets in 1996 declined by .14%. The corresponding reduction in the cost of funds rate was .11%, thus reducing the net interest margin in 1996. The contribution of interest free funds, primarily in the form of demand deposits, remained relatively level in the .85% to .87% range during the past three years. Foregone interest on nonperforming loans and foreclosed assets reduced net interest revenue by $5.2 million in 1997, $4.9 million in 1996 and $5.4 million in 1995. This resulted in corresponding reductions in net interest margin of .03% in each of the last three years. This nominal impact is a reflection of Firstar's continued low level of nonperforming assets. Table 2 shows the components of interest revenue and expense along with changes related to volumes and rates. Total interest revenue increased by 1.4% to $1,437.3 million in 1997. This resulted from the 1.1% increase in earning assets along with the .03% increase in the rate earned. Interest income on loans rose by 2.3% due to increased average loan balances partially offset by lower commercial loan yields. Securities 8 10 interest income declined with the reduction in the average balance levels partially offset by the improvement in the yield. Total interest revenue increased by 2.6% to $1,417.0 million in 1996. This resulted from an increase of 4.2% in average earning assets partially offset by the decline in the rate earned. Interest income on loans rose by 2.9% due to loan balance increases partially offset by lower commercial loan yields. Securities income rose due to the higher average balance levels. TABLE 2 ANALYSIS OF INTEREST REVENUE AND EXPENSE
1997 VS 1996 1996 VS 1995 ------------------------------ ---------------------------- INTEREST DUE TO DUE TO ------------------------------------ TOTAL ------------------- TOTAL ------------------ 1997 1996 1995 CHANGE VOLUME RATE CHANGE VOLUME RATE ---------- ---------- ---------- -------- -------- -------- ------- ------- -------- (thousands of dollars) Interest-bearing deposits with banks............... $ 691 $ 380 $ 967 $ 311 $ 255 $ 56 $ (587) $ (352) $ (235) Federal funds sold and resale agreements........ 5,880 4,916 10,534 964 1,204 (240) (5,618) (4,806) (812) Trading securities......... 133 392 968 (259) (403) 144 (576) (231) (345) Securities................. 285,125 291,261 280,045 (6,136) (12,684) 6,548 11,216 11,612 (396) Commercial loans........... 633,851 615,966 609,248 17,885 28,325 (10,440) 6,718 28,398 (21,680) Consumer loans............. 319,424 295,508 278,236 23,916 23,943 (27) 17,272 18,350 (1,078) Consumer mortgage loans.... 192,172 208,570 201,256 (16,398) (16,136) (262) 7,314 8,392 (1,078) ---------- ---------- ---------- -------- ------- Total loans............ 1,145,447 1,120,044 1,088,740 25,403 31,737 (6,334) 31,304 55,019 (23,715) ---------- ---------- ---------- -------- ------- Total interest revenue.............. 1,437,276 1,416,993 1,381,254 20,283 16,172 4,111 35,739 57,967 (22,228) Interest-bearing demand.... 24,775 21,786 23,831 2,989 815 2,174 (2,045) (259) (1,786) Money market accounts...... 119,135 102,927 85,231 16,208 8,742 7,466 17,696 18,708 (1,012) Savings passbook........... 33,179 40,034 44,509 (6,855) (3,777) (3,078) (4,475) (3,334) (1,141) Certificates of deposit.... 294,581 300,806 291,135 (6,225) (7,007) 782 9,671 8,286 1,385 ---------- ---------- ---------- -------- ------- Total deposits......... 471,670 465,553 444,706 6,117 (859) 6,976 20,847 18,700 2,147 Short-term borrowed funds.................... 127,153 123,629 133,151 3,524 2,086 1,438 (9,522) 4,675 (14,197) Long-term debt............. 52,265 43,830 43,982 8,435 9,724 (1,289) (152) 2,380 (2,532) ---------- ---------- ---------- -------- ------- Total interest expense.............. 651,088 633,012 621,839 18,076 5,612 12,464 11,173 25,411 (14,238) ---------- ---------- ---------- -------- ------- Net interest revenue... $ 786,188 $ 783,981 $ 759,415 $ 2,207 8,884 (6,677) $24,566 31,662 (7,096) ========== ========== ========== ======== =======
- --------------- Calculations are computed on a taxable-equivalent basis using a tax rate of 35%. The change attributable to both volume and rate has been allocated proportionately to the changes due to volume and rate. Total interest expense increased by 2.9% in 1997 to $651.1 million. Interest on deposits rose by 1.3% with the continued consumer shift to money market accounts and generally higher deposit interest rates. Interest cost for borrowed funds rose by 7.1% due to the issuance of new long-term debt securities and higher rates on short-term borrowed funds. In 1996, total interest expense increased by 1.8% to $633.0 million. Interest expense on deposits rose by 4.7% primarily due to a shift from lower cost interest-bearing demand and savings passbook accounts to money market accounts and certificates of deposit. Interest cost of borrowed funds declined in 1996 due to the lower rate paid for these funds. Firstar expects the shift in deposit mix from lower cost passbook accounts to money market accounts will continue into the future. 9 11 OTHER OPERATING REVENUE Total other operating revenue, excluding securities transactions and the gain on the formation of a joint venture to provide credit card processing services to merchants, increased by 6.2% to a level of $467.6 million in 1997. This compares with a 10.7% increase in 1996. Firstar continues to emphasize growth in fee revenue. Firstar's broad customer base provides opportunities for expanded revenues as the marketplace looks to financial institutions for services beyond traditional lending and deposit activities. Table 3 shows the composition of other operating revenues. TABLE 3 ANALYSIS OF OTHER OPERATING REVENUE
YEARS ENDED DECEMBER 31 1997 VS 1996 1996 VS 1995 ------------------------------ ------------------ ----------------- 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- ------- ------- ------- (thousands of dollars) Trust and investment management fees........................... $174,899 $148,019 $134,354 $ 26,880 18.2% $13,665 10.2% Service charges on deposit accounts....................... 87,483 91,953 81,775 (4,470) (4.9) 10,178 12.4 Credit card service revenue...... 71,038 69,945 62,106 1,093 1.6 7,839 12.6 Mortgage origination............. 34,194 26,065 15,848 8,129 31.2 10,217 64.5 Mortgage servicing............... 12,635 23,035 22,631 (10,400) (45.1) 404 1.8 -------- -------- -------- -------- ------- Mortgage banking revenue....... 46,829 49,100 38,479 (2,271) (4.6) 10,621 27.6 Data processing fees............. 19,993 19,443 17,924 550 2.8 1,519 8.5 Brokerage revenue................ 10,993 10,764 8,897 229 2.1 1,867 21.0 Insurance revenue................ 10,586 10,828 11,730 (242) (2.2) (902) (7.7) ATM fees......................... 6,504 5,109 5,085 1,395 27.3 24 .5 International fees............... 6,482 5,811 5,999 671 11.5 (188) (3.1) Safe deposit fees................ 4,617 4,040 4,207 577 14.3 (167) (4.0) Foreign exchange gains........... 2,704 2,272 2,426 432 19.0 (154) (6.3) Trading securities gains......... 1,128 2,388 2,234 (1,260) (52.8) 154 6.9 Municipal finance fees........... 845 747 936 98 13.1 (189) (20.2) Other............................ 23,538 19,967 21,775 3,571 17.9 (1,808) (8.3) -------- -------- -------- -------- ------- Subtotal..................... 467,639 440,386 397,927 27,253 6.2 42,459 10.7 Gain on sale of merchant processing..................... 22,821 22,821 Securities gains (losses)........ 679 66 (5,730) 613 5,796 -------- -------- -------- -------- ------- Total other operating revenue.................... $491,139 $440,452 $392,197 $ 50,687 11.5 $48,255 12.3 ======== ======== ======== ======== =======
Other operating revenue now represents 37.3% of Firstar's total taxable-equivalent revenues, an increase from 36.0% in 1996 and 34.4% in 1995. An industry measure of fee revenue prominence is the ratio of this revenue to average assets. During 1997 this ratio was 2.42% compared to 2.30% in 1996 and 2.18% in 1995. Firstar continues to remain in the top quartile of its peer group by this measure of fee revenue. Trust and investment management fees are the single largest source of fee revenue for the company, contributing $174.9 million, or 37% of total other operating revenue. Trust fees rose by 18.2% in 1997 as compared with the 10.2% increase in 1996. The general rise in the market value of assets contributed to the growth achieved in both years. In addition, expanded services are being offered through Firstar's banking network and additional marketing efforts are also being directed to institutional investors beyond the Midwest producing a net growth in account relationships. Assets under management increased by 15.5% during 1997 to a level of $25.5 billion which follows the 22.5% increase during 1996. Assets held in custody accounts were $91.1 billion at year-end 1997, a 30.0% increase from last year. Mutual fund services, where Firstar provides custody and accounting duties have been expanding steadily. Firstar is now the sixth largest third party transfer agent in the country with over 300 mutual fund accounts and 1.3 million individual accounts. Over 20% of total trust and investment management fees received by Firstar comes from this business activity. The increased volatility of equity markets and interest rates has had a significant effect on trust and investment management fees and future revenue levels could likewise be influenced by these factors. 10 12 Service fees on deposit accounts decreased by 4.9% in 1997 to a level of $87.5 million. This reduction was in part due to declines in certain consumer deposit accounts caused by Firstar's new deposit products introduced throughout 1997 and a higher earnings credit on commercial analyzed deposits. The standardization and reduction of consumer deposit products across Firstar's market regions has increased operational efficiencies, but the new pricing structures have resulted in some customers closing their accounts. During 1996, service charges on deposit account increased 12.4% due in part to higher commercial analyzed service charges and revenue from newly acquired banks. Credit card service revenues are the third largest source of fee revenue and totaled $71.0 million in 1997, an increase of 1.6% over 1996. The formation of the joint venture to process merchant activity reduced merchant fee revenue in the fourth quarter of 1997 by $3.0 million from the amount realized in the same period one year ago. Excluding merchant processing, credit card revenues were up 10.2% in 1997. Firstar expects that future revenue from merchant processing will also run at lower levels; however the impact on net income is not expected to be material due to a reduction in expenses that supported this activity. Over the longer term, the joint venture will benefit Firstar through access to state of the art processing technology and overall net contributions to earnings. The growth in credit card revenue during 1996 was 12.6%. Firstar services 608,000 cardholders and provides credit card programs to more than 800 financial institution. This customer base, which covers the upper Midwest and includes Wisconsin, Iowa, Illinois, Minnesota, Upper Michigan, Nebraska, Montana and the Dakotas, provides a market for the sale and expansion of other financial products. Revenue from mortgage origination activity rose 31.2% to a level of $34.2 million in 1997 which compares to a 64.5% increase in 1996. A gain of $1.4 million on the sale of portfolio mortgages was realized in 1997 and contributed to the higher revenues. Of more significance was the increased loan origination volumes during this three year period. Originations totaled $1.9 billion in 1997, $1.7 billion in 1996, and $1.4 billion in 1995. Loan origination volumes have increased with the overall reduction in interest rate levels during the past two years and the addition of new mortgage origination locations. Particularly, higher volumes were experienced during the latter half of 1997 and have continued into early 1998 with the current low interest rates available to borrowers. Mortgage loan servicing revenues declined in 1997 by 45.1% to a level of $12.6 million. Mortgage service contracts were sold in 1997 with a loss of $239 thousand compared with gains realized in both 1996 and 1995 of $7.1 million. The gains realized in 1995 and 1996 resulted from the sale of servicing rights which did not have a capitalized asset value. The reduced gains, along with the lower volume of mortgage loans serviced for others, reduced servicing revenue. Mortgage loans serviced for others were $3.1 billion at the end of 1997 compared with $3.2 billion a year earlier. Data processing fee income increased by 2.8% in 1997 following an 8.5% increase in the previous year. One-half of the increase for 1996 was attributable to an early buyout by a customer who was acquired by another bank. A shrinking customer base due to continuing bank consolidations through mergers or acquisitions and conversions by smaller community banks to in-house data processing systems have put pressure on revenue increases over the past several years. Intense pricing competition has also occurred due to the shrinking market for sales and has affected revenue levels through pricing changes and some loss of customers. Fee revenue in this business should remain under pressure in coming years. Securities losses of $5.7 million were realized in 1995. These losses were generated by the partial liquidation of a merged bank's portfolio to bring them in line with Firstar's investment policies. As mentioned previously, Firstar entered into a joint venture with NOVA Information Systems, Inc. and established Elan Merchant Services, LLC in the fourth quarter of 1997. The new company provides credit card processing services to merchants. Firstar contributed its existing payment processing contracts to the company for a 49% interest in the venture. NOVA provides the technological support. Firstar recorded a $22.8 million gain on the transaction in the fourth quarter of 1997. The remaining sources of other operating revenue are derived from a wide range of services and collectively totaled $67.4 million in 1997, $61.9 million in 1996 and $63.3 million in 1995. A gain on the sale of a payroll processing operation of $2.1 million was realized in 1995. 11 13 OTHER OPERATING EXPENSES Total operating expenses increased 4.5% to $744.0 million in 1997, excluding certain restructuring charges and other expenses incurred in 1996. Operating expenses rose by 0.2% in 1996 on a comparable basis. Information on the components of other operating expense is shown in Table 4. TABLE 4 ANALYSIS OF OTHER OPERATING EXPENSE
YEARS ENDED DECEMBER 31 1997 VS 1996 1996 VS 1995 ------------------------------ ------------------ ------------------ 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- ------- -------- ------- (thousands of dollars) Salaries.......................... $333,866 $320,239 $323,163 $ 13,627 4.3% $ (2,924) (.9)% Employee benefits................. 65,836 71,277 72,198 (5,441) (7.6) (921) (1.3) -------- -------- -------- -------- -------- Total personnel expense....... 399,702 391,516 395,361 8,186 2.1 (3,845) (1.0) Equipment expense................. 69,574 63,197 56,282 6,377 10.1 6,915 12.3 Net occupancy expense............. 63,232 64,235 57,992 (1,003) (1.6) 6,243 10.8 Business development.............. 30,415 27,540 29,413 2,875 10.4 (1,873) (6.4) Stationery and supplies........... 22,034 24,696 21,284 (2,662) (10.8) 3,412 16.0 Professional fees................. 27,412 22,244 20,491 5,168 23.2 1,753 8.6 Information processing expense.... 23,493 20,840 21,918 2,653 12.7 (1,078) (4.9) Delivery.......................... 21,091 19,497 19,192 1,594 8.2 305 1.6 Amortization of intangibles....... 14,987 15,321 11,068 (334) (2.2) 4,253 38.4 Processing and other losses....... 11,951 7,997 7,562 3,954 49.4 435 5.8 Wire communication................ 9,815 9,787 9,836 28 .3 (49) (.5) Employee education/recruiting/ relocation...................... 9,597 6,793 9,061 2,804 41.3 (2,268) (25.0) Commissions and service fees...... 5,673 6,246 5,799 (573) (9.2) 447 7.7 Bank processing fees.............. 7,392 5,926 5,707 1,466 24.7 219 3.8 Credit card assessment fees....... 5,904 5,890 5,011 14 .2 879 17.5 Published information............. 3,125 2,296 2,277 829 36.1 19 0.8 Amortization of loan servicing rights.......................... 2,527 2,573 1,641 (46) (1.8) 932 56.8 F.D.I.C. insurance................ 2,480 2,282 16,531 198 8.7 (14,249) (86.2) Insurance......................... 1,291 1,766 1,739 (475) (26.9) 27 1.6 Net foreclosed assets (income) expense......................... (995) 349 (281) (1,344) 630 Other............................. 13,318 11,235 13,087 2,083 18.5 (1,852) (14.2) -------- -------- -------- -------- -------- Subtotal...................... 744,018 712,226 710,971 31,792 4.5 1,255 .2 Restructuring expense............. 53,267 23,151 (53,267) 30,116 SAIF assessments.................. 7,837 (7,837) 7,837 -------- -------- -------- -------- -------- Total other operating expense..................... $744,018 $773,330 $734,122 $(29,312) (3.8) $ 39,208 5.3 ======== ======== ======== ======== ========
Personnel costs, which include salaries and fringe benefits, are the largest component of operating expenses, representing more than one-half of operating costs. This expense increased by 2.1% in 1997 following a decline of 1.0% during 1996. Full time equivalent personnel headcount was 7,755 on December 31, 1997, down from 8,367 at the end of 1996 and 9,263 at the end of 1995. Staff reductions have occurred under the corporate wide restructuring program which started in the third quarter of 1995 and concluded in mid 1997. Salary expense rose by 4.3% in 1997 despite the reduced FTE headcount due to increases in temporary staffing costs, higher cost of variable pay programs, and normal salary increases for all employees. Increased temporary staffing has occurred as these resources are dedicated to implement technology related enhancements and to staff operations areas of the company. Salary expense declined by 0.9% in 1996 with the major portion of the staff reductions occurring in that year. Higher levels of temporary staffing was also a factor in 1996. Fringe benefits declined by 7.6% in 1997 and by 1.3% in 1996. Lower pension and post retirement benefit costs were a factor in 1997 along with reduced staff levels in both years. 12 14 Equipment expense increased by 10.1% in 1997 compared with 12.3% in 1996. Firstar continues to invest in upgraded data processing equipment, ensuring that its data processing capabilities are up-to-date in order to provide quality service in a cost effective manner. Net occupancy expense declined by 1.6% in 1997 compared with a 10.8% increase in 1996. Occupancy expense has been reduced in recent years by the amortization of a deferred gain on the sale of a building. This amortization was $6.8 million in 1997 and $6.2 million in both 1996 and 1995. The amortization period ended in 1997 and, accordingly, future years' occupancy expense will be higher as a result. Business development expense rose by 10.4% in 1997 as compared to an unrepresentative lower level in 1996. Increased focus on customer development activities was implemented in 1997 and includes a new corporate branding campaign. Professional fees increased by 23.2% in 1997 as outside consultants have been engaged to help implement various process improvement programs. Processing and fraud losses have increased during the last two years driven by both increases in activity volumes in the trust area and some one-time losses incurred through the centralization of various operational functions. FDIC insurance is an uncontrollable cost, with the premium established by the federal regulatory agency. The FDIC sets varying premium amounts based upon capitalization levels and soundness criteria. Firstar's capital strength has permitted payments at the lowest rate levels since the inception of the current system by the FDIC. The FDIC has substantially reduced premium requirements during the past three years as can be seen in the $14 million reduction in expense from 1995 to 1997. The amortization of intangibles includes amounts associated with goodwill, core deposit intangibles and purchased credit card premiums. Expenses increased during 1996 due to the creation of additional intangible assets with the bank acquisitions completed during the year. All other operating expenses, excluding the charges described below, increased by 6.3% in 1997 and 3.5% in 1996. During 1996 Firstar recorded a $53.3 million charge in connection with Firstar Forward, the corporate wide restructuring program which was announced by the company in January 1996. The charge included severance accruals of $27.1 million associated with staff reductions of approximately 1,500 people, fixed asset writedowns of $3.9 million, and other project costs of $22.3 million. The total charge consisted of $45.4 million in anticipated cash expenditures and $7.9 million of non-cash items. Substantially all of the cash payments have been made as of December 31, 1997. The Savings Association Insurance Fund(SAIF) charge of $7.8 million was recorded in 1996. This banking industry-wide SAIF assessment helped recapitalize the savings and loan deposit insurance fund. Firstar's SAIF assessment was based upon deposits that it acquired through several savings and loan acquisitions. During 1995 certain merger and restructuring charges were taken in connection with four bank acquisitions. Acquisition related restructuring charges totaling $23.2 million are included in other operating expenses. Included in these charges were $11.9 million of costs associated with the severance of approximately 500 employees, $4.9 million related with office closings and write-offs of unusable equipment, $2.5 million of professional fees and $3.9 million of other costs associated with mergers. The restructuring charge of $23.2 million consisted of $17.3 million in anticipated cash expenditures and $5.9 million on non-cash asset write-downs. All cash payments have been made as of the end of 1997. Firstar is implementing a program to insure that its computer systems are year 2000 compliant. This process involves modifying or replacing certain hardware and software maintained by Firstar as well as monitoring the progress of service providers to ensure that they are taking the appropriate action to solve their year 2000 issues. Year 2000 compliance does involve significant business risk to both Firstar and its correspondent customers to which it provides data processing. Firstar has completed assessment of its year 2000 issues and the required updates and testing are currently in progress. Firstar expects that the total cost of this process will approach $20 million. Approximately $4.1 million was expensed during 1997. Firstar plans to complete nearly all year 2000 work by the end of 1998. 13 15 A measure of the success in managing operating expense is expressed in the ratio of expense to revenue and is referred to as the efficiency ratio. The objective is to reduce this ratio through revenue growth, cost control or a combination of both. Excluding the restructuring charges and other expenses discussed above, this ratio was 59.3% in 1997, 58.2% in 1996 and 61.4% in 1995. PROVISIONS FOR LOAN LOSSES The provision for loan losses is used to cover actual loan losses and to adjust the size of the reserve relative to the amount and quality of loans. In determining the adequacy of the reserve, management considers the financial strength of borrowers, loan collateral, current and anticipated economic conditions and other factors. The 1997 provision for loan losses was $54.7 million, compared with $42.6 million in 1996 and $36.8 million in 1995. Increased charge-off levels, primarily in the consumer lending area, have been experienced during the past two years. Additionally during 1995, extra loan loss provisions of $13.6 million were taken to increase newly acquired banks' loan loss reserve levels to conform with Firstar's loan loss reserve policies. Exclusive of this factor, the loan loss provision increased by $19.5 million in 1996. A further discussion of loan charge-off trends is included under "Credit Risk Management". INCOME TAXES Income tax expense was $147.6 million in 1997, compared to $124.2 million in 1996 and $118.4 million in 1995. The effective tax rate was 33.3% in 1997, 33.2% in 1996 and 34.1% in 1995. The effective tax rate remained relatively level in 1997 as compared to 1996 due to a reduction in state tax expense which was offset by a favorable settlement of prior years' taxes in 1996. The effective tax rate declined in 1996 as compared to 1995 due to the favorable settlement of prior years' taxes in 1996 and a reduction in state income tax expense. BALANCE SHEET ANALYSIS Changes in the balance sheet of a financial institution reflect both the forces of the marketplace and the company's response to these conditions. Firstar's strategy in managing balance sheet growth is based upon the goals of enhancing soundness, optimizing revenues and providing a broad range of services for customers. Total assets at the end of 1997 were $19.8 billion, unchanged from a year earlier. Average total assets for 1997 were $19.3 billion, an increase of 0.9% over 1996. EARNING ASSETS Total earning assets were $17.8 billion at year-end 1997, representing a $193 million, or 1.1% increase from December 31, 1996. On an average basis, total earning assets were $17.6 billion in 1997 compared to $17.4 billion in 1996, an increase of 1.1%. Reductions in average investment securities were used in part to fund the increased average loan balances. Table 5 shows the distribution of average earning assets for the past three years. Total loans were $13.6 billion at December 31, 1997, an increase of $373 million, or 2.8% from a year earlier. Average loan balances for 1997 increased by $368 million, or 2.8%, to a level of $13.3 billion. Excluding the impact of a mid-year 1996 bank acquisition, average loans increased by 0.3% in 1997. The ratio of loans to earning assets increased to 75.5% from 74.3% in 1996. 14 16 TABLE 5 AVERAGE EARNING ASSETS
1997 1996 1995 ------------------- ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- --------- ------- (millions of dollars) Commercial and industrial............ $ 3,493.8 19.8% $ 3,228.9 18.6% $ 3,054.2 18.3% Commercial mortgage.................. 2,966.9 16.9 2,941.9 16.9 2,817.9 16.9 Other commercial..................... 1,036.4 5.9 992.8 5.7 966.2 5.8 --------- ------ --------- ------ --------- ------ Commercial loans................... 7,497.1 42.6 7,163.6 41.2 6,838.3 41.0 Credit card.......................... 668.2 3.8 615.9 3.5 554.7 3.3 Consumer mortgage.................... 2,516.2 14.3 2,727.5 15.7 2,617.8 15.7 Home equity.......................... 1,174.7 6.7 1,013.1 5.8 859.5 5.2 Other consumer....................... 1,434.1 8.1 1,402.3 8.1 1,421.4 8.5 --------- ------ --------- ------ --------- ------ Consumer loans..................... 5,793.2 32.9 5,758.8 33.1 5,453.4 32.7 --------- ------ --------- ------ --------- ------ Total loans........................ 13,290.3 75.5 12,922.4 74.3 12,291.7 73.7 Securities held to maturity.......... 2,327.5 13.2 2,323.1 13.3 3,927.7 23.5 Securities available for sale........ 1,854.5 10.6 2,046.4 11.7 267.6 1.6 Trading securities................... 2.2 10.1 .1 14.2 .1 Interest-bearing deposits with banks.............................. 14.0 .1 8.7 .1 15.7 .1 Federal funds sold and resale agreements......................... 108.6 .6 88.3 .5 173.5 1.0 --------- ------ --------- ------ --------- ------ Total.............................. $17,597.1 100.0% $17,399.0 100.0% $16,690.4 100.0% ========= ====== ========= ====== ========= ======
Commercial loans, which account for 57% of the loan portfolio, were $7.7 billion at the end of 1997, an increase of $409 million, or 5.6%, from December 31, 1996. On an average balance basis, commercial loans increased by $334 million, or 4.7%, to a level of $7.5 billion in 1997. Excluding the impact of the bank acquisition on average balances, commercial loans increased by just under 1.0% in 1997. The modest growth in commercial loan average balances was influenced by a general decline in loans outstanding in certain regions of the company during 1996. The year-end to year-end increase of 5.6% is more representative of current growth trends in the commercial lending area. Consumer loans, excluding residential mortgages, were $3.5 billion at December 31, 1997, an increase of $240 million, or 7.5% from a year earlier. Consumer loan average balances rose by $246 million, or 8.1% to a level of $3.3 billion in 1997. Again, excluding the impact of bank acquisitions, consumer loan average balances increased by 6.5%. Strong growth has been experienced in average balances of home equity loans, up 15.9%, and credit card loans, up 8.5%, in 1997. Consumer loan growth has exceeded 10% on an annualized basis in the last two quarters of 1997. Residential mortgage loans totaled $2.4 billion at December 31, 1997, a reduction of $276 million, or 10.4% from a year earlier. Average residential mortgages declined by 7.7% in 1997. The reduction was attributable to the normal amortization and prepayments. Firstar's strategy is to originate and sell mortgages into the secondary market and thereby reduce the amount of mortgages held on its balance sheet. Also, due to the relatively flat yield curve experienced in 1997, consumer preference was toward longer-term fixed rate secondary market products versus adjustable rate portfolio products. 15 17 The investment securities portfolio was reduced by $58 million to a level of $4.2 billion at December 31, 1997. Tables 6 and 7 show the maturity range and changing mix of the securities portfolio. The portfolio is classified into two categories: securities held to maturity and securities available for sale. Securities that the company has the positive intent and ability to hold to maturity are carried at amortized cost. The designation of securities as available for sale are carried at their fair values with unrealized gains and losses recorded as a component of stockholders' equity. During 1997, increased investments in mortgage backed securities and municipal securities were made in response to the more favorable interest rates available on these securities. Reductions in U.S. Treasury securities occurred as these maturing securities were reinvested in higher yielding investments and loans. The weighted average yield on the investment portfolio rose from 6.16% on December 31, 1996 to 6.57% on December 31, 1997. The average maturity of the portfolio was 3.6 years at the end of 1997, down from 3.8 years a year earlier. Short-term investments, which include interest-bearing deposits with banks, trading account securities, and federal funds sold and resale agreements, averaged $125 million during 1997, an increase of $18 million from 1996. TABLE 6 MATURITY RANGE AND AVERAGE YIELD OF SECURITIES
TOTAL DUE WITHIN FIVE TO TEN DECEMBER 31, ONE YEAR ONE TO FIVE YEARS YEARS AFTER TEN YEARS 1997 --------------- ----------------- --------------- --------------- ----------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- ---- ---------- ---- -------- ---- -------- ---- ---------- ---- (thousands of dollars) Securities held to maturity: Mortgage backed obligations of federal agencies............... $178,579 7.19% $ 510,636 7.19% $322,784 7.11% $127,318 6.38% $1,139,317 7.08% State and political subdivisions........... 146,798 6.72 617,934 7.01 483,400 7.43 58,423 7.35 1,306,555 7.15 Corporate debt........... 1,105 5.68 2,681 6.39 2,002 7.39 464 4.97 6,252 6.48 -------- ---------- -------- -------- ---------- Total................ $326,482 6.97 $1,131,251 7.09 $808,186 7.30 $186,205 6.68 $2,452,124 7.11 ======== ========== ======== ======== ========== Securities available for sale: U.S. Treasury and federal agencies............... $109,690 5.71% $1,342,877 6.69% $ 8,247 6.54% $ % $1,460,814 6.62% Mortgage backed obligations of federal agencies............... 12,430 6.31 39,702 6.35 36,420 6.27 15,284 6.17 103,836 6.29 State and political subdivisions........... 3,217 8.18 2,435 6.41 521 3.53 6,173 7.09 Money market mutual funds.................. 38,773 5.00 38,773 5.00 -------- ---------- -------- -------- ---------- Total................ $164,110 5.64 $1,385,014 6.68 $ 45,188 6.29 $ 15,284 6.17 1,609,596 6.56 ======== ========== ======== ======== Equity securities........ 98,010 6.74 ---------- $1,707,606 6.57 ==========
- --------------- Rates are calculated on a taxable-equivalent basis using a tax rate of 35%. The maturity information on mortgage-backed obligations is based on anticipated payments. 16 18 TABLE 7 SECURITIES
DECEMBER 31 ------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (thousands of dollars) Securities held to maturity: U.S. Treasury and federal agencies......................... $ $ 756 $ 2,146 $1,612,188 $1,510,216 Mortgage backed obligations of federal agencies................. 1,139,317 1,092,528 1,266,458 867,990 361,784 State and political subdivisions... 1,306,555 1,147,387 1,141,987 1,069,755 1,036,236 Corporate debt..................... 6,252 10,027 15,590 79,891 108,429 Other.............................. 78 849 1,139 1,118 ---------- ---------- ---------- ---------- ---------- Total......................... $2,452,124 $2,250,776 $2,427,030 $3,630,963 $3,017,783 ========== ========== ========== ========== ========== Securities available for sale: U.S. Treasury and federal agencies......................... $1,460,814 $1,800,798 $1,917,725 $ 202,435 $ 79,200 Mortgage backed obligations of federal agencies................. 103,836 8,481 9,787 12,060 93,427 State and political subdivisions... 6,173 7,626 7,831 7,720 33,231 Corporate debt..................... 1,196 504 3,587 Equity securities.................. 98,010 111,315 92,767 57,621 32,122 Money market mutual funds.......... 38,773 38,370 18,542 62,313 100,402 ---------- ---------- ---------- ---------- ---------- Total......................... $1,707,606 $1,966,590 $2,047,848 $ 342,653 $ 341,969 ========== ========== ========== ========== ==========
FUND SOURCES Total deposits were $14.7 billion at December 31, 1997, a reduction of $500 million, or 3.3%, from the year earlier level. Average deposits totaled $14.3 billion during 1997, essentially level with the 1996 level. Excluding deposits derived from bank acquisitions, average deposit balances have declined by $343 million, or 2.3%, from 1996. Table 8 shows the composition of Firstar's deposits and other fund sources. TABLE 8 AVERAGE FUND SOURCES
1997 1996 1995 ------------------- ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- --------- ------- (millions of dollars) Transaction accounts.................. $ 4,785.5 27.4% $ 4,727.4 27.3% $ 4,399.0 26.8% Savings passbook...................... 1,441.2 8.3 1,599.1 9.3 1,731.3 10.6 Money market accounts................. 2,785.7 16.0 2,577.5 14.9 2,110.5 12.9 Certificates of deposit............... 4,419.5 25.4 4,519.9 26.1 4,384.0 26.7 --------- ----- --------- ----- --------- ----- Total core deposits.............. 13,431.9 77.1 13,423.9 77.6 12,624.8 77.0 Other deposits........................ 856.2 4.9 872.4 5.1 877.6 5.4 --------- ----- --------- ----- --------- ----- Total deposits................... 14,288.1 82.0 14,296.3 82.7 13,502.4 82.4 Short-term borrowed funds............. 2,397.3 13.7 2,357.8 13.6 2,275.8 13.9 Long-term debt........................ 746.5 4.3 641.1 3.7 610.9 3.7 --------- ----- --------- ----- --------- ----- Total............................ $17,431.9 100.0% $17,295.2 100.0% $16,389.1 100.0% ========= ===== ========= ===== ========= =====
17 19 Core deposits, which include transaction accounts and other stable time deposits, are Firstar's prime source of funding and totaled $14.0 billion at December 31, 1997, a reduction of $326 million from a year earlier. These deposits averaged $13.4 billion in 1997, unchanged from the 1996 level. Excluding bank acquisitions, average core deposits declined by 2.4% in 1997. Shifts in the mix of core deposits have been seen with movement from lower yielding passbook accounts and checking accounts to higher rate money market accounts and certificates of deposit. Core deposits represented 77% of average fund sources in 1997, consistent with the prior two years. Increased competition for consumer deposits; alternative investments such as mutual funds; and heightened consumer sensitivity to interest rates have limited Firstar's core deposit growth. An increased reliance was placed on purchased fund sources to support earning asset growth. Total purchased funds averaged $4.0 billion an increase of $129 million, or 3.3%, over 1996. Purchased funds represented 23% of total fund sources in 1997. Other time deposits, primarily certificates of deposit over $100,000, were reduced to a level at $856 million. Short-term borrowed funds were increased by $40 million to an average level of $2.4 billion and long-term debt was increased by $105 million to an average level of $747 million. Continued reliance on these alternative funding sources will be necessary into the future. During the fourth quarter of 1997, Firstar put in place a bank note program. Under this program, certain subsidiary banks may issue from time to time up to $1.5 billion of debt outstanding at any time, with maturities ranging from seven days to thirty years. At December 31, 1997, $250 million was outstanding under this program. CREDIT RISK MANAGEMENT Emphasis on credit quality standards and diversification of risk have been key strategies of Firstar. The benefits of this program are seen in the reductions in nonperforming assets and overall credit quality achieved during the past several years. During this period, nonperforming assets as a percentage of loans and foreclosed assets have declined from over 3% in 1987 to .51% at the end of 1997. The current nonperforming asset level represents a historically low level for Firstar. Nonperforming assets consist of loans that are not accruing interest, loans with renegotiated credit terms and collateral acquired in settlement of nonperforming loans. The composition of these assets is shown in Table 9. These nonperforming assets totaled $70.4 million at December 31, 1997, and represented .52% of Firstar's $13.6 billion of loans and foreclosed assets. This is a $24.7 million, or 26.0%, decrease from a year earlier. Commercial mortgage related nonperforming assets totaled $26.8 million at the end of 1997, a reduction of $13.3 million from a year earlier. These nonperforming assets represented .91% of their loan category, a reduction from 1.34% a year earlier. Firstar experienced an increase in real estate related nonperforming assets several years ago, although to a much lesser extent than many other financial institutions. These assets stood at $84.0 million at the end of 1991 and represented 4.20% of their respective loan category. As can be seen in Table 9, significant progress has been made in reducing this category of nonperforming assets and the overall credit quality is in line with the commercial loan portfolio in general. The remaining commercial loan portfolio had nonperforming assets of $26.7 million and a ratio of .56% of outstanding loans compared to .83% a year earlier. This level is reflective of the overall financial strength of Firstar's commercial borrowers. 18 20 TABLE 9 NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31 ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (thousands of dollars) Nonaccrual loans: Commercial................................... $26,739 $35,757 $26,239 $29,710 $24,591 Commercial mortgage.......................... 20,291 30,128 46,959 28,993 30,963 Consumer..................................... 16,828 19,193 16,187 9,831 10,881 ------- ------- ------- ------- ------- Total nonaccrual loans.................... 63,858 85,078 89,385 68,534 66,435 Renegotiated loans: Commercial................................... 40 71 823 Commercial mortgage.......................... 263 1,028 1,336 674 697 ------- ------- ------- ------- ------- Total renegotiated loans.................. 263 1,028 1,376 745 1,520 Foreclosed assets.............................. 6,244 8,926 7,141 13,282 19,881 ------- ------- ------- ------- ------- Total nonperforming assets................ $70,365 $95,032 $97,902 $82,561 $87,836 ======= ======= ======= ======= ======= Nonperforming assets as a percentage of: Loans and foreclosed assets.................. .52% .72% .77% .69% .81% Total assets................................. .35 .48 .51 .46 .54 Loans past due 90 days: Commercial................................... $21,774 $24,368 $21,039 $ 7,432 $ 7,453 Commercial mortgage.......................... 15,626 27,352 9,287 3,760 4,441 Consumer..................................... 20,228 22,938 19,084 15,709 13,758 ------- ------- ------- ------- ------- Total loans past due 90 days.............. $57,628 $74,658 $49,410 $26,901 $25,652 ======= ======= ======= ======= =======
Nonperforming consumer loans have been at higher levels during the past three years than previously experienced. Total consumer nonperforming loans were $16.8 million at December 31, 1997, or .29% of outstanding loans compared to $19.2 million, or .33% of outstanding consumer loans, a year earlier. While consumer nonperforming loans remain at a manageable level, the increase from the earlier levels reflects the impact of consumers taking on increased debt burdens in the past several years and the resulting increased level of personal bankruptcies. The effect of this trend can be seen in the increased consumer loan charge-off levels during the past two years. Loans ninety days or more past due on December 31, 1997, totaled $57.6 million, compared with $74.7 million a year earlier. These loans are on a full accrual basis and are judged by management to be collectible in full. In addition, Firstar had $38 million of loans at December 31, 1997, on which interest is accruing; however, because of existing economic conditions or circumstances of the borrower, doubt exists as to the ability of the borrower to comply with the present loan terms. Additional indicators of asset quality can be found in the geographic distribution, industry diversification and type of lending represented in the loan portfolio. Credit policies have been changed over the past several years to reduce vulnerability to potential adverse economic trends. Marketing efforts have been directed to Firstar's primary market segments which are consumer, small business and middle market customers in communities where Firstar banks are located and in contiguous states. This emphasis on smaller, locally based credits brings with it a diversified group of customers without any significant industry concentration. Firstar does not participate in any significant syndicated lending. 19 21 The reserve for loan losses is reviewed and adjusted quarterly, subject to evaluation of economic conditions and expectations, historical experience and risk ratings of individual loans. Table 10 shows the activity affecting the reserve for loan losses for the last five years. The reserve totaled $218.9 million at the end of 1997, compared with $213.1 million a year earlier. At December 31, 1997, the ratio of the reserve for loan losses to loans was 1.61% and the coverage of nonperforming assets was 311%. This compares with a reserve for loan losses to loans of 1.62% and to nonperforming assets of 224% a year earlier. Total net charge-offs of $48.9 million represented .37% of average loans during 1997, up from the .30% level experienced in 1996. TABLE 10 RESERVE FOR LOAN LOSSES
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (thousands of dollars) Balance at beginning of year.............. $213,138 $195,283 $190,552 $189,714 $183,251 Loan charge-offs: Commercial.............................. 15,310 13,328 13,417 21,300 15,090 Commercial mortgage..................... 2,999 3,696 7,246 3,374 4,611 Consumer................................ 21,306 13,099 13,915 8,040 6,763 Consumer mortgage....................... 730 2,814 1,671 766 1,301 Credit card............................. 30,398 30,271 16,614 14,248 15,073 -------- -------- -------- -------- -------- Total charge-offs.................... 70,743 63,208 52,863 47,728 42,838 Loan recoveries: Commercial.............................. 5,259 7,773 7,470 7,886 7,194 Commercial mortgage..................... 2,618 3,287 1,782 2,764 2,587 Consumer................................ 6,804 6,098 4,864 4,190 3,539 Consumer mortgage....................... 119 1,907 434 741 291 Credit card............................. 7,008 5,385 5,423 4,380 4,121 -------- -------- -------- -------- -------- Total recoveries..................... 21,808 24,450 19,973 19,961 17,732 -------- -------- -------- -------- -------- Net loan charge-offs...................... 48,935 38,758 32,890 27,767 25,106 Provision for loan losses................. 54,658 42,647 36,756 23,891 29,090 Reserves of acquired banks................ 13,966 865 4,714 2,479 -------- -------- -------- -------- -------- Total balance at end of year......... $218,861 $213,138 $195,283 $190,552 $189,714 ======== ======== ======== ======== ======== Reserve to year-end loans................. 1.61% 1.62% 1.55% 1.60% 1.75% Net charge-offs to average loans: Commercial.............................. .22% .13% .15% .37% .26% Commercial mortgage..................... .01 .01 .19 .02 .09 Total commercial loans............... .14 .08 .17 .22 .18 Consumer................................ .56 .29 .40 .27 .26 Consumer mortgage....................... .02 .03 .04 .04 Credit card............................. 3.50 4.04 2.02 1.93 2.18 Total consumer loans................. .66 .57 .39 .28 .34 Total loans.......................... .37 .30 .27 .25 .25
As a regional financial institution, Firstar lends to a diversified group of Midwestern borrowers and, to a much lesser degree, to national companies with Midwest operations. Net charge-offs in this commercial segment of the portfolio were $10.1 million, or .22% of average loans. This is up from the $5.6 million of net charge-offs in 1996, representing .13% of loans. While charge-offs in this segment of the portfolio have risen in 1997, the increase was for the most part attributable to two credits. Future charge-offs in this area should trend with the overall economic conditions of the markets that Firstar serves. 20 22 Commercial mortgage loan net charge-offs were under one-half million dollars in both 1997 and 1996 and represented only .01% of average commercial mortgage loans. Future charge-off levels in this area should follow the overall experience level of the other commercial lending areas of the company. Consumer lending includes loans to individuals in communities served by Firstar's banks. These loans include both open-ended credit arrangements subject to an overall limit per customer, such as credit card and home equity loans, and closed-end loans subject to specific contractual payment schedules, such as installment loans and residential mortgages. Consumer net charge-offs were $38.5 million in 1997, compared with $32.8 million in 1996 and $21.5 million in 1995. Total consumer net charge-offs of .66% in 1997 compares with .57% and .39% in 1996 and 1995, respectively. Consumer delinquency rates and bankruptcies have increased industry wide over the past three years. Increased consumer charge-offs have been the result of this trend. Credit card losses were $23.4 million in 1997 compared to $24.9 million in 1996 and $11.2 million in 1995. This represented charge-off rates of 3.50%, 4.04%, and 2.02% in 1997, 1996, and 1995, respectively. While high compared to Firstar's historical experience, these credit card charge-offs are well below national averages. Other consumer lending in the form of home equity loans and installment debt has seen increased charge-off levels in the past three years, but at a significantly lower rate than credit cards. These loss levels were at .56% of outstanding loans in 1997 compared to .29% in 1996 and .40% in 1995. Losses on consumer mortgages have been and should remain nominal. LIQUIDITY AND MARKET RISK MANAGEMENT Two objectives of Firstar's asset and liability management strategy include the maintenance of appropriate liquidity and management of interest rate risk. Liquidity management aligns sources and uses of funds to meet the cash flow requirements of customers and Firstar. Interest rate risk management seeks to generate growth in net interest revenue and manage exposure to risks associated with interest rate movements and provide for acceptable and predictable results. Although conceptually distinct, liquidity and interest rate sensitivity must be managed together since action taken with respect to one often influences the other. Asset liquidity is generally provided by short-term investments such as interest bearing deposits with other banks, federal funds sold and repurchase agreements. These investments totaled $90 million at December 31, 1997. Securities that have been designated as available for sale were $1.7 billion at the end of 1997 and can be sold to meet liquidity needs. The remaining securities portfolio, which is held to maturity, provides liquidity through scheduled maturities and the ability to use these securities in repurchase agreements. The requirement of liquidity is diminished by the predominance of core deposits, which account for 77% of Firstar's funding sources. Stable core deposits do not require significant amounts of liquidity to meet the net withdrawal demands of customers on a short or intermediate term basis. Other sources of liquidity are short-term borrowed funds and commercial time deposits which totaled $2.8 billion at the end of 1997. Firstar's ability to refinance maturing amounts and, when necessary, increase this funding base is a significant factor in its liquidity management. Additionally, Firstar has access to capital markets through the issuance of long-term debt or other securities. In December 1996, Firstar issued $150 million of Trust Capital Securities. In December 1997. Firstar Bank Milwaukee, N.A. issued $250 million of five year senior bank notes. Firstar also has in place a $125 million revolving credit facility which was unused at December 31, 1997. 21 23 TABLE 11 COMPOSITION OF LOANS
DECEMBER 31 ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (thousands of dollars) Commercial and industrial........ $ 3,644,721 $ 3,366,016 $ 3,078,148 $ 2,944,565 $ 2,641,967 Commercial construction.......... 466,934 418,040 387,378 329,717 262,476 Commercial mortgage.............. 2,485,034 2,574,376 2,462,010 2,472,042 2,166,390 Other commercial................. 1,123,824 953,145 1,038,677 963,883 925,370 ----------- ----------- ----------- ----------- ----------- Commercial loans............... 7,720,513 7,311,577 6,966,213 6,710,207 5,996,203 Credit card...................... 736,484 684,619 619,868 575,278 547,769 Consumer mortgage................ 2,384,406 2,660,290 2,722,531 2,382,857 2,268,470 Home equity...................... 1,271,966 1,121,580 935,907 767,540 645,002 Other consumer................... 1,455,417 1,417,468 1,387,994 1,469,946 1,367,377 ----------- ----------- ----------- ----------- ----------- Consumer loans................. 5,848,273 5,883,957 5,666,300 5,195,621 4,828,618 ----------- ----------- ----------- ----------- ----------- Total loans.................... $13,568,786 $13,195,534 $12,632,513 $11,905,828 $10,824,821 =========== =========== =========== =========== ===========
TABLE 12 MATURITY DISTRIBUTION OF LOANS
TOTAL DUE WITHIN ONE TO AFTER DECEMBER 31, ONE YEAR FIVE YEARS FIVE YEARS 1997 ---------- ----------- ---------- ------------ (thousands of dollars) Commercial............................... $3,201,210 $3,697,161 $ 822,142 $ 7,720,513 Consumer................................. 2,087,119 2,241,050 1,520,104 5,848,273 ---------- ---------- ---------- ----------- Total.................................. $5,288,329 $5,938,211 $2,342,246 $13,568,786 ========== ========== ========== ===========
- ------------ The maturity is based upon contractual terms, however, Firstar may extend the maturity at prevailing rates and terms in the normal course of business. Of the above loans due after one year, $5,021,977,000 have predetermined interest rates and $3,258,480,000 have floating or adjustable interest rates. TABLE 13 MATURITY RANGE OF TIME DEPOSITS
TOTAL DUE WITHIN THREE TO SIX TO AFTER DECEMBER 31, THREE MONTHS SIX MONTHS TWELVE MONTHS TWELVE MONTHS 1997 ------------ ---------- ------------- ------------- ------------ (thousands of dollars) Certificates of deposit of $100,000 or more................ $388,655 $221,759 $124,759 $112,497 $847,670 ======== ======== ======== ======== ========
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Firstar's market risk is composed primarily of interest rate risk. Firstar's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Corporation and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Audit-Examining Committee. Firstar's primary purpose is to manage exposure to risks associated with interest rate movements and provide for acceptable and predictable results. Firstar utilizes an investment portfolio as well as off-balance sheet instruments to manage the interest rate risk naturally created through its business activities. The 22 24 components of interest rate risk which are actively measured and managed include; repricing risk, basis risk, option risk and the risk of non-parallel shifts in the yield curve. Interest rate risk is measured in two ways to capture both near-term and long-term effects of rate volatility; earnings simulation modeling and net present value estimation. Earnings Simulation -- The earnings simulation model forecasts earnings over each of the next two years under a variety of scenarios that incorporate changes in the shape of the yield curve, changes in interest rate relationships and changes in the direction of rates. Management evaluates the effects on income of these various rate scenarios against earnings in a stable rate environment. The most recent earnings simulation projects net income would increase by approximately 2.6% of stable-rate net income if rates gradually fall by 150 basis points over the next year. It projects a decrease of approximately 2.3% if rates rise gradually by 150 basis points. Both simulations are well within the policy of limiting changes to 5% of net income. Net income is projected to fall below the level associated with stable rates if the yield curve flattens. Earnings are also affected by the relationship between different interest rates. For example, a 50 basis point narrower spread between the prime rate and the federal funds rate is projected to cause a 3.8% reduction in net income over a 1 year period. This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time. Loan and deposit growth assumptions as well as assumptions used to project rates for new loans and deposits are derived from historical analysis and management's outlook. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Noncontractual deposit growth rates and pricing are assumed to follow historical patterns. Net Present Value -- The Net Present Value (NPV) is defined as the discounted present value of all future expected cash flows of currently held assets, liabilities and off-balance sheet items. Interest rate risk analysis using NPV is an indication of the longer term repricing risk and options risk embedded in the balance sheet. At year-end 1997, a 100 basis point immediate increase in rates is estimated to reduce NPV by 2.2%. Alternatively, NPV is projected to increase by .7% if a 100 basis point decrease in rates occurs. Management considers this an acceptable risk profile commensurate with its core business activities. As with earnings simulation, assumptions about the timing and variability of balance sheet cash flows are critical in NPV analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are applied consistently across the different rate risk measures. CAPITAL Total stockholders' equity was $1.7 billion at the end of 1997 and represented 8.53% of total assets at the end of 1997 compared to 8.62% a year earlier. The market price of a share of Firstar common stock closed the year at $42.44, a 62% increase from a year earlier. Total market capitalization at December 31, 1997 was over $6 billion. Firstar's capital management plan strives to match longer term capital needs with maintaining sound capital levels. It also seeks to provide to shareholders a total return consistent with the best performing companies. Firstar has taken actions with respect to this capital management strategy. In December 1996 Firstar issued, through Firstar Capital Trust I, $150 million of Trust Capital Securities. These securities qualify as tier I capital and are mandatorily redeemable in 30 years. The capital securities are similar to preferred stock but have the tax advantage of deductibility of the cash distributions. A two for one stock split was announced in January 1997 with the issuance of the shares occurring February 15, 1997. All per share data included in these financial statements have been restated to give effect to this stock split. A stock repurchase program was announced in January 1997. The program authorized the buyback and retirement of up to 12 million shares of common stock. In addition, Firstar repurchases common shares for reissuance to fund employee stock plans. Firstar has sought to manage capital levels through stock 23 25 repurchases. These shares have been either retired or reserved for issuance in acquisitions or for employee stock plans. Firstar repurchased 7.1 million shares in 1997, 8.1 million shares in 1996 and 9.6 million shares in 1995 at a cost of $210 million, $190 million and $173 million in each respective year. Of these shares, 11.2 million were retired, 8.6 million were reissued in acquisitions, 4.3 million were reissued for employee stock plans, and 700 thousand were reissued in preferred stock conversions. Currently, Firstar has suspended its stock buyback program in order to build its tier 1 capital level back to the top quartile of its peer group of $10 to $25 billion banking companies and only anticipates repurchasing shares for reissuance under employee stock plans and for preferred stock conversions. Dividends paid to common stockholders totaled $119.4 million, or $.82 per share, an 11% increase over 1996. This represented a 40% payout of net income for 1997. It is Firstar's target to maintain a dividend payout level approximately at or above the median of its peer group which approximates 35%. Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and control of the industry. These standards relate capital to level of risk by assigning different weightings to assets and certain off-balance sheet activity. Capital is measured by two risk-based ratios: tier I capital and total capital, which includes tier II capital. The rules require that companies have minimum ratios of 4% and 8% for tier I and total capital, respectively. As of December 31, 1997, Firstar had tier I capital of 10.21% and total capital of 11.71%, significantly exceeding regulatory minimum standards. Firstar is considered "well capitalized" by its regulatory agency. The components of these capital levels are shown in Table 14. Additionally, a tier I leverage ratio is also used by bank regulators as another measure of capital strength. This ratio compares tier I capital to total reported assets reduced by goodwill. The regulatory minimum level of this ratio is 4%, and it acts as a constraint on the degree to which a company can leverage its equity base. Firstar's tier I leverage ratio was 8.50% at December 31, 1997. TABLE 14 CAPITAL COMPONENTS AND RATIOS
DECEMBER 31 ----------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (thousands of dollars) Risk-based capital: Stockholders' equity............................ $ 1,693,101 $ 1,704,047 $ 1,524,820 Trust capital securities........................ 150,000 150,000 Adjustment for unrealized gains on securities available for sale........................... (22,624) (19,191) (34,127) Minority interest in subsidiaries............... 2,913 2,384 3,171 Less disallowed intangibles..................... (188,466) (200,540) (107,298) ----------- ----------- ----------- Total tier I capital......................... 1,634,924 1,636,700 1,386,566 Allowable reserve for loan losses............... 200,438 175,725 167,564 Allowable long-term debt........................ 40,000 75,668 111,336 ----------- ----------- ----------- Total tier II capital........................ 240,438 251,393 278,900 ----------- ----------- ----------- Total capital................................ $ 1,875,362 $ 1,888,093 $ 1,665,466 =========== =========== =========== Risk-adjusted assets.............................. $16,016,627 $14,020,587 $13,377,391 Tier I capital to risk-adjusted assets............ 10.21% 11.67% 10.36% Total capital to risk-adjusted assets............. 11.71 13.47 12.45 Tier I leverage ratio............................. 8.50 8.55 7.52
24 26 [KPMG Peat Marwick LLP Logo] INDEPENDENT AUDITORS' REPORT The Board of Directors Firstar Corporation: We have audited the accompanying consolidated balance sheets of Firstar Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Firstar Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. [KPMG Peat Marwick LLP Logo] Milwaukee, Wisconsin January 14, 1998 25 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 AVERAGE BALANCES ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (thousands of dollars) ASSETS Cash and due from banks................... $ 1,254,289 $ 1,449,094 $ 998,381 $ 1,044,706 Interest-bearing deposits with banks...... 5,249 6,349 14,030 8,743 Federal funds sold and resale agreements.............................. 82,589 192,965 108,655 88,319 Trading securities........................ 2,293 13,489 2,238 10,140 Securities held to maturity............... 2,452,124 2,250,776 2,327,482 2,323,050 Securities available for sale............. 1,707,606 1,966,590 1,854,480 2,046,402 Loans..................................... 13,568,786 13,195,534 13,290,260 12,922,374 Reserve for loan losses................... (218,861) (213,138) (214,026) (206,913) ----------- ----------- ----------- ----------- Loans-net............................... 13,349,925 12,982,396 13,076,234 12,715,461 Bank premises and equipment............... 368,083 368,699 366,862 356,368 Customer acceptance liability............. 7,360 14,281 12,504 17,273 Other assets.............................. 614,167 522,781 562,683 548,367 ----------- ----------- ----------- ----------- Total assets............................ $19,843,685 $19,767,420 $19,323,549 $19,158,829 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand.................................. $ 3,607,659 $ 3,880,610 $ 3,186,828 $ 3,174,569 Interest-bearing demand................. 1,756,520 1,687,885 1,598,625 1,552,786 Money market accounts................... 2,947,683 2,744,751 2,785,697 2,577,477 Savings passbook........................ 1,339,038 1,518,033 1,441,221 1,599,075 Certificates of deposit................. 5,063,754 5,382,918 5,275,729 5,392,430 ----------- ----------- ----------- ----------- Total deposits....................... 14,714,654 15,214,197 14,288,100 14,296,337 Short-term borrowed funds................. 2,121,412 1,868,606 2,397,346 2,357,838 Long-term debt............................ 1,057,151 697,194 746,500 641,082 Bank acceptances outstanding.............. 7,360 14,281 12,504 17,273 Other liabilities......................... 250,007 269,095 271,262 270,951 ----------- ----------- ----------- ----------- Total liabilities.................... 18,150,584 18,063,373 17,715,712 17,583,481 Stockholders' equity: Preferred stock......................... 5,308 11,344 7,139 12,662 Common stock............................ 181,102 188,532 175,081 188,532 Issued: 1997, 144,881,896 shares 1996, 150,826,196 shares Capital surplus......................... 51,145 9,105 47,711 Retained earnings....................... 1,484,199 1,437,891 1,403,996 1,358,833 Treasury stock, at cost................. (132) (4,056) (3,007) (49,339) Held: 1997, 48,547 shares 1996, 490,396 shares Restricted stock.......................... (73) Unrealized gains on securities available for sale................................ 22,624 19,191 15,523 17,022 ----------- ----------- ----------- ----------- Total stockholders' equity........... 1,693,101 1,704,047 1,607,837 1,575,348 ----------- ----------- ----------- ----------- Total liabilities and equity......... $19,843,685 $19,767,420 $19,323,549 $19,158,829 =========== =========== =========== ===========
- ------------ The average balances are not covered by the Independent Auditors' Report. See accompanying notes to consolidated financial statements. 26 28 FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ----------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (thousands of dollars, except per share data) INTEREST REVENUE Loans.................................................... $1,138,417 $1,113,459 $1,081,685 Securities: Taxable................................................ 198,112 209,396 200,465 Nontaxable............................................. 58,242 54,403 53,329 ---------- ---------- ---------- Total securities.................................... 256,354 263,799 253,794 Interest-bearing deposits with banks..................... 691 380 967 Federal funds sold and resale agreements................. 5,880 4,916 10,534 Trading securities....................................... 131 344 806 ---------- ---------- ---------- Total interest revenue.............................. 1,401,473 1,382,898 1,347,786 INTEREST EXPENSE Deposits: Interest-bearing demand................................ 24,775 21,786 23,831 Money market accounts.................................. 119,135 102,927 85,231 Savings passbook....................................... 33,179 40,034 44,509 Certificates of deposit................................ 294,581 300,806 291,135 ---------- ---------- ---------- Total deposits...................................... 471,670 465,553 444,706 Short-term borrowed funds................................ 127,153 123,629 133,151 Long-term debt........................................... 52,265 43,830 43,982 ---------- ---------- ---------- Total interest expense.............................. 651,088 633,012 621,839 ---------- ---------- ---------- NET INTEREST REVENUE..................................... 750,385 749,886 725,947 Provision for loan losses................................ 54,658 42,647 36,756 ---------- ---------- ---------- NET INTEREST REVENUE AFTER LOAN LOSS PROVISION........... 695,727 707,239 689,191 OTHER OPERATING REVENUE Trust and investment management fees..................... 174,899 148,019 134,354 Service charges on deposit accounts...................... 87,483 91,953 81,775 Credit card service revenue.............................. 71,038 69,945 62,106 Mortgage banking revenue................................. 46,829 49,100 38,479 Data processing fees..................................... 19,993 19,443 17,924 Gain on sale of merchant processing...................... 22,821 Securities gains (losses)................................ 679 66 (5,730) Other revenue............................................ 67,397 61,926 63,289 ---------- ---------- ---------- Total other operating revenue....................... 491,139 440,452 392,197 OTHER OPERATING EXPENSE Salaries................................................. 333,866 320,239 323,163 Employee benefits........................................ 65,836 71,277 72,198 Equipment expense........................................ 69,574 63,197 56,282 Net occupancy expense.................................... 63,232 64,235 57,992 Restructuring expense.................................... 53,267 23,151 Other expense............................................ 211,510 201,115 201,336 ---------- ---------- ---------- Total other operating expense....................... 744,018 773,330 734,122 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................... 442,848 374,361 347,266 Provision for income taxes............................... 147,639 124,184 118,353 ---------- ---------- ---------- NET INCOME............................................... $ 295,209 $ 250,177 $ 228,913 ========== ========== ========== PER COMMON SHARE: Net income............................................... $ 2.03 $ 1.68 $ 1.50 Net income assuming dilution............................. 2.00 1.66 1.48 Dividends................................................ .82 .74 .66
See accompanying notes to consolidated financial statements. 27 29 FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED PREFERRED COMMON CAPITAL RETAINED GAIN/ RESTRICTED TREASURY STOCK STOCK SURPLUS EARNINGS (LOSS) STOCK STOCK TOTAL --------- -------- -------- ---------- ---------- ---------- --------- ---------- (thousands of dollars, except per share data) BALANCE AT DECEMBER 31, 1994.... $26,979 $190,731 $136,187 $1,172,062 $ (1,054) $(1,551) $ (10,669) $1,512,685 Net income...................... 228,913 228,913 Cash dividends: Preferred stock, series D ($35.00 per share).......... (1,247) (1,247) Preferred stock ($.90 per share)...................... (274) (274) Common stock ($.66 per share)...................... (99,838) (99,838) Converted 8,087 shares of preferred stock into 347,074 shares of common stock........ (4,044) 80 (123) 4,087 0 Redemption of 303,640 shares of preferred stock............... (7,591) (759) (8,350) Retired 5,251,398 shares of common stock.................. (3,283) (90,670) (93,953) Issued 627,300 shares of common stock for bank acquisitions... 1,207 8,069 9,276 Issued 1,779,880 shares of common stock for employee benefit plans................. 689 5,057 12,509 18,255 Issued 503,804 shares of common stock for note conversion..... 315 1,185 1,500 Purchased 4,313,196 shares of treasury stock................ (78,830) (78,830) Unrealized gains on securities available for sale............ 35,181 35,181 Amortization/adjustment of restricted stock.............. 393 1,109 1,502 ------- -------- -------- ---------- ---------- ------- --------- ---------- BALANCE AT DECEMBER 31, 1995.... 15,344 188,532 53,236 1,298,857 34,127 (442) (64,834) 1,524,820 Net income...................... 250,177 250,177 Cash dividends: Preferred stock, series D ($35.00 per share).......... (867) (867) Common stock ($.74 per share)...................... (110,276) (110,276) Converted 8,000 shares of preferred stock into 343,366 shares of common stock........ (4,000) (1,083) 5,083 0 Issued 9,781,096 shares of common stock for bank acquisitions.................. 4,787 215,019 219,806 Issued 1,854,724 shares of common stock for employee benefit plans................. (5,783) 30,984 25,201 Purchased 8,080,200 shares of treasury stock................ (189,997) (189,997) Unrealized gains on securities available for sale............ (14,936) (14,936) Amortization/adjustment of restricted stock.............. (12) 442 (311) 119 ------- -------- -------- ---------- ---------- ------- --------- ---------- BALANCE AT DECEMBER 31, 1996.... $11,344 $188,532 $ 51,145 $1,437,891 $ 19,191 $ 0 $ (4,056) $1,704,047 Net income...................... 295,209 295,209 Cash dividends: Preferred stock, series D ($35.00 per share).......... (483) (483) Common stock ($.82 per share)...................... (119,426) (119,426) Converted 12,072 shares of preferred stock into 518,127 shares of common stock........ (6,036) (518) (3,780) 10,334 0 Issued 1,095,622 shares of common stock for employee benefit plans................. (5,184) (2,601) 27,756 19,971 Purchased and retired 5,944,300 shares of common stock........ (7,430) (45,443) (122,611) (175,484) Purchased 1,171,900 shares of treasury stock................ (34,166) (34,166) Unrealized gains on securities available for sale............ 3,433 3,433 ------- -------- -------- ---------- ---------- ------- --------- ---------- BALANCE AT DECEMBER 31, 1997.... $ 5,308 $181,102 $ 0 $1,484,199 $ 22,624 $ 0 $ (132) $1,693,101 ======= ======== ======== ========== ========== ======= ========= ==========
See accompanying notes to consolidated financial statements. 28 30 FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................................. $ 295,209 $ 250,177 $ 228,913 Adjustments: Provision for loan losses............................. 54,658 42,647 36,756 Depreciation, amortization and accretion.............. 59,851 70,647 50,520 Net decrease (increase) in trading securities......... 11,196 (853) 19,021 Net (increase) decrease in loans held for resale...... (89,603) 173,454 (278,563) (Gain) loss on securities and other assets............ (2,398) (1,325) 3,866 Deferred income taxes................................. 6,096 7,073 (335) (Increase) decrease in other assets................... (105,726) 49,706 6,321 Decrease in other liabilities......................... (12,275) (25,740) (3,983) Other net............................................. 5,055 (3,489) 3,044 ----------- ----------- ----------- Net cash provided by operating activities........... 222,063 562,297 65,560 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in federal funds sold and resale agreements............................................ 110,376 (83,020) 241,359 Net decrease (increase) in interest-bearing deposits with banks............................................ 1,100 (882) 28,065 Sales of securities held to maturity.................... 17,541 Sales of securities available for sale.................. 679 253,438 270,984 Maturities of securities held to maturity............... 382,681 408,630 666,169 Maturities of securities available for sale............. 526,916 432,002 156,018 Purchases of securities held to maturity................ (588,407) (224,488) (1,410,008) Purchases of securities available for sale.............. (265,318) (371,728) (90,936) Net (increase) decrease in loans........................ (331,571) 187,545 (521,197) Net cash from acquisitions.............................. 64,718 294 Proceeds from sales of foreclosed assets................ 14,276 8,226 12,074 Purchases of bank premises and equipment................ (73,097) (57,773) (55,369) Proceeds from sales of bank premises and equipment...... 10,102 3,221 4,638 ----------- ----------- ----------- Net cash provided (used) by investing activities.... (212,263) 619,889 (680,368) CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in deposits..................... (499,543) (176,297) 828,503 Net increase (decrease) in short-term borrowed funds.... 252,806 (508,659) 103,908 Repayment of long-term debt............................. (29,319) (216,491) (25,127) Proceeds from long-term debt............................ 389,276 148,500 186,760 Cash dividends.......................................... (119,909) (111,143) (101,359) Preferred stock redemption.............................. (8,350) Common/treasury stock repurchases....................... (209,650) (197,324) (165,456) Common/treasury stock issued............................ 11,734 17,576 14,561 ----------- ----------- ----------- Net cash (used) provided by financing activities.... (204,605) (1,043,838) 833,440 ----------- ----------- ----------- Net increase (decrease) in cash and due from banks...... (194,805) 138,348 218,632 Cash and due from banks at beginning of year............ 1,449,094 1,310,746 1,092,114 ----------- ----------- ----------- Cash and due from banks at end of year.................. $ 1,254,289 $ 1,449,094 $ 1,310,746 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest.............................................. $ 648,004 $ 636,493 $ 600,006 Income taxes.......................................... 137,737 116,052 116,443 Transfers to foreclosed assets from loans............... 8,153 8,345 9,166 Acquisitions: Assets acquired....................................... 1,370,563 85,762 Cash paid for purchase of stock....................... $ $ (5,535) $ Cash acquired......................................... 70,253 294 ----------- ----------- ----------- Net cash from acquisitions.......................... $ $ 64,718 $ 294 =========== =========== ===========
See accompanying notes to consolidated financial statements. 29 31 FIRSTAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business--Firstar Corporation is a registered bank holding company providing financial services through 241 locations in Wisconsin, Illinois, Minnesota, Iowa, Arizona and Florida. These banking activities include accepting demand, time and savings deposits; making both secured and unsecured business and personal loans; providing trust and investment management services to individuals and corporate customers; providing correspondent banking services to other financial institutions; conducting mortgage banking activities; providing international banking services; conducting retail brokerage operations; providing mutual fund custody services; and other related banking activities. Principles of presentation--The consolidated financial statements include the accounts of Firstar and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Results of operations of companies purchased are included from the date of acquisition. Assets and liabilities of purchased companies are recorded at estimated fair value at the date of acquisition. Financial statements have been restated to include companies acquired under pooling of interests when material. Investments in joint ventures where Firstar's equity interest is less than fifty percent are not consolidated and are accounted for under equity method accounting rules. Certain prior year amounts have been reclassified to conform to current year classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and all accompanying footnotes. Actual results could differ from those estimates. Securities--Purchases of securities that are made with the positive intent and ability to hold them to maturity are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield method. Securities to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available for sale and carried at market value. Valuation adjustments net of deferred tax are recorded as a component of stockholders' equity. Securities held for indefinite periods of time may include securities that management intends to use as part of its asset/liability management strategy or have been acquired in business acquisitions and are designated to be sold. Gains or losses on sales of securities are computed on the basis of specific identification of the adjusted cost of each security. Trading account securities are carried at market. Valuation adjustments are included in other revenue in the consolidated statements of income. Loans--Loans, which include lease financing receivables, are stated at the principal amount. Interest is accrued on all loans not discounted by applying the interest rate to the amount outstanding. On discounted loans, income is recognized on a basis which results in approximately level rates of return over the term of the loans. Loan origination and commitment fees and certain direct loan origination costs are being deferred where material and the net amount amortized as an adjustment of the related loans' yield. These amounts are being amortized over the contractual life of the related loans. Where it is not reasonable to expect that income will be realized, accrual of income ceases and these loans are placed on a "cash basis" for purposes of income recognition. Loans upon which foreclosure action is commenced or for which borrowers have begun bankruptcy proceedings are reviewed individually as to continuation of interest accrual. Mortgage loans held for sale are carried at the lower of aggregate cost or market, after consideration of related loan sale commitments. Reserve for loan losses--The reserve for loan losses is maintained at a level adequate to provide for potential loan losses through charges to operating expense. The reserve is based upon a continuing review of loans which includes consideration of actual net loan loss experience, changes in the size and character of the loan portfolio, identification of problem situations which may affect the borrowers' ability to repay, estimated value of underlying collateral and evaluation of current economic conditions. With respect to loans which are 30 32 deemed impaired, the calculation of reserve levels is based upon the discounted present value of expected cash flows received from the debtor or other measures of value such as market prices or collateral values. Firstar considers all nonaccrual commercial loans to be impaired. Loan losses are recognized through charges to the reserve. Installment and credit card loan losses are charged to the reserve based upon fixed delinquency periods. All other loans are evaluated individually and charged to the reserve to the extent that outstanding principal balances are deemed uncollectible. Any subsequent recoveries are added to the reserve. Foreclosed assets--Foreclosed assets, the balance of which is included in other assets, includes primarily properties acquired through loan foreclosure proceedings or acceptance of deeds in lieu of foreclosure. These properties are recorded at the lower of the carrying value of the related loans or the fair market value of the foreclosed asset acquired less the estimated costs to sell the foreclosed asset. Initial valuation adjustments, if any, are charged against the reserve for loan losses. Subsequent reevaluations of the properties, which indicate reduced value, are recognized through charges to other operating expense. Revenues and expenditures related to holding and operating these properties are included in other operating expense. Bank premises and equipment--Bank premises and equipment are stated at cost less depreciation, which has been accumulated on the straight-line basis. Maintenance and repairs are charged to expense and betterments are capitalized. Intangible assets--Intangible assets, consisting of goodwill, core deposit premium and credit card premium, are included in other assets in the balance sheet. Goodwill is amortized over periods of fifteen to twenty-five years. Core deposit intangibles are amortized over a life of up to ten years. Credit card premiums are amortized over a life of ten years. Firstar periodically evaluates the carrying value and remaining amortization period of all long lived assets including intangible assets for impairment. Adjustments are recorded when the benefit of the asset decreases due to disposition of branches or deposits associated with the entity acquired in the purchase business combination. Mortgage servicing rights--Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the balance sheet. The value of these capitalized servicing rights, along with purchased mortgage servicing rights, are amortized in relation to the servicing revenue expected to be earned. The carrying value of these rights are reviewed for impairment. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including underlying loan type, note rate, prepayment trends and external market factors. Stock based compensation plans--Firstar has various stock based compensation plans that authorize the granting of stock options, restricted stock, and other stock based awards to eligible employees. Firstar has elected not to adopt the recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" which requires a fair-value based method of accounting for stock options and equity awards and will continue to follow APB No. 25 "Accounting for Stock Issued to Employees" and related interpretations to account for its stock based compensation plans. Income taxes--Firstar and its subsidiaries file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign currency transactions--Monetary assets and liabilities recorded in foreign currencies are translated at the rate of exchange in effect at each year-end. Income statement items are translated monthly using the average rate for the month. Firstar enters into forward exchange contracts on behalf of its customers and hedges its risk by entering into offsetting transactions with other counterparties. The fair value of these transactions are included in other assets and liabilities and the related gain or loss is recorded in other revenue. Derivative and other financial instruments--Firstar uses interest rate swaps, caps and floors to manage its interest rate risks arising from recorded financial assets and liabilities. These instruments are accounted for on 31 33 an accrual basis when the instrument can be demonstrated to effectively change the cash flows of a designated asset or liability and such asset or liability exposes Firstar to interest rate risk. Amounts to be paid or received under interest rate swaps, caps and floors are recognized as interest income or expense of the related asset or liability. Gains and losses on early termination of these instruments are deferred and amortized as an adjustment to yield on the related asset or liability over the shorter of the remaining contract life or the maturity of the related asset or liability. If the related asset or liability is sold or otherwise liquidated, the instrument is marked to market, with resultant gains and losses recognized in other revenue. Interest rate swaps, caps and floors that do not meet this criteria are carried at market value with changes therein recognized in other revenue. Fees paid or received in connection with caps and floors are deferred and amortized to income or expense over the life of the instrument. Interest rate swaps, caps, floors and futures entered into as an intermediary are accounted for at market value. Realized gains and losses and changes in market value are recognized in other operating revenue. Cash and cash equivalents--For purposes of the consolidated statements of cash flows, cash and cash equivalents are considered to include the balance sheet caption cash and due from banks. Income per common share--In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which became effective for the Corporation for reporting periods ending after December 15, 1997. Under the provisions of SFAS No. 128, primary and fully-diluted earnings per share were replaced with basic and diluted earnings per share. Basic earnings per share is arrived at by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation is arrived at by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options, the conversion impact of convertible preferred stock, and shares issuable under other contracts. Prior years were also restated under SFAS No. 128. Recent accounting pronouncements--The Financial Accounting Standard Board issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which is effective for transactions entered into after December 31, 1996. This statement supersedes the existing standards on accounting for mortgage servicing rights and provides accounting and reporting standards for transfers and servicing of all financial assets and extinguishment of liabilities based upon consistent application of a financial components approach that focuses on control. The adoption of this statement did not have a significant effect on the result of operations or financial position. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting the components of comprehensive income prominently within the financial statements. Comprehensive income includes net income plus certain transactions that are reported directly within stockholders' equity. The provisions of this statement are effective with the first quarter of 1998 financial statements and will have no impact on financial position or results of operations of Firstar. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The provisions of this statement require the disclosure of financial information about a company's operating segments in interim and annual financial statements. The definition of operating segments is to be based upon internal management practices of the company. The statement is effective in 1998 and its adoption will have no impact on the financial condition or results of operations of Firstar. 32 34 NOTE 2. MERGERS AND ACQUISITIONS The following table summarizes completed acquisitions:
TOTAL METHOD OF NAME OF INSTITUTION ASSETS ACQUISITION DATE CONSIDERATION ACCOUNTING ------------------- ------ ---------------- ------------- ---------- (millions of dollars) 1996: American Bancorporation, Inc. St. Paul, MN........................ $1,187 July 1996 Cash $38.6 Purchase 8,000,000 shares of common stock Harvest Financial Corp. Dubuque, IA......................... 353 January 1996 1,774,408 shares Purchase of common stock ------ $1,540 ====== 1995: Investors Bank Corp. Wayzata, MN......................... $1,134 April 1995 6,013,846 shares Pooling of of common stock interests First Moline Financial Corp. Moline, IL.......................... 86 March 1995 627,300 shares Purchase of common stock First Colonial Bankshares Corporation Chicago, IL......................... 1,780 January 1995 15,401,534 shares Pooling of of common stock interests ------ $3,000 ======
NOTE 3. SECURITIES The amortized cost and approximate market values of securities are as follows:
DECEMBER 31, 1997 ---------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (thousands of dollars) Securities held to maturity: Mortgage backed obligations of federal agencies.................................... $1,139,317 $32,038 $ (779) $1,170,576 State and political subdivisions............... 1,306,555 23,129 (1,144) 1,328,540 Corporate debt................................. 6,252 (8) 6,244 ---------- ------- ------- ---------- Total....................................... $2,452,124 $55,167 $(1,931) $2,505,360 ========== ======= ======= ========== Securities available for sale: U.S. Treasury and federal agencies............. $1,425,457 $36,175 $ (818) $1,460,814 Mortgage backed obligations of federal agencies.................................... 103,036 949 (149) 103,836 State and political subdivisions............... 6,146 36 (9) 6,173 Equity securities.............................. 98,010 98,010 Money market mutual funds...................... 38,773 38,773 ---------- ------- ------- ---------- Total....................................... $1,671,422 $37,160 $ (976) $1,707,606 ========== ======= ======= ==========
33 35
DECEMBER 31, 1996 ---------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (thousands of dollars) Securities held to maturity: U.S. Treasury and federal agencies............. $ 756 $ $ $ 756 Mortgage backed obligations of federal agencies.................................... 1,092,528 28,511 (3,948) 1,117,091 State and political subdivisions............... 1,147,387 15,673 (3,544) 1,159,516 Corporate debt................................. 10,027 23 (43) 10,007 Other.......................................... 78 78 ---------- ------- ------- ---------- Total....................................... $2,250,776 $44,207 $(7,535) $2,287,448 ========== ======= ======= ========== Securities available for sale: U.S. Treasury and federal agencies............. $1,771,460 $32,950 $(3,612) $1,800,798 Mortgage backed obligations of federal agencies.................................... 8,624 96 (239) 8,481 State and political subdivisions............... 7,601 55 (30) 7,626 Equity securities.............................. 111,315 111,315 Money market mutual funds...................... 38,370 38,370 ---------- ------- ------- ---------- Total....................................... $1,937,370 $33,101 $(3,881) $1,966,590 ========== ======= ======= ==========
The amortized cost and approximate market value of securities at December 31, 1997, by contractual maturity, are shown below. Maturities of mortgage backed obligations were estimated based on anticipated payments.
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE ---------------------------- ------------------------------ AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ------------ ------------ ------------- ------------- (thousands of dollars) Due in one year or less....................... $ 326,482 $ 333,366 $ 164,028 $ 164,110 Due after one year through five years......... 1,131,251 1,150,509 1,349,422 1,385,014 Due after five years through ten years........ 808,186 833,018 44,701 45,188 Due after 10 years............................ 186,205 188,467 15,261 15,284 ---------- ---------- ---------- ---------- $2,452,124 $2,505,360 1,573,412 1,609,596 ========== ========== Equity securities............................. 98,010 98,010 ---------- ---------- Total.................................... $1,671,422 $1,707,606 ========== ==========
Gross gains of $1,179,000 , $67,000 and $487,000 and gross losses of $500,000 , $1,000 and $6,217,000 were realized on the sale of securities classified as available for sale in 1997, 1996 and 1995, respectively. The amortized cost of securities pledged to secure public or trust deposits, securities sold under repurchase agreements and for other purposes as required or permitted by law was $1,656,281,000 at December 31, 1997 and $1,927,236,000 at December 31, 1996. 34 36 NOTE 4. LOANS The composition of loans, including lease financing receivables, is summarized below. Loans are presented net of unearned discount which amounted to $28,175,000 and $22,740,000 at December 31, 1997 and 1996, respectively. Commercial loans pledged to secure public deposits were $169,015,000 on December 31, 1997 and $184,333,000 on December 31, 1996. Residential mortgage loans held for resale were $234,008,000 and $143,614,000 on December 31, 1997 and 1996, respectively.
DECEMBER 31 -------------------------- 1997 1996 ----------- ----------- (thousands of dollars) Commercial and industrial................................... $ 3,644,721 $ 3,366,016 Commercial construction..................................... 466,934 418,040 Commercial mortgage......................................... 2,485,034 2,574,376 Other commercial............................................ 1,123,824 953,145 ----------- ----------- Commercial................................................ 7,720,513 7,311,577 Credit card................................................. 736,484 684,619 Consumer mortgage........................................... 2,384,406 2,660,290 Home equity................................................. 1,271,966 1,121,580 Other consumer.............................................. 1,455,417 1,417,468 ----------- ----------- Consumer.................................................. 5,848,273 5,883,957 ----------- ----------- Total.................................................. $13,568,786 $13,195,534 =========== ===========
Loans on which income is recognized only as cash payments are received or is accrued at less than the original contract rate are summarized below.
DECEMBER 31 --------------------------------------- 1997 1996 1995 ------- ------- ------- (thousands of dollars) Commercial................................................. $47,293 $66,913 $74,574 Consumer................................................... 16,828 19,193 16,187 ------- ------- ------- Total................................................. $64,121 $86,106 $90,761 ======= ======= =======
The effect of nonperforming loans on interest revenue was as follows:
YEARS ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 ------- ------- ------- (thousands of dollars) Interest at original contract rate......................... $ 7,367 $ 9,236 $ 8,348 Interest collected......................................... 2,463 4,474 3,768 ------- ------- ------- Net reduction of interest revenue..................... $ 4,904 $ 4,762 $ 4,580 ======= ======= =======
35 37 NOTE 5. RESERVE FOR LOAN LOSSES An analysis of the reserve for loan losses is as follows:
YEARS ENDED DECEMBER 31 ------------------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Balance at beginning of year............................ $213,138 $195,283 $190,552 Provision for loan losses............................... 54,658 42,647 36,756 Loan recoveries......................................... 21,808 24,450 19,973 Loan charge-offs........................................ (70,743) (63,208) (52,863) Reserves of acquired banks.............................. 13,966 865 -------- -------- -------- Balance at end of year.................................. $218,861 $213,138 $195,283 ======== ======== ======== Charge-offs, net of recoveries, as a percentage of average loans......................................... .37% .30% .27% Reserve as a percentage of year-end loans............... 1.61 1.62 1.55
A portion of the reserve for loan losses is allocated to loans deemed impaired. All impaired loans are included in nonperforming assets. Information on these loans and their related reserve for loan losses are as follows:
DECEMBER 31 --------------------------------------- 1997 1996 1995 ------- ------- ------- Impaired loans: With reserve allocation.................................. $27,911 $41,643 $43,851 Without reserve allocation............................... 19,119 24,242 29,347 ------- ------- ------- Total................................................. $47,030 $65,885 $73,198 ======= ======= ======= Reserve allocated........................................ 2,295 4,914 8,952 Average balance of impaired loans during year............ 62,835 69,783 67,271 Interest income recognized during year................... 2,463 4,296 3,200
NOTE 6. BANK PREMISES AND EQUIPMENT Bank premises and equipment are summarized as follows:
DECEMBER 31 ---------------------- 1997 1996 --------- --------- (thousands of dollars) Land........................................................ $ 43,335 $ 45,991 Bank premises............................................... 367,639 345,986 Equipment................................................... 328,011 311,979 --------- --------- Subtotal............................................... 738,985 703,956 Accumulated depreciation.................................... (370,902) (335,257) --------- --------- Total.................................................. $ 368,083 $ 368,699 ========= =========
Depreciation charged to other operating expense amounted to $49,179,000, $46,791,000 and $42,684,000 in 1997, 1996 and 1995, respectively. Rental expense for bank premises and equipment amounted to $40,901,000, $36,662,000 and $34,057,000 in 1997, 1996 and 1995, respectively. Contingent rentals and sublease rental income amounts were not significant. Occupancy expense is net of amortization of a total of $68 million of pre-tax deferred gain on a building sale which was amortized through 1997, at which time the related leaseback expired. This amortization was $6,813,000 in 1997, $6,240,000 in 1996 and $6,240,000 in 1995. 36 38 Firstar and its subsidiaries are obligated under noncancelable operating leases for various bank premises and equipment. These leases expire intermittently over the years through 2034. The minimum rental commitments under noncancelable leases for the next five years are shown below:
PERIOD AMOUNT -------- --------- (thousands of dollars) Bank premises and equipment................................. 1998 $30,345 1999 28,991 2000 28,117 2001 26,503 2002 26,779
NOTE 7. INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, are summarized as follows:
DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Goodwill.................................................... $174,954 $186,462 $107,298 Core deposit intangibles.................................... 20,496 24,438 15,161 Credit card premium......................................... 607 -------- -------- -------- Total.................................................. $196,057 $210,900 $122,459 ======== ======== ======== Amortization of intangibles during year..................... $ 14,987 $ 15,321 $ 11,068
NOTE 8. MORTGAGE SERVICING RIGHTS The fair value of capitalized mortgage servicing rights was $23.1 million on on December 31, 1997 and $17.0 million on December 31, 1996. Firstar serviced $3,107 million and $3,164 million of mortgage loans for other investors as of December 31, 1997 and 1996, respectively. Changes in capitalized mortgage servicing are summarized as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Balance--beginning of year.................................. $ 12,728 $ 9,538 $ 7,238 Servicing rights capitalized................................ 22,661 18,117 7,096 Amortization of servicing rights............................ (2,508) (2,461) (1,641) Sales of servicing rights................................... (16,682) (12,354) (3,155) Valuation allowance......................................... (19) (112) -------- -------- -------- Balance--end of year........................................ $ 16,180 $ 12,728 $ 9,538 ======== ======== ========
NOTE 9. SHORT-TERM BORROWED FUNDS Short-term borrowed funds are summarized as follows:
1997 1996 1995 ---------- ---------- ---------- (thousands of dollars) Federal funds purchased and repurchase agreements: At December 31......................................... $1,512,882 $1,223,037 $1,980,442 Average during year.................................... 2,014,522 1,902,766 1,994,281 Maximum month-end balance.............................. 2,291,116 2,110,250 2,407,507 Average rate at year-end............................... 5.20% 5.66% 5.44% Average rate during year............................... 5.29 5.25 5.83
37 39 Federal funds purchased, which totaled $1,123 million at December 31, 1997, generally represent one-day borrowings. Securities sold under repurchase agreements, which totaled $390 million at December 31, 1997, represent borrowings maturing within one year that are secured by U.S. Treasury and federal agency securities. Other short-term borrowed funds comprise primarily treasury, tax and loan notes and Federal Home Loan Bank notes. Firstar additionally has a $125 million line of credit agreement in place which expires in April 2000. The credit agreement has certain restrictive covenants and requires payment of quarterly fees based upon both the commitment amount and usage levels. No advances were outstanding under this line at the end of 1997. NOTE 10. LONG-TERM DEBT Long-term debt is summarized as follows:
DECEMBER 31 --------------------- 1997 1996 ---------- -------- (thousands of dollars) Federal Home Loan Bank notes................................ $ 457,438 $345,946 7.15% subordinated notes.................................... 100,000 100,000 10.25% subordinated notes................................... 78,340 78,340 Trust capital securities.................................... 150,000 150,000 6.25% senior bank notes..................................... 250,000 Other debt.................................................. 21,373 22,908 ---------- -------- Total.................................................. $1,057,151 $697,194 ========== ========
Notes payable to the Federal Home Loan Bank are collateralized by Federal Home Loan Bank stock and first mortgage consumer real estate loans. The notes mature from 1998 through 2012 and have a variable interest rate averaging 5.89% as of December 31, 1997. Firstar issued $100,000,000 of 7.15% notes under an indenture dated as of August 28, 1995. The notes, which are subordinated to all unsubordinated indebtedness of Firstar for borrowed money, are unsecured and mature September 1, 2000. The notes may be redeemed on or after September 1, 1998. The indenture contains a provision which restricts the disposition of or subjecting to lien any common stock of certain subsidiaries. Firstar issued $100,000,000 of 10 1/4% notes under an indenture dated as of May 1, 1988. The notes, which are subordinated to all unsubordinated indebtedness of Firstar for borrowed money, are unsecured and mature May 1, 1998. The indenture contains a provision which restricts the disposition of or subjecting to lien any common stock of certain subsidiaries. On December 17, 1996, Firstar issued $150 million of trust capital securities through Firstar Capital Trust I, a statutory business trust, of which all common securities are owned by Firstar. The capital securities pay cumulative cash distributions semiannually at an annual rate of 8.32%. The securities are redeemable from December 23, 2006 until December 23, 2016 at a declining rate of 104.16% to 100% of the principal amount. After December 23, 2016 they are redeemable at par until December 15, 2026 when redemption is mandatory. Prior redemption is permitted under certain circumstances such as changes in tax or regulatory capital rules. The proceeds of the capital securities were invested by the Trust in junior subordinated debentures of Firstar. Firstar guarantees the capital securities through the combined operation of the debentures and other related documents. Firstar's obligations under the guarantee are unsecured and subordinate to senior and subordinated indebtedness of Firstar. The securities qualify as tier I capital for regulatory capital purposes. Firstar Bank Milwaukee, N.A. issued $250 million of 6.25% senior notes on December 4, 1997. The notes are unsecured and mature on December 1, 2002. Long-term debt has aggregate maturities for the five years 1998 through 2002 as follows: $255,553,000 in 1998, $162,173,000 in 1999, $229,697,000 in 2000, $146,000 in 2001 and $253,840,000 in 2002. 38 40 NOTE 11. STOCKHOLDERS' EQUITY The authorized and outstanding shares of Firstar are as follows:
DECEMBER 31 ------------------------ 1997 1996 ----------- ----------- Preferred stock, $1.00 par value Series C--Authorized...................................... 2,500,000 2,500,000 Preferred stock from acquired bank: Series D--Authorized...................................... 40,250 40,250 --Outstanding.................................... 10,615 22,688 Common stock, $1.25 par value: Authorized................................................ 240,000,000 240,000,000 Outstanding (net of treasury stock)....................... 144,833,349 150,335,800
Under the Firstar Shareholder rights plan each share of common stock entitles its holder to one-quarter right. Under certain conditions, each right entitles the holder to purchase one one-hundredth of a share of series C preferred stock at a price of $85, subject to adjustment. The rights will only be exercisable if a person or group has acquired, or announced an intention to acquire, 20% or more of the outstanding shares of Firstar common stock. Under certain circumstances, including the existence of a 20% acquiring party, each holder of a right, other than the acquiring party, will be entitled to purchase at the exercise price Firstar common shares having a market value of two times the exercise price. In the event of the acquisition of Firstar by another company subsequent to a party acquiring 20% or more of Firstar common stock, each holder of a right is entitled to receive the acquiring company's common shares having a market value of two times the exercise price. The rights may be redeemed at a price of $.01 per right prior to the existence of a 20% acquiring party, and thereafter, may be exchanged for one common share per right prior to the existence of a 50% acquiring party. The rights will expire on January 19, 1999. The rights do not have voting or dividend rights and until they become exercisable, have no dilutive effect on the earnings of Firstar. Under the rights plan, the Board of Directors of Firstar may reduce the thresholds applicable to the rights from 20% to not less than 10%. Preferred shares, when issued, rank prior to common shares both as to dividends and liquidation but have no general voting rights. The Series C preferred stock, none of which is outstanding, is entitled to 100 votes per share and other rights such that the value of a one one-hundredth interest in a Series C preferred share should approximate the value of one common share. On January 31, 1995, Firstar converted 38,775 shares of First Colonial Bankshares Corporation Series C preference stock, represented by 775,500 depository shares, into like shares of its Series D preferred stock in connection with the acquisition of First Colonial Bankshares Corporation. Each share receives annual dividends of $35 and is convertible into 42.92 shares of common stock. Shares are redeemable at $500 per share. A two-for-one stock split was completed on February 15, 1997 to common stockholders. All common stock and per share data included in the consolidated financial statements and in the notes to consolidated financial statements have been retroactively adjusted to reflect the split. 39 41 NOTE 12. STOCK BASED COMPENSATION PLANS Firstar has two stock based compensation plans, a stock option plan and a performance based stock plan. Firstar's incentive stock plan provides for a maximum grant of 11.2 million stock options, appreciation rights, and/or shares of stock. Stock options are granted with an exercise price equal to the stock fair market value at the date of grant. All outstanding stock options expire ten years and one month after the date of grant and vest and become fully exercisable after a period from between one to three years. At December 31, 1997, there were 3,358,000 additional shares available for grant under the plan. Firstar in connection with bank acquisitions, converted existing options for shares of the acquired banks into an equivalent number of options for shares of Firstar common stock. As of December 31, 1997 these options totaled 253,770 with an exercise price of $5.40 to $11.81. No additional stock options will be awarded under these plans. The following table summarizes option activity under these plans:
NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE ---------- ---------------- Options outstanding at December 31, 1994.................... 6,158,328 $10.00 Granted..................................................... 985,200 13.69 Assumed through acquisitions................................ 5,812 4.72 Exercised................................................... (1,524,979) 8.93 Forfeited................................................... (162,266) 12.88 Expired..................................................... (6,000) 15.84 ---------- Options outstanding at December 31, 1995.................... 5,456,095 10.86 Granted..................................................... 1,021,400 20.12 Assumed through acquisitions................................ 69,904 6.36 Exercised................................................... (1,744,361) 8.98 Forfeited................................................... (290,336) 16.79 Expired..................................................... (25,444) 2.09 ---------- Options outstanding at December 31, 1996.................... 4,487,258 13.30 Granted..................................................... 1,855,000 28.31 Exercised................................................... (1,061,005) 10.26 Forfeited................................................... (204,500) 24.64 Expired..................................................... (11,664) 11.02 ---------- Options outstanding at December 31, 1997.................... 5,065,089 19.04 ==========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- WEIGHTED-AVG. RANGE OF NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG. EXERCISE PRICES OUTSTANDING CONTRACT LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ------------- -------------- ----------- -------------- $5.29 to 11.81................ 764,870 2.48yr. $ 7.55 764,870 $ 7.55 $12.56 to 16.25............... 1,765,052 6.16 14.41 1,241,797 14.69 $20.00 to 22.75............... 828,867 8.29 20.14 250,263 20.31 $28.31........................ 1,706,300 9.26 28.31 0 --------- --------- Options at December 31, 1997........................ 5,065,089 2,256,930 ========= =========
40 42 Firstar's performance based stock plan grants performance shares to key executives. Estimated future payouts are predicated upon achievement of Firstar return on equity goals in relation to peer group banking companies and the market value of Firstar's common stock over a three year period. The grants are designated in shares of stock and the participant is paid the value of the earned shares one-half in cash and one-half in shares of Firstar's common stock plus a dividend equivalent for the performance period. The maximum number of performance shares awarded in 1997, 1996 and 1995 was 89,338, 132,891 and 178,035 respectively. The maximum number of common shares issuable under these awards was 44,669 at $28.31 per share in 1997, 66,445 at $20.00 per share in 1996, and 89,017 at $13.69 per share in 1995. Compensation expense recorded under this plan was $4,502,000 in 1997, $4,104,000 in 1996, and $2,092,000 in 1995. For purposes of providing the pro forma disclosures required under SFAS No. 123 "Accounting for Stock Based Compensation", the fair value of stock options granted was estimated using the Black-Scholes option pricing model. The per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $7.65, $4.78 and $3.27 on the date of grant with the following weighted-average assumptions: 1997--expected dividend yield 3.0%, risk-free interest rate of 6.5%, an expected life of 7 years and expected volatility of 22%; 1996--expected dividend yield 3.4%, risk-free interest rate of 5.55%, an expected life of 7 years and expected volatility of 23%; 1995--expected dividend yield 4.4%, risk-free interest rate of 7.76%, an expected life of 7 years and expected volatility of 22%. Had compensation cost for Firstar's stock-based plans been determined in accordance with SFAS No. 123, net income would have been $292.5, $248.9 million and $228.2 million in 1997, 1996 and 1995, respectively. Earnings per common share assuming dilution would have been $1.99 in 1997, $1.65 in 1996 and $1.48 in 1995. NOTE 13. OTHER OPERATING EXPENSE A summary of other operating expense is as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Business development........................................ $ 30,415 $ 27,540 $ 29,413 Professional fees........................................... 27,412 22,244 20,491 Information processing expense.............................. 23,493 20,840 21,918 Stationery and supplies..................................... 22,034 24,696 21,284 Delivery.................................................... 21,091 19,497 19,192 Intangible amortization..................................... 14,987 15,321 11,068 Processing and other losses................................. 11,951 7,997 7,562 F.D.I.C. insurance.......................................... 2,480 2,282 16,531 Net foreclosed assets (income) expense...................... (995) 349 (281) SAIF assessments............................................ 7,837 Other....................................................... 58,642 52,512 54,158 -------- -------- -------- Total.................................................. $211,510 $201,115 $201,336 ======== ======== ========
41 43 NOTE 14. EMPLOYEE BENEFIT PLANS Firstar and its subsidiaries have non-contributory defined benefit pension plans covering substantially all employees. The benefits are based upon years of service and the employee's compensation during the last ten years of employment. The funding policy is to contribute annually the minimum amount necessary to satisfy federal minimum funding standards. Plan assets are primarily invested in listed stocks and U.S. Treasury and federal agency securities. The table below summarizes data relative to the plans.
DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Actuarial present value of benefit obligations: Vested benefit obligation................................. $257,798 $228,417 $216,261 Accumulated benefit obligation............................ 264,478 233,975 221,716 Projected benefit obligation.............................. 336,090 293,128 280,328 Plan assets at fair value................................... 338,005 291,462 237,195 Plan assets greater (less) than projected benefit obligation................................................ 1,915 (1,666) (43,133) Unrecognized prior service cost............................. 591 (120) (1,791) Unrecognized net asset...................................... (2,213) (3,446) (4,680) Unrecognized net loss....................................... 10,155 6,430 36,373 -------- -------- -------- Pension asset (liability).............................. $ 10,448 $ 1,198 $(13,231) ======== ======== ======== Net pension expense comprised the following: Service cost.............................................. $ 9,447 $ 10,319 $ 7,526 Interest cost on projected benefit obligation............. 22,196 20,443 18,863 Actual return on plan assets.............................. (45,693) (31,086) (46,230) Net amortization and deferral............................. 23,030 12,750 28,519 -------- -------- -------- Net pension expense.................................... $ 8,980 $ 12,426 $ 8,678 ======== ======== ======== Assumptions used in actuarial values: Discount rate............................................. 7.25% 7.75% 7.50% Rates of increase in compensation levels.................. 5.50 5.50 5.50 Expected rate of return on plan assets.................... 9.00 9.00 9.00
Firstar also has unfunded pension plans covering certain employees. Interest rates used in calculating the actuarial values are essentially the same as in the previously described plans. The table below summarizes data relative to the plans.
DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Projected benefit obligation................................ $(27,486) $(19,681) $(12,497) Unrecognized prior service cost............................. 2,158 2,365 2,572 Unrecognized transition obligation.......................... 61 104 146 Unrecognized net loss....................................... 9,628 3,885 2,068 -------- -------- -------- Pension liability...................................... $(15,639) $(13,327) $ (7,711) ======== ======== ======== Net pension expense comprised the following: Service cost.............................................. $ 696 $ 478 $ 294 Interest cost on projected benefit obligation............. 1,812 1,200 835 Net amortization and deferral............................. 592 451 260 -------- -------- -------- Net pension expense.................................... $ 3,100 $ 2,129 $ 1,389 ======== ======== ========
Firstar has profit sharing plans under which eligible employees can participate by contributing a portion of their salary for investment in one or more trust funds. Contributions are made to the account of each participant based upon profitability or at the discretion of the board of directors. Amounts expensed in connection with this plan were $9,597,000 in 1997, $7,013,000 in 1996, and $11,370,000 in 1995. 42 44 In addition to pension benefits, certain health care benefits are made available to active and retired employees. The table below summarizes data relative to this benefit program. The program is unfunded and the transition obligation is being amortized over 20 years.
DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Accumulated postretirement benefit obligation: Retirees.................................................. $(32,648) $(31,178) $(40,893) Fully eligible active plan participants................... (5,553) (5,716) (6,478) Other active plan participants............................ (13,351) (11,552) (12,641) -------- -------- -------- Total.................................................. (51,552) (48,446) (60,012) Unrecognized transition obligation.......................... 38,124 42,590 50,194 Unrecognized net gain....................................... (17,780) (20,661) (7,528) -------- -------- -------- Postretirement benefit liability....................... $(31,208) $(26,517) $(17,346) ======== ======== ======== Net postretirement benefit expense comprised the following: Service cost.............................................. $ 943 $ 963 $ 787 Interest cost............................................. 3,658 4,401 3,753 Net amortization and deferral............................. 1,760 2,354 2,093 Plan curtailment.......................................... 1,287 2,181 -------- -------- -------- Net postretirement benefit expense..................... $ 7,648 $ 9,899 $ 6,633 ======== ======== ========
For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed, decreasing to 5.5% by 2004 and remaining at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement accumulated benefit obligation by $3,404,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $421,000. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25%, 7.75% and 7.50 % at December 31, 1997, 1996 and 1995, respectively. NOTE 15. INCOME TAXES The taxes applicable to income before income taxes were as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Current income taxes: Federal................................................... $122,997 $ 97,942 $ 95,797 State and other........................................... 18,546 19,169 22,891 -------- -------- -------- Subtotal............................................... 141,543 117,111 118,688 Deferred income taxes: Federal................................................... 5,611 5,339 510 State and other........................................... 485 1,734 (845) -------- -------- -------- Subtotal............................................... 6,096 7,073 (335) -------- -------- -------- Provision for income taxes............................. $147,639 $124,184 $118,353 ======== ======== ========
Exercised stock options produced tax benefits of $8,237,000 in 1997, $7,848,000 in 1996 and $3,785,000 in 1995 which were allocated directly to stockholders' equity. Also, the sale of subsidiaries which were acquired in a purchase business combination produced tax expense of $4,515,000 in 1996 which was allocated directly to goodwill. 43 45 The actual provision for income taxes differed from the amount computed by applying the federal statutory rate of 35% to income before income taxes as shown below:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Tax expense at statutory rate............................... $154,997 $131,091 $121,543 Increase (reduction) in taxes resulting from: Tax-exempt income......................................... (21,714) (20,460) (20,456) State and local taxes--net of federal income tax benefit................................................ 12,370 13,587 14,330 Amortization of nondeductible intangibles................. 3,703 4,050 2,748 Favorable settlement of prior years' taxes................ (3,229) Other--net................................................ (1,717) (855) 188 -------- -------- -------- Provision for income taxes............................. $147,639 $124,184 $118,353 ======== ======== ========
The significant components of deferred income tax expense attributable to income from continuing operations are as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars) Deferred tax expense (exclusive of the effects of other components listed below).................................. $ 6,298 $ 6,541 $ 98 Change in beginning of year valuation allowance due to effective tax planning strategies......................... (1,008) Change in valuation allowance due to creation/utilization of net operating losses................................... (202) 532 575 -------- -------- -------- Total.................................................. $ 6,096 $ 7,073 ($ 335) ======== ======== ========
The significant components of the net deferred tax asset were as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- ---- (thousands of dollars) Deferred tax liabilities: Equipment leased to customers............................. $(23,464) $(16,952) $(13,860) Securities available for sale............................. (13,242) (10,019) (20,164) Bank premises and equipment............................... (12,704) (12,616) (11,120) Acquired assets accounted for as a purchase............... (11,043) (12,906) (9,491) Other--net................................................ (619) Deferred tax assets: Reserve for loan losses................................... 88,644 85,734 78,176 Pension and post-retirement benefits...................... 16,188 14,335 11,463 State and federal net operating loss carry forwards....... 11,462 11,887 11,378 Deferred compensation..................................... 10,618 12,834 8,889 Other--net................................................ 3,347 6,755 -------- -------- -------- Subtotal............................................... 65,840 75,644 62,026 Valuation allowance......................................... (10,941) (11,143) (10,611) -------- -------- -------- Net deferred tax asset................................. $ 54,899 $ 64,501 $ 51,415 ======== ======== ========
The change in net deferred tax asset includes $3,223,000 of tax expense in 1997, $10,145,000 of tax benefit in 1996 and $20,800,000 of tax expense in 1995 allocated directly to stockholders' equity for unrealized 44 46 gains (losses) on securities available for sale recorded in accordance with SFAS No. 115. Other changes relate to acquisitions. The valuation allowance was decreased $202,000 in 1997, increased $532,000 in 1996 and decreased $433,000 in 1995. The valuation allowance has been recognized primarily to offset deferred tax assets related to state net operating loss carry forwards totaling approximately $212,983,000 which expire at various times within the next 15 years. The net deferred tax asset is included in other assets. Amounts originally reported for 1996 have been reclassified to reflect actual tax return results. NOTE 16. NET INCOME PER COMMON SHARE Basic and diluted earnings per share of Firstar were calculated as follows:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 -------- -------- -------- (thousands of dollars, except per share) Basic: Net income................................................ $295,209 $250,177 $228,913 Less preferred dividends.................................. 483 867 1,521 -------- -------- -------- Net income applicable to common stock..................... $294,726 $249,310 $227,392 Average common shares outstanding......................... 145,143 148,061 151,432 Net income per common share--basic..................... $ 2.03 $ 1.68 $ 1.50 Diluted: Net income................................................ $295,209 $250,177 $228,913 Average common shares outstanding......................... 145,143 148,061 151,432 Options & stock plans..................................... 1,570 1,312 2,106 Preferred stock........................................... 593 1,063 1,318 -------- -------- -------- Average common shares outstanding--diluted................ 147,306 150,436 154,856 Net income per common share--diluted................... $ 2.00 $ 1.66 $ 1.48
NOTE 17. COMMITMENTS AND CONTINGENT LIABILITIES Firstar has outstanding at any time a significant number of commitments to extend credits to its customers. These commitments include revolving credit agreements, term loan commitments, short-term borrowing agreements and standby letters of credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured agreements to extend credit. Such commitments are reviewed periodically, at which time the commitments may be maintained, increased, decreased or canceled depending upon evaluation of the customer's credit worthiness and other considerations. Standby and commercial letters of credit are conditional commitments issued by Firstar to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Firstar uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Firstar evaluates each customer's credit worthiness on a case-by-case basis. The 45 47 amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the party. Firstar originates and sells residential mortgage loans as a part of various mortgage backed security programs sponsored by United States government agencies or government-sponsored agencies, such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association. These sales are often subject to certain recourse provisions in the event of default by the borrower. The following is a summary of such commitments at December 31, 1997 and 1996:
DECEMBER 31 ---------------- 1997 1996 ------ ------ (millions of dollars) Commitments to extend credit................................ $5,547 $6,044 Credit card lines........................................... 2,969 2,470 Standby and commercial letters of credit.................... 546 550 Mortgage loans sold with recourse........................... 179 220
Firstar and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which involve substantial claims for compensatory or punitive damages. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of Firstar. NOTE 18. REGULATORY RESTRICTIONS AND CAPITAL RATIOS Federal regulations require Firstar to maintain as reserves, minimum cash balances based on deposit levels at subsidiary banks. Cash balances restricted from usage due to these requirements were $75 million and $60 million at December 31, 1997 and 1996, respectively. Firstar's subsidiary banks are restricted by regulation as to the amount of funds which can be transferred to the parent in the form of loans and dividends. As of December 31, 1997, $173 million could be loaned to Firstar by the subsidiary banks subject to strict collateral requirements, and $114 million could be paid to Firstar by the subsidiary banks in the form of dividends. In addition each subsidiary bank could pay dividends to Firstar in an amount which approximates Firstar's equity in their 1998 net income. The payment of dividends by any subsidiary bank may also be affected by other factors beyond this regulatory limitation, such as maintenance of adequate capital for each subsidiary bank. Firstar and its bank subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on Firstar's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Firstar must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Firstar's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 46 48 Firstar and its subsidiaries listed below have met all capital requirements necessary to be classified as "well capitalized" as of December 31, 1997 and 1996.
MINIMUM TO BE WELL DECEMBER 31, 1997 CAPITAL REQUIREMENT CAPITALIZED --------------------- --------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- ---------- ----- ---------- ----- (thousands of dollars) Total Capital (to Risk Weighted Assets): Consolidated.......................... $1,875,362 11.71% $1,281,330 8.00% $1,601,663 10.00% Firstar Bank Milwaukee................ 655,236 10.21 513,593 8.00 641,992 10.00 Firstar Bank Wisconsin................ 353,984 11.43 247,791 8.00 309,738 10.00 Firstar Bank Minnesota................ 241,675 12.27 157,544 8.00 196,930 10.00 Firstar Bank Iowa..................... 243,968 11.63 167,814 8.00 209,767 10.00 Firstar Bank Illinois................. 212,508 14.31 118,464 8.00 148,080 10.00 Firstar Bank U.S.A.................... 139,390 12.76 87,381 8.00 109,227 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated.......................... 1,634,924 10.21% 640,665 4.00% 960,998 6.00% Firstar Bank Milwaukee................ 538,295 8.38 256,797 4.00 385,195 6.00 Firstar Bank Wisconsin................ 303,196 9.79 123,895 4.00 185,843 6.00 Firstar Bank Minnesota................ 216,964 11.02 78,772 4.00 118,158 6.00 Firstar Bank Iowa..................... 210,707 10.04 83,907 4.00 125,860 6.00 Firstar Bank Illinois................. 193,882 13.05 59,232 4.00 88,848 6.00 Firstar Bank U.S.A.................... 105,705 9.68 43,691 4.00 65,536 6.00 Tier 1 Leverage (to Average Assets): Consolidated.......................... 1,634,924 8.50% 769,046 4.00% 961,307 5.00% Firstar Bank Milwaukee................ 538,295 7.29 295,445 4.00 369,306 5.00 Firstar Bank Wisconsin................ 303,196 7.57 160,213 4.00 200,266 5.00 Firstar Bank Minnesota................ 216,964 8.16 106,353 4.00 132,941 5.00 Firstar Bank Iowa..................... 210,707 7.29 115,672 4.00 144,590 5.00 Firstar Bank Illinois................. 193,882 7.28 106,498 4.00 133,122 5.00 Firstar Bank U.S.A.................... 105,705 12.77 33,114 4.00 41,393 5.00
MINIMUM TO BE WELL DECEMBER 31, 1996 CAPITAL REQUIREMENT CAPITALIZED ------------------- -------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------ ----------- ------ ---------- ------ (thousands of dollars) Total Capital (to Risk Weighted Assets): Consolidated.......................... $1,888,093 13.47% $1,121,647 8.00% $1,402,059 10.00% Firstar Bank Milwaukee................ 569,904 11.19 407,573 8.00 509,466 10.00 Firstar Bank Wisconsin................ 379,913 12.82 237,135 8.00 296,419 10.00 Firstar Bank Minnesota................ 291,586 13.67 170,702 8.00 213,377 10.00 Firstar Bank Iowa..................... 244,750 12.64 154,892 8.00 193,615 10.00 Firstar Bank Illinois................. 223,752 14.83 120,731 8.00 150,914 10.00 Firstar Bank U.S.A.................... 56,532 11.47 39,421 8.00 49,276 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated.......................... 1,636,700 11.67% 560,823 4.00% 841,235 6.00% Firstar Bank Milwaukee................ 482,490 9.47 203,786 4.00 305,680 6.00 Firstar Bank Wisconsin................ 340,363 11.48 118,568 4.00 177,852 6.00 Firstar Bank Minnesota................ 264,821 12.41 85,351 4.00 128,026 6.00 Firstar Bank Iowa..................... 220,542 11.39 77,446 4.00 116,169 6.00 Firstar Bank Illinois................. 204,796 13.57 60,366 4.00 90,548 6.00 Firstar Bank U.S.A.................... 50,227 10.19 19,711 4.00 29,566 6.00 Tier 1 Leverage (to Average Assets): Consolidated.......................... 1,636,700 8.55% 765,900 4.00% 957,375 5.00% Firstar Bank Milwaukee................ 482,490 6.73 286,717 4.00 358,397 5.00 Firstar Bank Wisconsin................ 340,363 8.10 168,150 4.00 210,188 5.00 Firstar Bank Minnesota................ 264,821 9.22 114,873 4.00 143,592 5.00 Firstar Bank Iowa..................... 220,542 7.91 111,489 4.00 139,361 5.00 Firstar Bank Illinois................. 204,796 7.46 109,773 4.00 137,216 5.00 Firstar Bank U.S.A.................... 50,227 11.47 17,516 4.00 21,895 5.00
47 49 NOTE 19. DERIVATIVE FINANCIAL INSTRUMENTS Rate Risk Management As part of its asset and liability management, Firstar uses various types of interest rate contracts for the purpose of managing its interest rate risks. The use of interest rate contracts enables Firstar to synthetically alter the repricing characteristics of designated earning assets and interest-bearing liabilities. The following tables summarize the notional amounts of interest rate contracts at December 31, 1997, used by Firstar in its asset and liability management process:
INTEREST RATE SWAPS ----------------------------- RECEIVE FIXED RATE TOTAL ------------------ INTEREST INDEX RECEIVE CAPS AND RATE AMORTIZING OTHER VARIABLE FLOORS CONTRACTS ---------- ----- -------- -------- --------- (millions of dollars) December 31, 1995................................. $ 269 $ 55 $ 37 $ 701 $1,062 Additions....................................... 25 25 Maturities...................................... (162) (28) (110) (300) ----- ---- ---- ----- ------ December 31, 1996................................. 107 27 62 591 787 Maturities...................................... (84) (27) (54) (50) (215) ----- ---- ---- ----- ------ December 31, 1997................................. $ 23 $ 0 $ 8 $ 541 $ 572 ===== ==== ==== ===== ======
Index amortizing interest rate swaps are used to convert variable rate loans to a fixed rate basis. The amortizing feature of these swaps serves to extend the maturity after a predetermined mandatory period if the three-month LIBOR index rate is above a pre-established reference rate on a quarterly basis. Additionally, the notional amount of the swaps is reduced on a quarterly basis based upon pre-established rates. Interest rate swaps were used to convert variable rate loans to fixed rate loans. Interest rate swaps totaling $8 million were used to convert fixed rate loans and securities to a variable rate basis. Interest rate floors provide for the receipt of payments when the three month LIBOR rate is below a predetermined interest rate floor. Firstar has entered into $210 million of floors to manage interest rate risk on certain variable rate loans and has entered into $331 million of floors to manage the interest rate risk on money market fund deposits which have guaranteed minimum interest rates. Interest rate caps provide for the receipt of payments when the three month LIBOR rate exceeds predetermined interest rate caps. Firstar had entered into interest rate caps to manage interest rate risk on variable rate borrowed funds. No interest rate caps are currently in place. Net cash flows associated with off-balance sheet interest rate contracts used to manage interest rate risk reduced net interest revenue by $1,100,000, $1,500,000 and $9,100,000 during 1997, 1996 and 1995, respectively. The notional values of derivative financial instruments represent the amounts on which interest payments are exchanged between the counterparties. Those notional values do not represent direct credit exposures. Firstar is exposed to credit-related losses in the event of nonperformance by counterparties to these instruments but does not expect any counterparty to fail to meet their obligations. Where appropriate, Firstar requires collateral based upon the positive market value of the exposure taking into account bilateral netting agreements with certain counterparties. Based on market values, Firstar's credit exposure was $251 thousand at December 31, 1997. Firstar enters into both mandatory and optional commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking activities. Firstar commits to sell the loans at specified prices in a future period typically within 90 days. The risk associated with these commitments consists primarily of loans not closing in sufficient volumes and at appropriate yields to meet the sale commitments. Firstar had contracts totaling $334 million and $173 million on December 31, 1997 and 1996, 48 50 respectively. Gains or losses on these contracts are included in the determination of the market value of mortgages held for sale. The maturity of derivative financial instruments as of December 31, 1997 is as follows:
MATURITY RANGE OF DERIVATIVE FINANCIAL INSTRUMENTS --------------------------------------------------------------------- MARKET WEIGHTED VALUE AVERAGE ASSET 1998 1999 2000 TOTAL MATURITIES (LIABILITY) ----- ----- ----- ----- ---------- ----------- (millions of dollars) Interest rate swaps Receive variable....................... $ 8 $ 8 1.3 yrs $(.3) Average receive rate................ 5.91% 5.91% Average pay rate.................... 8.59% 8.59% Receive fixed.......................... $ 16 $ 7 $ 23 1.0 yrs (.1) Average receive rate................ 5.17% 5.40% 5.24% Average pay rate.................... 5.78% 5.75% 5.77% Interest rate floors..................... $ 25 $ 211 $ 305 $ 541 1.9 yrs .3 Average floor rate..................... 5.00% 5.09% 4.77% 4.90% ----- ----- ----- ----- ---- Total............................. $ 41 $ 226 $ 305 $ 572 1.9 yrs $(.1) ===== ===== ===== ===== ====
- --------------- All interest rates represent rates in effect on December 31, 1997. Index rate for interest rate caps/floors is three month LIBOR. Trading Activities Firstar also acts as an intermediary for customers in their management of interest rate and foreign currency rate risk. In this regard, Firstar will enter into interest rate swaps, caps, floors and foreign exchange contracts with customers to minimize their exposure to market risk. Firstar enters into essentially offsetting transactions with other counterparties. Customer related derivative activity, as well as derivative contracts not used to manage interest rate risk on recorded assets and liabilities, is marked to market value. The credit exposure at year-end of $6.5 million is represented by the fair value of contracts with a positive value. Gross credit exposure amounts disregard the value of any collateral. Revenue from this intermediary activity was $2.9 million and $2.2 million in 1997 and 1996, respectively. Information on these transactions is shown below:
1997 1996 ----------------------------- ----------------------------- ESTIMATED ESTIMATED FAIR VALUE FAIR VALUE NOTIONAL ------------------ NOTIONAL ------------------ AMOUNT YEAR-END AVERAGE AMOUNT YEAR-END AVERAGE -------- -------- ------- -------- -------- ------- (millions of dollars) Interest rate swaps In a receivable position............... $283 $2.9 $3.1 $460 $3.4 $5.4 In a payable position.................. 267 2.0 2.3 311 2.5 4.5 Interest rate caps/floors Held................................... 63 0.6 9.6 77 1.2 1.5 Written................................ 63 0.6 9.6 77 1.2 1.5 Foreign exchange contracts In a receivable position............... 38 3.0 2.7 49 1.5 1.6 In a payable position.................. 51 1.5 1.3 36 .9 .9
49 51 NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that Firstar disclose estimated fair values for its financial instruments. Fair value estimates were based on relevant market data and information about the various financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time Firstar's entire holdings of a particular financial instrument. Because no market exists for a significant portion of Firstar's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, future expected loss experience, and other factors. These estimates are subjective and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities which are not considered financial instruments. Significant assets that are not considered financial instruments include goodwill, core deposit intangibles, certain customer relationships and fixed assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. Fair value estimates, methods and assumptions are set forth below for Firstar's financial instruments. Cash and short-term investments--The carrying amounts for short-term investments (which include interest-bearing deposits with banks, federal funds sold and resale agreements) approximate fair value because they mature in 90 days or less and do not represent unanticipated credit concerns. Securities--Estimated fair value for securities is based on quoted market prices. The fair value of certain small issues and municipal securities which are not readily available through market quotations is assumed to equal carrying value as these securities generally have short terms. These securities do not represent a significant portion of the portfolio. Loans--Fair values were estimated by discounting the expected future cashflows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. For variable rate loans which reprice frequently, the estimated fair value is equal to the carrying value. Deposits--The fair value of deposits with no stated maturity, such as interest bearing and non-interest bearing demand, savings and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using current market rates for similar types of deposits. Borrowed funds--The carrying value of short-term borrowed funds approximates fair value as they are payable within three months or less. The estimated fair value of long-term debt is based on broker quotations, when available. Debt for which quoted prices were not available was valued using cash flows discounted at a current market rate for similar types of debt. Derivative financial instruments--The fair value of interest rate swap agreements is based on the present value of the swap primarily using counter party or third party dealer quotes. Fair values for caps and floors were obtained using an option pricing model. These values represent the estimated amount Firstar would receive or pay to terminate the contracts or agreements taking into account current interest rates and market volatility. Prices obtained from counter parties or pricing models are tested by obtaining third party valuations. The fair value of commitments to extend credit and standby letters of credit is not material and is not shown here. 50 52 The estimated fair value of Firstar's financial instruments is summarized as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------ ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ----------- ---------- ----------- ----------- (thousands of dollars) Financial assets: Cash and short-term investments.......... $ 1,342,127 $1,342,127 $ 1,648,408 $ 1,648,408 Trading securities....................... 2,293 2,293 13,489 13,489 Securities available for sale............ 1,707,606 1,707,606 1,966,590 1,966,590 Securities held to maturity.............. 2,452,124 2,505,360 2,250,776 2,287,448 Loans, net of allowance for loan losses................................ 13,349,925 13,474,914 12,982,396 12,991,668 Financial liabilities: Deposits: Without stated maturities............. 9,650,900 9,650,900 9,831,279 9,831,279 With stated maturities................ 5,063,754 5,082,283 5,382,918 5,400,419 Short-term borrowed funds................ 2,121,412 2,121,412 1,868,606 1,868,606 Long-term debt........................... 1,057,151 1,069,438 697,194 701,879 Derivative financial instruments: Asset and liability management: Interest rate instruments Asset............................... 251 2,561 Liability........................... 361 1,199 Trading activities: Interest rate contracts Asset............................... 3,512 3,512 4,589 4,589 Liability........................... 2,675 2,675 3,700 3,700 Foreign exchange contracts Asset............................... 2,969 2,969 1,500 1,500 Liability........................... 1,475 1,475 900 900
51 53 NOTE 21. PARENT CORPORATION CONDENSED FINANCIAL STATEMENTS BALANCE SHEETS
DECEMBER 31 ----------------------- 1997 1996 ---------- ---------- (thousands of dollars) Assets: Cash and due from banks................................... $ $ 80 Short-term investments.................................... 34,672 161,150 Securities available for sale............................. 4,997 5,011 Commercial loans.......................................... 21 64 Loans to bank subsidiaries................................ 80,000 36,282 Investment in bank subsidiaries........................... 1,890,844 1,905,505 Investment in other subsidiaries.......................... 33,554 25,381 Other assets.............................................. 10,025 8,124 ---------- ---------- Total assets........................................... $2,054,113 $2,141,597 ========== ========== Liabilities and stockholders' equity: Short-term borrowed funds................................. $ $ 75,000 Long-term debt............................................ 332,980 332,980 Other liabilities......................................... 28,032 29,570 Stockholders' equity...................................... 1,693,101 1,704,047 ---------- ---------- Total liabilities and stockholders' equity............. $2,054,113 $2,141,597 ========== ==========
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ---------------------------------- 1997 1996 1995 -------- ---------- ---------- (thousands of dollars) Revenue: Dividends from bank subsidiaries.......................... $322,423 $ 219,714 $ 145,338 Dividends from other subsidiaries......................... 6,000 6,000 6,000 Fees from subsidiaries.................................... 43,429 29,810 26,083 Investment and loan income................................ 5,302 5,362 5,423 Other revenue............................................. 188 1,546 121 -------- ---------- ---------- Total revenue.......................................... 377,342 262,432 182,965 Expense: Interest.................................................. 29,085 23,760 15,501 Salaries and employee benefits............................ 28,740 20,336 18,795 Other expense............................................. 18,015 13,814 17,251 -------- ---------- ---------- Total expense.......................................... 75,840 57,910 51,547 Income before income taxes and equity in undistributed income of subsidiaries.................................... 301,502 204,522 131,418 Provision for income tax benefits........................... (10,825) (7,096) (6,465) -------- ---------- ---------- Income before equity in undistributed income of subsidiaries.............................................. 312,327 211,618 137,883 Equity in undistributed income (dividends in excess of earnings)................................................. (17,118) 38,559 91,030 -------- ---------- ---------- Net income............................................. $295,209 $ 250,177 $ 228,913 ======== ========== ==========
52 54 STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 --------------------------------- 1997 1996 1995 --------- --------- --------- (thousands of dollars) Cash flows from operating activities: Net income............................................... $ 295,209 $ 250,177 $ 228,913 Adjustments: Equity in undistributed income of subsidiaries........ 17,118 (38,559) (91,030) Depreciation, amortization and accretion.............. 743 789 553 (Increase) decrease in other assets................... (1,495) 11,789 (2,579) (Decrease) increase in other liabilities.............. (623) 4,269 1,516 Other net............................................. 392 (248) 94 --------- --------- --------- Net cash provided by operating activities........... 311,344 228,217 137,467 Cash flows from investing activities: Net decrease (increase) in short-term investments........ 126,478 (114,750) 24,550 Net increase in long-term investments.................... (24) (5,011) Net decrease in commercial loans......................... 42 263 98 Net (increase) decrease in loans to subsidiaries......... (43,718) 831 1,645 Purchases of premises and equipment...................... (1,377) (589) (1,092) Capital contributions to subsidiaries.................... (5,028) (400) --------- --------- --------- Net cash provided by (used in) investing activities....................................... 81,401 (119,273) 19,790 Cash flows from financing activities: Repayment of long-term debt.............................. (46,616) Net proceeds from long-term debt......................... 153,050 99,360 Repayment of short-term debt............................. (175,000) Net proceeds from short-term debt........................ 100,000 75,000 Cash dividends........................................... (119,909) (111,143) (101,359) Preferred stock redemption............................... (8,350) Common stock transactions................................ (197,916) (179,748) (146,985) --------- --------- --------- Net cash used in financing activities............... (392,825) (109,457) (157,334) --------- --------- --------- Net decrease in cash and due from banks.................... (80) (513) (77) Cash and due from banks at beginning of year............... 80 593 670 --------- --------- --------- Cash and due from banks at end of year..................... $ 0 $ 80 $ 593 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest................... $ 28,711 $ 23,757 $ 13,036
53 55 FIRSTAR CORPORATION AND SUBSIDIARIES SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1997 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (thousands of dollars, except per share) Interest revenue.................................... $341,580 $350,532 $354,256 $355,105 Interest expense.................................... 154,556 163,921 166,398 166,213 -------- -------- -------- -------- Net interest revenue................................ 187,024 186,611 187,858 188,892 Provision for loan losses........................... 9,718 9,532 11,290 24,118 Other operating revenue............................. 110,449 113,378 120,906 146,406 Other operating expense............................. 178,622 180,102 183,764 201,530 -------- -------- -------- -------- Income before income taxes.......................... 109,133 110,355 113,710 109,650 Provision for income taxes.......................... 37,338 37,647 38,423 34,231 -------- -------- -------- -------- Net income.......................................... $ 71,795 $ 72,708 $ 75,287 $ 75,419 ======== ======== ======== ======== Per common share: Net income.......................................... $ .49 $ .50 $ .52 $ .52 Net income assuming dilution........................ .48 .50 .51 .51 Dividends........................................... .19 .21 .21 .21 Stock price ranges: High.............................................. 32 5/8 33 1/8 38 43 11/16 Low............................................... 25 9/16 27 1/4 30 5/8 34 Close............................................. 27 1/2 30 1/2 36 1/4 42 7/16
1996 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (thousands of dollars, except per share) Interest revenue.................................... $342,579 $340,835 $351,022 $348,462 Interest expense.................................... 158,243 156,636 161,152 156,981 -------- -------- -------- -------- Net interest revenue................................ 184,336 184,199 189,870 191,481 Provision for loan losses........................... 9,209 10,846 8,908 13,684 Other operating revenue............................. 105,055 106,223 113,351 115,823 Other operating expense............................. 227,922 169,530 187,012 188,866 -------- -------- -------- -------- Income before income taxes.......................... 52,260 110,046 107,301 104,754 Provision for income taxes.......................... 15,142 39,883 38,029 31,130 -------- -------- -------- -------- Net income.......................................... $ 37,118 $ 70,163 $ 69,272 $ 73,624 ======== ======== ======== ======== Per common share: Net income.......................................... $ .25 $ .48 $ .46 $ .49 Net income assuming dilution........................ .25 .48 .46 .48 Dividends........................................... .17 .19 .19 .19 Stock price ranges: High.............................................. 22 15/16 24 7/8 24 9/16 26 7/8 Low............................................... 18 5/16 21 1/16 21 7/16 23 3/4 Close............................................. 22 3/8 23 1/16 24 1/8 26 1/4
54 56 FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND FINANCIAL RATIOS
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (thousands of dollars, except per share data) INTEREST REVENUE LOANS............... $1,138,417 $1,113,459 $1,081,685 $ 914,311 $ 824,082 Securities........................... 256,354 263,799 253,794 193,280 195,391 Other................................ 6,702 5,640 12,307 12,153 8,581 ---------- ---------- ---------- ---------- ---------- Total interest revenue............. 1,401,473 1,382,898 1,347,786 1,119,744 1,028,054 INTEREST EXPENSE Deposits............................. 471,670 465,553 444,706 321,969 315,858 Short-term borrowed funds............ 127,153 123,629 133,151 67,622 25,189 Long-term debt....................... 52,265 43,830 43,982 31,315 27,068 ---------- ---------- ---------- ---------- ---------- Total interest expense............. 651,088 633,012 621,839 420,906 368,115 ---------- ---------- ---------- ---------- ---------- NET INTEREST REVENUE................. 750,385 749,886 725,947 698,838 659,939 Provision for loan losses............ 54,658 42,647 36,756 23,891 29,090 ---------- ---------- ---------- ---------- ---------- NET INTEREST REVENUE AFTER LOAN LOSS PROVISION.......................... 695,727 707,239 689,191 674,947 630,849 OTHER OPERATING REVENUE Trust and investment management fees............................... 174,899 148,019 134,354 120,349 112,521 Service charges on deposit accounts........................... 87,483 91,953 81,775 82,378 83,060 Credit card service revenue.......... 71,038 69,945 62,106 55,867 53,728 Other................................ 157,719 130,535 113,962 112,025 143,609 ---------- ---------- ---------- ---------- ---------- Total other operating revenue...... 491,139 440,452 392,197 370,619 392,918 OTHER OPERATING EXPENSE Salaries and employee benefits....... 399,702 391,516 395,361 380,961 368,514 Equipment expense.................... 69,574 63,197 56,282 54,556 53,123 Net occupancy expense................ 63,232 64,235 57,992 52,984 58,328 Other................................ 211,510 254,382 224,487 217,684 209,309 ---------- ---------- ---------- ---------- ---------- Total other operating expense...... 744,018 773,330 734,122 706,185 689,274 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES........... 442,848 374,361 347,266 339,381 334,493 Provision for income taxes........... 147,639 124,184 118,353 112,708 106,555 ---------- ---------- ---------- ---------- ---------- NET INCOME........................... $ 295,209 $ 250,177 $ 228,913 $ 226,673 $ 227,938 ========== ========== ========== ========== ========== Per common share: Net income......................... $ 2.03 $ 1.68 $ 1.50 $ 1.49 $ 1.50 Net income assuming dilution....... 2.00 1.66 1.48 1.47 1.49 Dividends.......................... .82 .74 .66 .58 .50 Return on average total assets....... 1.53% 1.31% 1.26% 1.37% 1.49% Return on average common equity...... 18.41 15.95 15.11 15.96 17.81 Dividend payout ratio................ 40.39 44.05 44.00 38.93 33.33 Equity as a percentage of assets: At year-end........................ 8.53 8.62 7.95 8.41 8.28 Average for the year............... 8.32 8.22 8.37 8.67 8.67 Full-time equivalent staff (at year-end).......................... 7,755 8,367 9,263 9,895 9,831 Average common shares outstanding (000's)............................ 145,143 148,061 151,432 150,391 148,262 Average common shares outstanding-- assuming dilution (000's).......... 147,306 150,436 154,856 154,489 152,930
55 57 FIRSTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST REVENUE AND RATE ANALYSIS
1997 1996 1995 ---------------------------------- ---------------------------------- ------------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST ----------- ---------- ------- ----------- ---------- ------- ----------- ---------- (thousands of dollars) ASSETS Interest-bearing deposits with banks.............. $ 14,030 $ 691 4.93% $ 8,743 $ 380 4.35% $ 15,668 $ 967 Federal funds sold and resale agreements....... 108,655 5,880 5.41 88,319 4,916 5.57 173,541 10,534 Trading securities....... 2,238 133 5.94 10,140 392 3.87 14,243 968 Securities: Taxable................. 2,967,029 198,112 6.68 3,243,188 209,408 6.46 3,125,536 200,484 Nontaxable.............. 1,214,933 87,013 7.16 1,126,264 81,853 7.27 1,069,721 79,561 ----------- ---------- ----------- ---------- ----------- ---------- Total securities...... 4,181,962 285,125 6.82 4,369,452 291,261 6.67 4,195,257 280,045 Loans: Commercial.............. 7,497,082 633,851 8.45 7,163,564 615,966 8.60 6,838,277 609,248 Consumer................ 3,277,008 319,424 9.75 3,031,369 295,508 9.75 2,835,632 278,236 Consumer mortgage....... 2,516,170 192,172 7.64 2,727,441 208,570 7.65 2,617,765 201,256 ----------- ---------- ----------- ---------- ----------- ---------- Total loans........... 13,290,260 1,145,447 8.62 12,922,374 1,120,044 8.67 12,291,674 1,088,740 ----------- ---------- ----------- ---------- ----------- ---------- Interest earning assets................ 17,597,145 1,437,276 8.17 17,399,028 1,416,993 8.14 16,690,383 1,381,254 Reserve for loan losses.................. (214,026) (206,913) (197,181) Cash and due from banks................... 998,381 1,044,706 895,767 Other assets............. 942,049 922,008 826,431 ----------- ----------- ----------- Total assets.......... $19,323,549 $19,158,829 $18,215,400 =========== =========== =========== LIABILITIES AND EQUITY Interest-bearing demand.................. $ 1,598,625 $ 24,775 1.55% $ 1,552,786 $ 21,786 1.40% $ 1,571,378 $ 23,831 Money market accounts.... 2,785,697 119,135 4.28 2,577,477 102,927 3.99 2,110,503 85,231 Savings passbook......... 1,441,221 33,179 2.30 1,599,075 40,034 2.50 1,731,344 44,509 Certificates of deposit................. 5,275,729 294,581 5.58 5,392,430 300,806 5.58 5,261,589 291,135 Short-term borrowed funds................... 2,397,346 127,153 5.30 2,357,838 123,629 5.24 2,275,739 133,151 Long-term debt........... 746,500 52,265 7.00 641,082 43,830 6.84 610,889 43,982 ----------- ---------- ----------- ---------- ----------- ---------- Interest-bearing liabilities........... 14,245,118 651,088 4.57 14,120,688 633,012 4.48 13,561,442 621,839 Demand deposits.......... 3,186,828 3,174,569 2,827,623 Other liabilities........ 283,766 288,224 300,942 Stockholders' equity..... 1,607,837 1,575,348 1,525,393 ----------- ----------- ----------- Total liabilities and equity................ $19,323,549 $19,158,829 $18,215,400 =========== =========== =========== Net interest revenue/margin.......... $ 786,188 4.47% $ 783,981 4.51% $ 759,415 ========== ========== ========== 1995 1994 1993 ------- ---------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- ----------- ---------- ------- ----------- ---------- ------- (thousands of dollars) ASSETS Interest-bearing deposits with banks.............. 6.17% $ 24,843 $ 1,297 5.22% $ 64,832 $ 2,667 4.11% Federal funds sold and resale agreements....... 6.07 219,521 9,645 4.39 165,042 5,119 3.10 Trading securities....... 6.80 22,123 1,560 7.05 17,332 985 5.68 Securities: Taxable................. 6.41 2,452,243 145,358 5.93 2,313,373 144,460 6.24 Nontaxable.............. 7.44 1,074,371 75,355 7.01 1,064,975 78,460 7.37 ----------- ---------- ----------- ---------- Total securities...... 6.68 3,526,614 220,713 6.26 3,378,348 222,920 6.60 Loans: Commercial.............. 8.91 6,243,142 513,254 8.22 5,637,854 432,271 7.67 Consumer................ 9.81 2,636,378 241,152 9.15 4,472,934 396,560 8.87 Consumer mortgage....... 7.69 2,336,342 167,087 7.15 * * * ----------- ---------- ----------- ---------- Total loans........... 8.86 11,215,862 921,493 8.22 10,110,788 828,831 8.20 ----------- ---------- ----------- ---------- Interest earning assets................ 8.28 15,008,963 1,154,708 7.69 13,736,342 1,060,522 7.72 Reserve for loan losses.................. (191,441) (188,358) Cash and due from banks................... 954,489 1,016,639 Other assets............. 773,024 744,283 ----------- ----------- Total assets.......... $16,545,035 $15,308,906 =========== =========== LIABILITIES AND EQUITY Interest-bearing demand.................. 1.52% $ 1,643,922 $ 21,065 1.28% $ 1,632,045 $ 29,366 1.80% Money market accounts.... 4.04 2,027,485 57,274 2.82 1,960,086 49,583 2.53 Savings passbook......... 2.57 1,854,944 43,887 2.37 1,755,129 45,330 2.58 Certificates of deposit................. 5.53 4,410,873 199,743 4.53 4,290,651 191,579 4.47 Short-term borrowed funds................... 5.85 1,591,305 67,622 4.25 865,298 25,189 2.91 Long-term debt........... 7.20 477,405 31,315 6.56 421,537 27,068 6.42 ----------- ---------- ----------- ---------- Interest-bearing liabilities........... 4.59 12,005,934 420,906 3.51 10,924,746 368,115 3.37 Demand deposits.......... 2,837,257 2,793,567 Other liabilities........ 268,098 263,080 Stockholders' equity..... 1,433,746 1,327,513 ----------- ----------- Total liabilities and equity................ $16,545,035 $15,308,906 =========== =========== Net interest revenue/margin.......... 4.55% $ 733,802 4.89% $ 692,407 5.04% ========== ==========
- --------------- Interest and rates are calculated on a taxable equivalent basis, using a tax rate of 35%. The rate calculations include the effect of certain loans on which income is recognized only as cash payments are received or is accrued at less than the original contract rate. * Comparable data not available 56 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Notice of the 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A is incorporated herein by reference. The executive officers of Firstar Corporation are listed under Item 1 of this document. ITEM 11. EXECUTIVE COMPENSATION The Notice of the 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Notice of the 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Notice of the 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. FINANCIAL STATEMENTS The following financial statements of Firstar Corporation are filed as a part of this document under Item 8. Financial Statements and Supplementary Data. Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report (a)2. FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been included in the consolidated financial statements or are either not applicable or not significant. 57 59 (a)3. EXHIBITS 3.1 Articles of incorporation of Firstar Corporation (incorporated by reference to Exhibit 3.1 of the Form 10-K for the year ended December 31, 1996) 3.2 By-Laws of Firstar Corporation (incorporated by reference to Exhibit 3.2 of the Form 10-K for the year ended December 31, 1996) 4.3 Indenture dated as of May 1, 1988 between Firstar Corporation and Chemical Bank, as Trustee, relating to 10 1/4% Subordinated Notes due May 1, 1998 (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Registration No. 33-21527 of Firstar) 4.4 Shareholder Rights Plan of Firstar Corporation (incorporated by reference to Exhibit 4 of Form 8-K dated January 19, 1989 of Firstar) 4.5 Indenture dated as of August 23, 1995 between Firstar Corporation and Chemical Bank, as Trustee, relating to 7.15% Subordinated Notes Due September 1, 2000 (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Registration No. 33-61633 of Firstar) 4.6 Credit Agreement dated as of April 22, 1996 between Firstar Corporation and First National Bank of Chicago, as agent, (incorporated by reference to Exhibit 4.6 of the 10-K for 1996) 4.9 Form of Amended and Restated Depository Agreement among Firstar Corporation, Firstar Trust Company as depository, and the holders from time-to-time of Depository Receipts issued thereunder and the Form of Depository Receipt (incorporated by reference to Exhibit 4(g) of Amendment No. 1 to Registration No. 33-57245 of Firstar) 4.10 Series A Capital Securities Guarantee Agreement dated as of December 23, 1996 between Firstar Corporation and The Chase Manhattan Bank, as Guarantee Trustee (incorporated by reference to Exhibit 4.10 of the Form 10-K for the year ended December 31, 1996) 4.11 Indenture dated as of December 23, 1996 between Firstar Corporation and The Chase Manhattan Bank, as Debenture Trustee, relating to 8.32% Series A Junior Subordinated Deferrable Interest Debentures due December 15, 2026 (incorporated by reference to Exhibit 4.11 of the Form 10-K for the year ended December 31, 1996) 10.2 Directors' Stock Plan 10.3 Directors' Deferred Compensation Plan, as amended 10.4* Key Executive Employment and Severance Agreement, as amended (incorporated by reference to Exhibit 10.4 of the Form 10-Q of Firstar for the quarter ended September 30, 1993) 10.5 First Colonial Bankshares Corporation 1988 Stock Option Plan, as amended, assumed by Firstar (incorporated by reference to Exhibits 4.1 to 4.10 of Registration No. 33-57521 of Firstar) 10.6 Investors Bank Corp. Stock Option Plan, as amended, assumed by Firstar (incorporated by reference to Exhibits 4.1 and 4.2 of Registration No. 33-58915 of Firstar) 10.7* 1988 Incentive Stock Plan, as amended (incorporated by reference to Exhibit A of the Notice of the 1994 Annual Meeting and Proxy Statement of Firstar) 10.8* Annual Executive Incentive Plan, as amended (incorporated by reference to Exhibit B of the Notice of the 1994 Annual Meeting and Proxy Statement of Firstar) 10.10 Form of Indemnity Agreement between Firstar Corporation and its directors (incorporated by reference to Exhibit 10 of the Quarterly Report on Form 10-Q of Firstar for the quarter ended September 30, 1988) 21. Subsidiaries of Firstar Corporation 23. Consent of Independent Auditors 24. Powers of Attorney 27. Financial Data Schedule
- --------------- * Executive Compensation Plans A copy of the exhibits listed herein can be obtained by writing to Mr. Jeffrey B. Weeden, Senior Vice President-Finance and Chief Financial Officer, Firstar Corporation, P.O. Box 532, Milwaukee, Wisconsin 53201. (b) No Form 8-Ks were filed during the fourth quarter of 1997. 58 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTAR CORPORATION /s/ ROGER FITZSIMONDS -------------------------------------- Roger L. Fitzsimonds March 12, 1998 Chairman and Chief Executive Officer Pursuant to the requirement 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. /s/ ROGER FITZSIMONDS March 12, 1998 - ------------------------------------------------------ Roger L. Fitzsimonds Chairman, Chief Executive Officer and director /s/ JOHN A. BECKER March 12, 1998 - ------------------------------------------------------ John A. Becker President, Chief Operating Officer and director /s/ JEFFREY B. WEEDEN March 12, 1998 - ------------------------------------------------------ Jeffrey B. Weeden Senior Vice President-Finance and Chief Financial Officer
DIRECTORS Michael E. Batten* Robert C. Buchanan* George M. Chester, Jr.* Roger H. Derusha* James L. Forbes* Joe F. Hladky* C. Paul Johnson* James H. Keyes* William H. Lacy* Sheldon B. Lubar* Kenneth P. Manning* Daniel F. McKeithan, Jr.* Robert J. O'Toole* Judith D. Pyle* William W. Wirtz* *By /s/ WILLIAM J. SCHULZ March 12, 1998 -------------------------------------------------- William J. Schulz Attorney-in-Fact
59 EX-10.2 2 EXHIBIT 10.2 1 EXHIBIT 10.2 FIRSTAR CORPORATION DIRECTORS' STOCK PLAN 1. ESTABLISHMENT; PURPOSE Firstar Corporation and each of its bank subsidiaries (individually, "Firstar") hereby establish a stock plan for the benefit of their directors, known as the Firstar Corporation Directors' Stock Plan (the "Stock Plan"), to be administered by Firstar Corporation (the "Administrator"). The purpose of the Stock Plan is to provide an incentive to Firstar directors who are not employees of Firstar to remain as directors, increase their efforts for the success of Firstar, and encourage them to own shares of Common Stock of Firstar Corporation (or units of phantom stock under the Firstar Corporation Directors' Deferred Compensation Plan), thereby aligning their interests more closely with the interests of the stockholders of Firstar Corporation. 2. ELECTION TO PARTICIPATE Any director of Firstar who is not an employee of Firstar may elect to participate in the Stock Plan by filing an election with the Administrator prior to January 1 of the year the director desires to participate. Any director who serves on more than one Firstar board of directors may make a separate election to participate in the Stock Plan with respect to each such Firstar entity. Once an election has been filed with the Administrator, the director shall participate in the Stock Plan with respect to the applicable Firstar board of directors for the entire year in which he or she has initially elected to participate and for all subsequent years until the director files a notice of revocation of election with the Administrator, which revocation shall be effective as of December 31 of the year in which it is filed. 3. FEES PAID IN STOCK Commencing as of January 1 of the year a director elects to participate, all director fees earned by the director shall be paid in the form of shares of Common Stock of Firstar Corporation ("Common Stock") until the director shall cease to serve as a member of the applicable Firstar board of directors or until December 31 of the year in which the director shall file a notice of revocation of election pursuant to paragraph 2, whichever first occurs. Director fees for the purpose of the Stock Plan shall be all fees paid to a director by reason of his or her being a member of any voting, non-advisory board of directors of Firstar or any committee thereof. The number of shares of Common Stock to be paid to a director shall be computed by dividing the total amount of fees earned by the director in a given period by the fair market value of one share of Common Stock as of the last business day of the calendar quarter immediately preceding the quarter in which the period occurs. Fair market value means the closing price of the Common Stock on the New York Stock Exchange. Shares paid to a director shall be credited on a quarterly or more frequent basis to an account ("Share Account") for such director established by the Administrator with Firstar Trust Company, the transfer agent for the Common Stock. Directors may transfer or withdraw shares held in their Share Account subject to the restrictions of paragraph 7. 2 4. TREASURY SHARES Shares paid to directors under the Stock Plan shall be paid out of Treasury Shares of Common Stock held by Firstar Corporation. 5. DIVIDENDS Dividends paid on shares held in a director's Share Account will be paid to the director in the ordinary course of business by the Transfer Agent unless the director participates in the Firstar Corporation Dividend Reinvestment Plan, in which case such dividends will be reinvested in additional shares of Common Stock in accordance with the Dividend Reinvestment Plan. 6. NO FRACTIONAL SHARES No fractional shares shall be credited to the Share Accounts. Whenever the computation of the number of shares to be credited to a director's Share Account results in a fractional amount of one-half or greater, such amount shall be rounded up to the next greater whole number of shares and in all other cases such amount shall be rounded down to the next lower whole number of shares. 7. SECURITIES LAW COMPLIANCE The Administrator may impose such requirements and restrictions with respect to any shares of Common Stock acquired under the Stock Plan as it may deem advisable including, without limitation, (a) legends and/or stop-transfer orders restricting transferability, (b) investment and other representations from directors, and (c) other requirements or restrictions under applicable Federal or state securities laws and any stock exchange upon which the Common Stock is then listed. 8. ADJUSTMENT IN CAPITALIZATION In the event that any change in the outstanding shares of Common Stock occurs by reason of a stock dividend, stock split, recapitalization, merger, consolidation, combination, share exchange or similar corporate change, the number of shares of Common Stock to be credited to a director's Share Account in the calendar quarter in which such change occurs shall be appropriately adjusted. 9. FIRSTAR CORPORATION DIRECTORS' DEFERRED COMPENSATION PLAN Directors who participate in the Stock Plan may elect to defer receipt of their shares of Common Stock otherwise payable under the Stock Plan by electing to also participate in the Firstar Corporation Directors' Deferred Compensation Plan. 10. AMENDMENT The Stock Plan may be amended or terminated at any time by action of the board of directors of Firstar. EX-10.3 3 EXHIBIT 10.3 1 EXHIBIT 10.3 FIRSTAR CORPORATION DIRECTORS' DEFERRED COMPENSATION PLAN (THE "PLAN") The Plan is hereby amended and restated as follows: 1. ESTABLISHMENT Firstar Corporation and each of its bank subsidiaries (individually, "Firstar") hereby establish a deferred compensation plan for the benefit of their directors, known as the Firstar Corporation Directors' Deferred Compensation Plan (the "Plan"), to be administered by Firstar Corporation (the "Administrator"). One of the purposes of the Plan is to provide a means for participating directors to defer federal and state taxation on their director fees until they receive the balances in their Accounts. Consequently, Firstar Corporation shall have the discretion to interpret the Plan and to restrict the timing of elections under the Plan beyond that otherwise set forth in the terms of the Plan, as necessary to comply with applicable tax laws and rules on deferral of compensation. 2. ELECTION TO PARTICIPATE Any director of Firstar may elect to participate in the Plan with respect to Cash Fees or Stock Fees (as defined in Section 3 below), by filing an election with the Administrator prior to January 1 of the year the director desires to participate. Any director who serves on more than one Firstar board of directors may make a separate election to participate in the Plan with respect to each such Firstar entity. Once an election has been filed with the Administrator, the director shall participate in the Plan for the entire year in which he or she has initially elected to participate and for all subsequent years until the director files a notice or revocation of election with the Administrator, which revocation shall be effective as of December 31 of the year in which it is filed. Any participating director may elect once, at the time of his or her first election to participate in the Plan with respect to Stock Fees, to have the entire balance in his or her Cash Account converted to units in a Stock Account by dividing the dollar amount in the Cash Account by the market value of Common Stock of Firstar Corporation ("Firstar Stock") on the last trading day of the year of such election. The election to convert the director's Cash Account to a Stock Account shall be effective on January 1 of the following year. 3. DIRECTOR FEES Commencing as of January 1 of the year a director elects to participate all director fees earned by the director shall be deferred. Director fees that a Firstar director has elected to receive in Firstar Stock pursuant to the Firstar Corporation Directors' Stock Plan ("Stock Fees") shall be credited to his or her Stock Account under this Plan. Any amount credited to the Stock Account shall be converted into a 1 2 number of units equal to the number of shares of Firstar Stock that would have been distributed had the shares not been deferred hereunder. For any director who participates in the Plan with respect to more than one Firstar entity, separate Accounts shall be established for such director for each such Firstar entity. Director fees other than Stock Fees ("Cash Fees") shall be credited to a director's Cash Account under this Plan. Deferral under this Plan shall continue until the director shall cease to serve as a member of any Firstar board of directors or until December 31 of the year in which the director shall file a notice of revocation of election pursuant to Section 2, whichever first occurs. Director fees for the purpose of this Plan shall be all fees paid to a director by reason of his or her being a member of any voting, non-advisory board of directors of Firstar or any committee thereof. 4. DIRECTOR'S DEFERRED COMPENSATION ACCOUNTS For each director who participates in the Plan a Director's Deferred Compensation Account (the "Account"), consisting of a Cash Account and/or a Stock Account, shall be established. All Cash Fees deferred pursuant to this Plan shall be credited to the director's Cash Account on the date on which such fees otherwise would have been payable to the director had they not been deferred hereunder. All deferred Stock Fees shall be credited to the director's Stock Account on the date on which the underlying Firstar Stock would have been distributable to the Director pursuant to the Firstar Corporation Directors' Stock Plan had the receipt of such shares not been deferred hereunder. 5. EARNINGS FACTOR Until the balance of a director's Cash Account has been fully paid in accordance with Section 8, the balance from time to time standing in the Cash Account shall bear interest at a rate equivalent to the yield on 90-Day Treasury Bills in effect at the beginning of each calendar quarter. Such interest shall be credited to the Cash Account on the last day of each calendar quarter on which there is a balance in a director's Cash Account. On each dividend payment date applicable to Firstar Stock, each Stock Account shall be credited with an amount of dollars equal to the dividend that would have been paid on the same number of shares of Firstar Stock as the number of units in the Stock Account. Such dividend amount shall then be converted into additional units by dividing the dividend amount by the closing price of one share of Firstar Stock on the New York Stock Exchange on the dividend payment date (or the last business day prior thereto if the dividend payment date is not a business day.) In the event of a stock split or stock dividend, the number of units held by each Stock Account shall be adjusted in the same manner as the same number of shares of Firstar Stock would be adjusted. In the event of Firstar Corporation's merger with another corporation or conversion of its common stock into other securities, the Stock Account shall be adjusted to reflect units in the new securities equivalent to those that would have been received by a 2 3 shareholder holding the number of shares of Firstar Stock equal to the number of units held by the Stock Account. For all purposes thereafter, whenever "Firstar Corporation" or "Firstar Stock" is used in this Plan there shall be substituted for such terms the name of the corporation whose shares or securities were received by the Firstar shareholders. The board of directors of Firstar Corporation may make such other appropriate adjustments in the Stock Account as may be necessary to have that account reflect for Plan participants the economic value of being a Firstar shareholder. 6. NATURE OF ACCOUNTS The Accounts shall be utilized solely as devices for the measurement and determination of the amount of deferred compensation payable under the Plan. The Accounts shall not constitute or be treated as trust funds of any kind. All amounts at any time credited to the Account shall be and remain the sole property of Firstar Corporation, and a director shall have no ownership rights of any kind with respect thereto. A director's rights are limited to the right to receive payments as provided herein and a director's position with respect thereto is that of a general unsecured creditor of Firstar Corporation. Directors with balances in the Stock Account have no voting rights in Firstar Stock and no other incidents of stock ownership, by virtue of such balances, except the rights to dividend-equivalent credits set forth in Section 5. 7. NONASSIGNMENT Neither a director nor his or her duly designated beneficiary shall have any right to assign, transfer, pledge or otherwise convey the right to receive any amount of compensation which may be due hereunder, and any such attempted assignment, transfer, pledge or other conveyance shall not be recognized by Firstar. 8. PAYMENT OR DISTRIBUTION OF DIRECTOR'S DEFERRED COMPENSATION ACCOUNTS A director, prior to January 1 of any full calendar year of service as a director of Firstar, may elect and (subject to prior approval by the Board of Directors of Firstar Corporation in the case of changes by directors of Firstar Corporation affecting distribution of their Stock Accounts) may change any such prior elections, by giving notice to the Administrator, to have the balance in his or her Cash Account paid and/or the balance in his or her Stock Account converted into Firstar Common Stock and distributed, in any one of the following ways: (a) In a lump sum on January 31 of the first calendar year after the director ceases to serve as a member of any board of directors of Firstar or on January 31 of any calendar year within ten years thereafter. (b) In any number of equal consecutive annual installments, up to and including ten, commencing on January 31 of the first calendar year after the director ceases to serve as a member of any board of directors of Firstar, or commencing on January 31 of any calendar year within ten years thereafter. 3 4 (c) In a lump sum upon the earlier of (i) a Change of Control of the Corporation, as defined in the Firstar Corporation Key Executive Employment and Severance Agreement (a "Change of Control") or (ii) on January 31 of the first calendar year after the director ceases to serve as a member of any board of directors of Firstar or on January 31 of any calendar year within ten years thereafter. (d) In any number of equal consecutive annual installments, up to and including ten, commencing on January 31 of the first calendar year after the director ceases to serve as a member of any board of directors of Firstar, or commencing on January 31 of any calendar year within ten years thereafter, provided, however, that upon a Change of Control any amounts remaining in the Account shall be paid in a lump sum. The payment election made with respect to a director's Cash Account and the distribution election made with respect to the director's Stock Account, must be the same. The units in the Stock Account shall be converted one-for-one into shares of Firstar Stock and distributed to the director on the dates elected hereunder for distribution of the Stock Account. Cash shall be paid in lieu of fractional shares of Firstar Stock. In the event that the director makes a payment/distribution election under this Section 8, and does not serve as a director of Firstar for the full calendar year immediately following the year in which such election was filed, such election shall have no effect. In such event, if the director had made an earlier payment/distribution election under this Section 8 prior to a full calendar year in which he or she serves as a director of Firstar, the earlier election shall continue to govern the form of payment or distribution of the balance in the director's Account. If the director did not make such an earlier election, he or she shall be deemed to have made no payment/distribution election under this Section 8. In the event that the director makes no payment/distribution election under this Section 8, the balance in his or her Account shall be paid in a lump sum on January 31 of the first calendar year after the director ceases to serve as a member of any board of directors of Firstar. In the event of the death of a director, the balance in his or her Account shall be paid or distributed in a lump sum to the director's designated beneficiary (or to his or her estate in the absence of any beneficiary designation) on January 31 of the first calendar year following the date of death. 9. DESIGNATION OF BENEFICIARY A director may designate the beneficiary which is to receive all the funds in or stock payable under the director's Account at the director's death. Such designation shall be effective by filing a written notification with the Administrator and may be changed from time to time by similar action. If no such designation is made by a director, any such balance shall be paid to the director's estate. 4 5 10. ADMINISTRATOR The Administrator shall maintain all books and records in connection with the Plan. The Administrator shall calculate the balances in the Accounts and shall annually notify directors as to the balances in their Accounts. The Administrator, however, shall not be liable for Firstar's obligations under the Plan. 11. AMENDMENT The Plan may be amended or terminated at any time by action of the board of directors of Firstar but no amendment shall decrease the then current balances in the Accounts. 5 EX-21 4 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES Firstar Corporation has no parents. The following list shows the name of each subsidiary of Firstar and the percentage of ownership as of February 27, 1998.
Percentage Jurisdiction in which Name of Subsidiary Ownership Incorporated or Organized ------------------ --------- ------------------------- 1 Firstar Bank Milwaukee, National Association 100% United States 1 Firstar Bank Wisconsin 100% Wisconsin 1 Firstar Bank Wausau, National Association 100% United States 1 Firstar Bank Iowa, National Association 100% United States 1 Firstar Bank Burlington, National Association 100% United States 1 Firstar Bank of Minnesota, National Association 100% United States 1 Firstar Bank Illinois 100% Illinois 1 Firstar Bank U.S.A., National Association 100% United States 2 Firstar Metropolitan Bank & Trust 100% Arizona 1 Firstar Corporation of Arizona 100% Arizona 1 Firstar Trust Company 99.95% Wisconsin 1 Firstar Trust Company of Florida, National Association 100% United States 3 DPC of Milwaukee, Inc. 100% Wisconsin 3 Firstar Trade Services Corporation 100% Wisconsin 5 Firstar Trade Services Limited 100% Hong Kong 1 American Credit Corporation 100% Minnesota 1 Firstar Investment Research & Management Company, LLC 100% Wisconsin 1 Firstar Insurance Services, LLC 100% Wisconsin 3 Firstar Investment Services, Inc. 100% Wisconsin 1 Elan Life Insurance Company, Inc. 79% Arizona 1 Firstar Title Corp. 100% Wisconsin 3 Firstar Community Investment Corporation 100% Wisconsin 3 Firstar Leasing Services Corporation 100% Wisconsin 3 CSFM Corporation 100% Wisconsin 3 Firstar Home Mortgage Corporation 100% Wisconsin 3 Firstar Information Services Corporation 100% Wisconsin 1 Banks of Iowa Capital Corporation 100% Iowa
2 3 Milwaukee Capital Corporation 100% Nevada 4 Wisconsin Capital Corporation 100% Nevada 1 Firstar Capital Trust I 100% Delaware Notes ----- 1 Subsidiary of Firstar Corporation 2 Subsidiary of Firstar Corporation of Arizona 3 Subsidiary of Firstar Bank Milwaukee, National Association 4 Subsidiary of Firstar Bank Wisconsin 5 Subsidiary of Firstar Trade Services Corporation
EX-23 5 EXHIBIT 23 1 EXHIBIT 23 The Board of Directors Firstar Corporation: We consent to incorporation by reference in the Registration Statements Nos. 33-38830, 33-41030, 33-19830, 33-57521, 33-57523, 33-58559, 33-58913, 33-58915 and 33-59207 on Form S-8 of Firstar Corporation of our report dated January 14, 1998 relating to the consolidated balance sheets of Firstar Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Firstar Corporation. KPMG Peat Marwick LLP Milwaukee, Wisconsin March 12, 1998 EX-25 6 EXHIBIT 25 1 EXHIBIT 25 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 23rd day of February, 1998. /s/ George M. Chester, Jr. -------------------------- George M. Chester, Jr. 2 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 18th day of February, 1998. /s/ C. Paul Johnson ------------------- C. Paul Johnson 3 FIRSTAR CORPORATION (Commission File No. 1-2981 POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 30th day of January, 1998. /s/ William H. Lacy ------------------- William H. Lacy 4 FIRSTAR CORPORATION (Commission File No. 1-2981 POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 29th day of January, 1998. /s/ Robert C. Buchanan ----------------------- Robert C. Buchanan 5 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 29th day of January, 1998. /s/ William W. Wirtz -------------------- William W. Wirtz 6 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 23rd day of January, 1998. /s/ Robert J. O'Toole --------------------- Robert J. O'Toole 7 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 21st day of January, 1998. /s/ Daniel F. McKeithan, Jr. ---------------------------- Daniel F. McKeithan, Jr. 8 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 11th day of February, 1998. /s/ Michael E. Batten --------------------- Michael E. Batten 9 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 14th day of January, 1998. /s/ Judith D. Pyle ------------------ Judith D. Pyle 10 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 15th day of January, 1998. /s/ Kenneth P. Manning ---------------------- Kenneth P. Manning 11 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 19th day of January, 1998. /s/ Sheldon B. Lubar -------------------- Sheldon B. Lubar 12 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 20th day of January, 1998. /s/ James H. Keyes ------------------ James H. Keyes 13 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 12th day of January, 1998. /s/ Joe F. Hladky ----------------- Joe F. Hladky 14 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 13th day of January, 1998. /s/ James L. Forbes ------------------- James L. Forbes 15 FIRSTAR CORPORATION (Commission File No. 1-2981) POWER OF ATTORNEY Annual Report on Form 10-K WHEREAS, FIRSTAR CORPORATION, a Wisconsin corporation (hereinafter referred to as the "Corporation"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, an Annual Report of Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, the undersigned is or may hereafter be a director or executive officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints ROGER L. FITZSIMONDS, JEFFREY B. WEEDEN AND WILLIAM J. SCHULZ, and each of them, his or her attorney, with full power to act for and in his or her name, place and stead, to sign his or her name in such capacity to the Annual Report or Form 10-K, hereby ratifying and confirming all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney this 12th day of January, 1998. /s/ Roger H. Derusha -------------------- Roger H. Derusha EX-27 7 EXHIBIT 27
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 1,254,289 5,249 82,589 2,293 1,707,606 2,452,124 2,505,360 13,568,786 218,861 19,843,685 14,714,654 2,121,412 257,367 1,057,151 0 5,308 181,102 1,506,691 19,843,685 1,138,417 256,354 6,702 1,401,473 471,670 651,088 750,385 54,658 679 744,018 442,848 295,209 0 0 295,209 2.03 2.00 4.47 63,858 57,628 263 0 213,138 70,743 21,808 218,861 218,552 309 0
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