10-K405 1 1994 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K ----------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NO. 1-11792 MERCANTILE BANCORPORATION INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 43-0951744 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) P.O. BOX 524 63166-0524 ST. LOUIS, MISSOURI (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 314-425-2525 SECURITIES REGISTERED PURSUANT TO NAME OF EXCHANGE ON WHICH SECTION 12(B) OF THE ACT: REGISTERED: (1) COMMON STOCK ($5.00 PAR VALUE) (1) NEW YORK STOCK EXCHANGE (2) PREFERRED STOCK PURCHASE RIGHTS (2) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X 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. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON- AFFILIATES OF THE REGISTRANT AS OF MARCH 10, 1995: COMMON STOCK, $5.00 PAR VALUE, $1,488,634,772 INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF MARCH 10, 1995: COMMON STOCK $5.00 PAR VALUE, 45,681,034 SHARES OUTSTANDING DOCUMENTS INCORPORATED BY REFERENCE AS PROVIDED HEREIN, PORTIONS OF THE DOCUMENTS BELOW ARE INCORPORATED BY REFERENCE:
DOCUMENT PART--FORM 10-K -------- --------------- ANNUAL REPORT OF THE REGISTRANT TO ITS SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1994 PARTS I, II, IV PROXY STATEMENT FOR THE 1995 ANNUAL MEETING OF SHAREHOLDERS PART III
2 PART I ITEM I. BUSINESS THE COMPANY Mercantile Bancorporation Inc. ("Mercantile" or "Registrant") is a holding company which, as of March 10, 1995, owned all the stock (except for directors' qualifying shares) of Mercantile Bank of St. Louis National Association ("Mercantile Bank"), 40 commercial banks located throughout Missouri, southern Illinois, eastern Kansas, and northern Iowa, one savings and loan association located in Lebanon, Missouri, and other non-banking subsidiaries. At December 31, 1994, Mercantile's consolidated assets were $12,241,794,000, consolidated loans were $8,114,845,000, consolidated deposits were $9,053,859,000 and consolidated shareholders' equity was $1,068,250,000. At Decem- ber 31, 1994, Mercantile Bank and its consolidated subsidiaries had assets of $6,351,671,000, loans of $3,936,710,000, deposits of $3,881,183,000 and shareholder's equity of $524,064,000. Mercantile has its principal offices at P.O. Box 524, St. Louis, Missouri 63166-0524 (telephone number 314-425-2525). BUSINESS GENERAL Mercantile was organized on March 10, 1970, as a Missouri corporation for the purpose of becoming a multi-bank holding company. Mercantile commenced operations as a bank holding com- pany in March 1971. Since then Mercantile has acquired and organized additional banks, bank holding companies and savings and loan associations which are located throughout Missouri, southern Illinois, eastern Kansas, and northern Iowa. FINANCIAL SUMMARY OF MERCANTILE A financial summary of Mercantile and its consolidated subsidiaries is detailed below:
DECEMBER 31 --------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (THOUSANDS) Total assets $12,241,794 $12,141,127 $12,273,028 $10,765,280 $10,136,510 Loans and leases 8,114,845 7,381,774 7,499,221 6,945,537 6,883,722 Investments in debt and equity securities 3,033,775 3,401,178 3,401,277 2,474,766 1,886,145 Deposits 9,053,859 9,602,083 9,927,959 8,776,421 8,277,953 Shareholders' equity 1,068,250 958,557 851,324 690,262 580,913
SUBSIDIARIES The table setting forth the names and locations of Mercantile's subsidiary financial institutions as well as their total assets, shareholder's equity and return on assets as of December 31, 1994, is included on page 12 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, and is incorporated herein by reference. 1 3 Mercantile acquired a number of subsidiaries in transactions that closed in 1994 and in the first two months of 1995. Effective January 3, 1994, Mercantile acquired Metro Bancorporation, a Waterloo, Iowa-based bank holding company with assets of approximately $370 million. A total of 1,638,278 shares of Mercantile common stock were issued in the transaction, which was accounted for as a pooling-of-interests. Effective February 1, 1994, Mercantile consummated its acquisition of United Postal Bancorp, Inc. ("UPBI"), the holding company for United Postal Savings Association ("UPSA"), a Missouri-chartered savings association, which at the time of acquisition had assets of approximately $1.3 billion. A total of 5,631,953 shares of Mercantile common stock were issued in the acquisition transaction, which was accounted for as a pooling-of-interests. On August 16, 1994, UPSA was merged into Mercantile Bank. Effective January 3, 1995, Mercantile acquired UNSL Financial Corp. ("UNSL") a Lebanon, Missouri-based holding company for United Savings Bank, a Missouri-chartered savings bank with assets of approximately $508 million. A total of 1,578,107 shares of Mercantile common stock were issued in the transaction, which was accounted for as a pooling-of-interests. Also effective January 3, 1995, Mercantile acquired Wedge Bank, an Illinois-chartered bank headquarted in Alton, Illinois, which at the time of acquisition had assets of approximately $196 million. A total of 969,954 shares of Mercantile common stock were issued in the transaction, which was accounted for as a pooling-of- interests. In addition Mercantile has announced signed agreements to acquire five other holding companies. On September 21, 1994, Mercantile announced that it had signed an agreement to acquire Central Mortgage Bancshares, Inc. ("Central Mortgage"), a $650 million asset-bank holding company based in Kansas City, Missouri. The transaction is expected to be consummated in the second quarter of 1995. Approximately 2,625,000 shares of Mercantile common stock will be issued upon consummation of the acquisition, which will be accounted for as a pooling-of-interests. At a meeting held on January 24, 1995 the shareholders of Central Mortgage approved the terms of the acquisition. On December 5, 1994, Mercantile announced its intention to enter the Arkansas banking market through the acquisition of TCBankshares, Inc. ("TCB"), a $1.4 billion asset-holding company which owns six banks in central, northern and western Arkansas. Approximately 4,750,000 shares of Mercantile common stock, 5,300 shares of Mercantile Series B-1 Preferred Stock, and 9,500 shares of Mercantile Series B-2 Preferred Stock, will be issued in the acquisition, which is anticipated will be consummated in the second quarter of 1995. The transaction will be accounted for as a pooling-of-interests. The shareholders of TCB have signed agreements pursuant to which each has agreed to vote all shares owned in favor of the acquisition. On December 23, 1994, Mercantile announced that it had signed an agreement to acquire Plains Spirit Financial Corporation, the holding company for the Davenport, Iowa-based First Federal Savings Bank of Iowa, a federally chartered savings bank with assets of approximately $439 million. It is anticipated that the transaction will be consummated late in the second quarter of 1995. Shareholders of Plains Spirit Financial Corporation will receive a combination of cash and up to 1.4 million shares of Mercantile common stock in exchange for their Plains Spirit stock. The acquisition will be accounted for as a purchase. On January 27, 1995, Mercantile announced that it had signed an agreement to acquire Southwest Bancshares, Inc., the holding company for Southwest Bank, a $176 million-asset, Missouri- chartered bank located in Bolivar, Missouri. Approximately 675,000 shares of Mercantile common stock will be issued upon consummation of the acquisition, which is anticipated will occur in the third quarter of 1995. The acquisition will be accounted for as a pooling-of-interests. On February 17, 1995, Mercantile announced that it had signed an agreement to acquire AmeriFirst Bancorporation Inc., the $164 million-asset holding company for AmeriFirst Bank, a Missouri- chartered bank located in southeast Missouri. Approximately 661,000 shares of Mercantile common stock will be issued in exchange for the outstanding stock of AmeriFirst Bancorporation upon consummation of the merger, which is anticipated will occur in the third quarter of 1995. The acquisition will be accounted for as a pooling-of-interests. Except as may otherwise be indicated above, consummation of each of the above-listed pending acquisitions is subject to approval by all appropriate regulatory authorities and the shareholders of each of the companies to be acquired. 2 4 SERVICES AND TRANSACTIONS WITH SUBSIDIARIES Mercantile provides its subsidiaries with advice and specialized services in the areas of accounting and taxation, budgeting and strategic planning, employee benefits and human resources, insurance, operations, marketing, credit analysis and administration, loan support and participations, investments, auditing, trust, data processing, bank security and banking and corporate law. A fee is charged by Mercantile for these services. The responsibility for the management of each subsid- iary remains with its Board of Directors and with the officers elected by each Board. Intercompany transactions between Mercantile and its sub- sidiaries are subject to restrictions of existing banking and savings and loan laws and accepted principles of fair dealing. Mercantile had 149 full-time equivalent employees at December 31, 1994. Mercantile uses the premises of Mercantile Bank for its offices. Mercantile pays Mercantile Bank a fee for services and facilities furnished to it. EMPLOYEES At December 31, 1994, Mercantile and its subsidiaries had 5,656 full-time equivalent employees. Mercantile provides a variety of employment benefits and believes it enjoys a good relationship with its employees. OPERATIONS Financial Services. Through its subsidiary financial institutions, Mercantile offers complete banking and trust services to the commercial, industrial, residential and agricultural areas which it serves. Services include commercial, real estate, installment and credit card loans, checking, savings and time deposits, trust and other fiduciary services, and various other customer services such as bond trading, direct equipment lease financing, international banking and safe deposit services. Most subsidiary financial institutions serve only the general area in which they are located, predominantly in the 7th, 8th and 10th Federal Reserve Districts. In general, the smaller subsidiary banks are engaged primarily in retail banking, with most of the business and commercial activities centered in the larger subsidiary banks. Membership in Mercantile's subsidiary group provides each subsidiary institution with a means of satisfying the credit needs of its customers beyond its own legal lending limit. Correspondent Banking. In addition to Mercantile's services for individuals and corporations, its largest subsidiary bank, Mercantile Bank, is a bankers' bank. Mercantile Bank is a correspondent bank for 552 commercial banks located throughout the United States. Correspondent banking services to banks in Kansas and western Missouri are provided through Mercantile Bank of Kansas City and Mercantile Bank of Topeka. In addition, Mercantile Bank of Joplin provides correspondent services for banks in its area. Correspondent banking services include the processing of checks and collection items, loan assistance and assistance with training and operations. Trust and Investment Advisory Services. Mercantile, through its subsidiaries, offers clients all types of fiduciary services, ranging from the management of funds for individuals, corporate retirement plans and charitable foundations to the administration of estates and trusts. To investors it offers portfolio manage- ment, advisory and custodian services. For corporations, governmental bodies and public authorities, Mercantile subsidiaries act as fiscal and paying agent, transfer agent, registrar and trustee under corporate indentures and pension and profit sharing trust agreements. Mercantile Trust Company National Association is a nationally-chartered bank which provides individual trust services. Mississippi Valley Advisors Inc., a registered investment advisor and subsidiary of Mercantile Bank, among other things provides investment advisory services for employee benefit funds, including pension and profit-sharing plans, endowment funds and registered mutual funds. At December 31, 1994, Mercantile subsidiaries managed investments with a market value of approximately $12.0 billion and administered $4.6 billion in non-managed assets. Certain of Mercantile's subsidiary banks provide trust and investment services to individual and corporate customers with assistance from Mercantile Bank. 3 5 Investment and Underwriting Activities. Mercantile Bank offers a wide range of investment services to individuals, corporations, correspondent banks and others. Included in those services are foreign exchange, derivative products, money market and bond trading operations which serve banks and corporations in the purchase and sale of various investments and/or hedging instruments. In addition, Mercantile Bank is registered as a municipal securities dealer. Brokerage Services. Mercantile Investment Services, Inc. ("MISI"), a subsidiary of Mercantile Bank, is a registered broker/dealer and a member of both the National Association of Securities Dealers, Inc. ("NASD") and the Securities Investors Protection Corporation ("SIPC"). MISI currently offers brokerage services, including execution of transactions involving stocks, bonds, options, mutual funds and other securities. International. Mercantile Bank maintains accounts at 39 foreign banks, and 45 foreign banks maintain accounts at Mercantile Bank. In addition, Mercantile Bank is engaged in providing its customers with international banking services. Mercantile Bank and Mercantile Bank of Kansas City offer a wide range of services to their customers involved in international business including currency exchange and letters of credit. Customers of other subsidiary banks with a need for such services are referred to these banks. Mercantile Bank maintains a branch in the City of Georgetown in the Grand Cayman Islands. This branch enables Mercantile Bank to participate in the Eurodollar market for deposits and loans. At December 31, 1994, total deposits of the foreign branch amounted to $245,935,000. COMPETITION Mercantile's subsidiary financial institutions are subject to intense competition from other banks and financial institutions in their service areas, predominantly the 7th, 8th and 10th Federal Reserve Districts. In making loans, substantial competi- tion is encountered from banks and other lending institutions such as savings and loan associations, insurance companies, finance companies, credit unions, factors, small loan companies and pension trusts. In addition, Mercantile subsidiaries compete for retail deposits with savings and loan associations, credit unions and money market mutual funds. The competition provided by other financial institutions is not limited to those institutions with offices located in the area served by the particular subsidiary. Many other institutions also offer some or all of the trust and fiduciary services performed by Mercantile's subsidiaries. Mercantile Bank competes with all local institutions and, in the field of corporate pension trust services, competition is nationwide. Missouri law currently allows Missouri banks and bank holding companies to acquire, and be acquired by, similar entities in states contiguous to Missouri which have reciprocal laws. To date, Mercantile has made acquisitions in Illinois, Kansas and Iowa. Mercantile currently has a pending acquisition in Arkansas. At March 10, 1995, all states contiguous to Missouri had enacted laws permitting interstate acquisitions on a regional or nationwide, reciprocal or nonreciprocal basis, and all such laws were in effect as of such date. In addition, a number of other non-contiguous states have enacted laws which allow acquisitions of banks and bank holding companies located therein by similar entities regardless of location or reciprocity of law in such entities' domicile state. In September 1994 legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates the interstate expansion and consolidation of banking organizations (i) by permitting bank holding companies that are adequately capitalized and managed, beginning September 29, 1995, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) by permitting the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or to "opt out" of this authority before that date, (iii) by permitting banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) by permitting foreign banks to establish, with approval of the regulators in the United States, branches outside their home states to the same extent that national or state banks located in the home state would be authorized to do so, and (v) by permitting banks, beginning September 29, 1995, to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state. One 4 6 effect of this legislation will be to permit Mercantile to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. Overall, this legislation is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. SUPERVISION AND REGULATION General. As a bank holding company, Mercantile is subject to regulation under the Bank Holding Company Act of 1956, as amended, ("BHCA") and its examination and reporting requirements. Under the BHCA, a bank holding company may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank or savings and loan association, without the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. As a savings and loan holding company Mercantile is also subject to regulatory oversight by the Office of Thrift Supervision (the "OTS") under the Home Owner's Loan Act of 1933, as amended. As such, Mercantile is required to register and file reports with the OTS and is subject to regulation by the OTS. In addition, the OTS has enforcement authority over Mercantile which permits the OTS to restrict or prohibit activities that are determined to be a serious risk to its subsidiary savings association. Mercantile and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of Mercantile's subsidiaries, and therefore the earnings of Mercantile, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the Federal Deposit Insurance Corporation ("FDIC"), the OTS and the Office of the Comptroller of the Currency (the "Comptroller"). In addition, there are numerous governmental requirements and regulations that affect the activities of Mercantile and its subsidiaries. Certain Transactions with Affiliates. There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries. In general, these restrictions require that any such extensions of credit must be on non-preferential terms and secured by designated amounts of specified collateral and be limited, as to the holding company or any one of such nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to the holding company and all such nonbank subsidiaries in the aggregate, to 20% of such capital stock and surplus. Payment of Dividends. Mercantile is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of Mercantile's revenues is dividends from its national and state banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends the affiliate banks can pay to Mercantile without regulatory approval. The approval of the appropriate bank regulator is required for any dividend by a national bank or state member bank if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits, as defined by regulatory agencies, for such year combined with its retained net profits for the preceding two years. In addition, a national bank or a state member bank may not pay a dividend in an amount greater than its net profits then on hand. The payment of dividends by any affiliate bank may also be affected by other factors, such as the maintenance of adequate capital for such affiliate bank. Capital Adequacy. The Federal Reserve Board has issued standards for measuring capital adequacy for bank holding companies. These standards are designed to provide risk- responsive capital guidelines and to incorporate a consistent framework for use by financial institutions operating in major international financial markets. The banking regulators have issued standards for banks that are similar to, but not identical with, the standards for bank holding companies. In general, the risk-related standards require banks and bank holding companies to maintain certain capital levels based on "risk-adjusted" assets, so that categories of assets with potentially higher credit risk will require more capital backing than categories with lower credit risk. In addition, banks and bank holding companies are required to maintain capital to support off-balance sheet activities such as loan commitments. Mercantile and each of its subsidiary financial institutions exceed all applicable capital adequacy standards. 5 7 FDIC Insurance Assessments. The subsidiary depository institutions of Mercantile are subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based premium schedule. Under this schedule, the annual premiums initially range from $.23 to $.31 for every $100 of deposits. Each financial institution is assigned to one of three capital groups--well capitalized, adequately capitalized or undercapitalized--and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors, and on the basis of other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification assigned to the institution by the FDIC. As of December 31, 1994, all Mercantile subsidiary depository institutions were categorized as "well capitalized". The Financial Institutions Reform, Recovery and Enforcement Act of 1989 adopted in August 1989 to provide for the resolution of insolvent savings associations, also required the FDIC to establish separate deposit insurance funds -- the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. The law also requires the FDIC to set deposit insurance assessments at such levels as will cause BIF and SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits insured by them within a reasonable period of time. Due to low costs of resolving bank insolvencies in the last few years, BIF is expected to reach its designated reserve ratio in mid-1995. As a result, the FDIC recently proposed to lower deposit insurance assessment rates on banks by revising the range to $.04 to $.31 for every $100 of deposits. However, the balance in SAIF is not expected to reach the designated reserve ratio until about the year 2002, as the law provides that a significant portion of the costs of resolving past insolvencies of savings associations must be paid from this source. Accordingly, it is likely that SAIF rates will be significantly higher than BIF rates in the future. Since Mercantile has acquired substantial amounts of SAIF-insured deposits during the years from 1989 to the present, which deposits have not been converted from SAIF to BIF, it will be required to pay insurance assessments on these acquired deposits at rates significantly higher than the rates charged by BIF until such time that the rates are equalized. Mercantile does not expect that its SAIF deposit insurance costs will have a significant adverse effect on its earnings. Support of Subsidiary Banks. Under Federal Reserve Board policy, Mercantile is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each of the subsidiaries in circumstances where it might not choose to do so absent such a policy. In addition, any capital loans by Mercantile to any of its subsidiaries would also be subordinate in right of payment to deposits and certain other indebtedness of such subsidiary. This support may be required at times when Mercantile may not find itself able to provide it. Consistent with this policy regarding bank holding companies serving as a source of financial strength for their subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and overall financial condition. FIRREA and FDICIA. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains a cross- guarantee provision which could result in insured depository institutions owned by Mercantile being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by Mercantile. Under FIRREA, failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive changes to the federal banking laws. FDICIA instituted certain changes to the supervisory process, including provisions that mandate certain regulatory agency actions against undercapitalized institutions within specified time limits. FDICIA contains various other provisions that may affect the operations of banks and savings institutions. The prompt corrective action provision of FDICIA requires the federal banking regulators to assign each insured institution to one of five capital categories ("well capitalized," "adequately capitalized" or one of three "undercapitalized" categories) and to take progressively more restrictive actions based on the capital categorization, as specified below. Under FDICIA, capital 6 8 requirements would include a leverage limit, a risk-based capital requirement and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any relevant capital measure. The FDIC and the Federal Reserve Board adopted capital- related regulations under FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier 1 capital to adjusted total assets of 5% or greater; and (iv) was not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An association will be adequately capitalized if it was not "well capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to adjusted total assets of 4% or greater (except that certain associations rated "Composite 1" under the federal banking agencies' CAMEL rating system may be adequately capitalized if their ratios of core capital to adjusted total assets were 3% or greater). As previously discussed, all Mercantile subsidiary financial institutions as of December 31, 1994 were categorized as "well capitalized". FDICIA makes extensive changes in existing rules regarding audits, examinations and accounting. It generally requires annual on-site, full scope examinations by each bank's primary federal regulator. It also imposes new responsibilities on management, the independent audit committee and outside accountants to develop or approve reports regarding the effectiveness of internal controls, legal compliance and off-balance sheet liabilities and assets. Depositor Preference Statute. Legislation enacted in August 1993 provides a preference for deposits and certain claims for administrative expenses and employee compensation against an insured depository institution in the liquidation or other resolution of such an institution by any receiver. Such obligations would be afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, as well as any obligation to shareholders of such an institution in their capacity as such. Community Development Legislation. The Riegle Community Development and Regulatory Improvement Act of 1994 is intended to (i) increase the flow of loans to businesses in distressed communities by providing incentives to lenders to provide credit within those communities, (ii) remove impediments to the securitization of small business loans, (iii) provide for a reduction in paperwork and a streamlining of bank regulation through, for example, the coordination of examinations in a bank holding company context, a reduction in the number of currency transaction reports required, improvements to the National Flood Insurance Program that include enabling lenders to force place flood insurance, and (iv) increase the level of consumer protection provided to customers in banking transactions. Mercantile believes that these provisions of the new law will not have a material effect on its operation. 7 9 STATISTICAL DISCLOSURES The following statistical disclosures, except as noted, are included in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, and incorporated herein by reference.
ANNUAL REPORT SCHEDULE REFERENCE -------- ------------- I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. Average Balance Sheets Page 66 B. Analysis of Net Interest Earnings (included herein at page 9) N/A C. Taxable-equivalent Rate-Volume Analysis (included herein at page 9) N/A II. INVESTMENT PORTFOLIO A. Book Value by Type of Security Note E, Page 52 B. Maturity Distribution (included herein at page 10) N/A III. LOAN PORTFOLIO A. Types of Loans Exhibit 23, Page 30 B. Maturities and Sensitivities to Changes in Interest Rates Exhibit 23, Page 30 C. Risk Elements 1. Non-accrual, Past Due and Restructured Loans Exhibit 28, Page 34 Exhibit 29, Page 35 Note A, Pages 48, 49 2. Potential Problem Loans Commentary, Page 35 3. Foreign Outstandings IV. SUMMARY OF LOAN LOSS EXPERIENCE A. Reserve for Possible Loan Losses Exhibit 25, Page 32 Commentary, Page 31 Note A, Page 48 B. Allocation of the Reserve for Possible Loan Losses Exhibit 27, Page 33 V. DEPOSITS A. Average Balances and Rates Paid by Deposit Category Page 66 B. Maturity Distribution of Certain CDs and Time Deposits Exhibit 13, Page 24 VI. RETURN ON EQUITY AND ASSETS Exhibit 2, Page 15 VII. SHORT-TERM BORROWINGS (included herein at page 11) N/A There were no significant interest bearing deposits with foreign banks at December 31, 1994, 1993 or 1992.
8 10 ------------------------------------------------------------------------------------------------------------------------------------ TAXABLE-EQUIVALENT RATE-VOLUME ANALYSIS
INCREASE (DECREASE) ----------------------------------------- AVERAGE VOLUME AVERAGE RATE INTEREST 1993 TO 1994 1992 TO 1993 ----------------------------------------- --------------- -------------------- -------------------- 1994 1993 1992 1994 1993 1992 1994 1993 1992 RATE VOL. TOTAL RATE VOL. TOTAL ---- ---- ---- ---- ---- ---- ---- ---- ---- -------- ---- ----- -------- ---- ----- ($ in Millions) ($ in Millions) INTEREST INCOME Loans and leases $ 2,077 $ 2,009 $ 2,053 7.23% 6.54% 6.99% Commercial $150 $132 $143 $ 14 $ 4 $ 18 $ (8) $ (3) $(11) 1,260 1,301 1,315 8.18 8.00 8.25 Real estate-commercial 103 104 109 2 (3) (1) (3) (2) (5) 173 156 167 8.39 7.28 7.76 Real estate-construction 15 11 13 2 2 4 (1) (1) (2) 2,332 2,347 2,465 7.55 7.90 8.72 Real estate-residential 176 186 215 (8) (2) (10) (19) (10) (29) 1,029 934 921 8.33 9.01 9.77 Consumer 86 84 90 (7) 9 2 (7) 1 (6) 751 665 521 16.01 16.27 16.31 Credit card 120 108 85 (2) 14 12 - 23 23 - 1 2 6.69 6.72 6.91 Foreign - - - - - - - - - ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- 7,622 7,413 7,444 8.52 8.43 8.80 Total Loans and Leases 650 625 655 1 24 25 (38) 8 (30) Investments in debt and equity securities 11 14 12 5.12 5.32 5.75 Trading 1 1 1 - - - - - - 3,021 3,144 2,786 5.46 5.84 7.01 Taxable 165 183 195 (11) (7) (18) (37) 25 (12) 240 234 191 8.06 8.41 9.40 Tax-exempt 19 20 18 (1) - (1) (2) 4 2 ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- 3,272 3,392 2,989 5.65 6.01 7.16 Total 185 204 214 (12) (7) (19) (39) 29 (10) Short-term investments Federal funds sold and 182 245 201 4.21 3.31 4.04 repurchase agreements 7 8 8 1 (2) (1) (2) 2 - Due from banks-interest 44 74 117 4.22 3.54 5.03 bearing 2 3 6 - (1) (1) (1) (2) (3) ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Short-term 226 319 318 4.22 3.37 4.41 Investments 9 11 14 1 (3) (2) (3) - (3) ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Interest $11,120 $11,124 $10,751 7.59 7.55 8.21 Income $844 $840 $883 $(10) $ 14 $ 4 $ - $ 37 $(43) ======= ======= ======= ==== ==== ==== ==== ==== ==== ==== ==== ==== INTEREST EXPENSE Interest Bearing Deposits $1,564 $1,507 $1,283 1.87 2.11 2.95 Interest bearing demand $ 29 $ 32 $ 38 $ (4) $ 1 $ (3) $(13) $ 7 $ (6) 1,617 1,643 1,533 2.92 2.76 3.41 Money market accounts 47 45 52 3 (1) 2 (11) 4 (7) 904 865 737 2.32 2.57 3.35 Savings 21 22 25 (2) 1 (1) (7) 4 (3) Consumer time certificates 3,067 3,481 3,878 4.36 4.66 5.68 under $100,000 134 163 220 (9) (20) (29) (35) (22) (57) 34 82 107 3.18 2.75 3.88 Other time 1 2 4 - (1) (1) (1) (1) (2) ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Interest Bearing 7,186 7,578 7,538 3.23 3.48 4.50 Core Deposits 232 264 339 (12) (20) (32) (67) (8) (75) Time certificates 459 460 550 4.22 3.88 4.66 $100,000 and over 19 18 26 1 - 1 (4) (4) (8) 109 31 23 4.95 4.38 3.72 Foreign 6 1 1 1 4 5 - - - ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Purchased 568 491 573 4.36 3.91 4.62 Deposits 25 19 27 2 4 6 (4) (4) (8) ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Interest Bearing 7,754 8,069 8,111 3.32 3.51 4.51 Deposits 257 283 366 (10) (16) (26) (71) (12) (83) 1,043 818 821 4.24 2.90 3.70 Short-term borrowings 44 24 30 14 6 20 (6) - (6) 13 - - 6.19 - - Bank notes 1 - - - 1 1 - - - 292 275 237 7.62 8.02 8.95 Long-term debt 22 22 21 (1) 1 - (2) 3 1 ------- ------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- $9,102 $9,162 $9,169 3.56 3.59 4.55 Total Interest Expense $324 $329 $417 $ 3 $ (8) $ (5) $(79) $ (9) $(88) ======= ======= ======= ==== ==== ==== ==== ==== ==== ==== ==== ==== 4.03 3.96 3.66 NET INTEREST RATE SPREAD NET INTEREST RATE MARGIN AND NET INTEREST 4.67 4.59 4.33 INCOME $520 $511 $466 ==== ==== ==== Taxable-equivalent basis. Includes tax-equivalent adjustments of $9,114,000, $9,574,000 and $9,570,000 for 1994, 1993 and 1992, respectively, based on Federal income tax rates of 35% for 1994 and 1993, and 34% for 1992. The rate-volume variance is allocated entirely to rate. Income from loans on non-accrual status is included in loan income on a cash basis, while non-accrual loan balances are included in average volume. ----------------------------------------------------------------------------------------------------------------------------------
9 11 ------------------------------------------------------------------------------------------------------------- INVESTMENTS IN DEBT AND EQUITY SECURITIES ($ IN THOUSANDS)
DECEMBER 31, 1994 AVAILABLE-FOR-SALE HELD-TO-MATURITY --------------------------------------- --------------------------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE YIELD COST VALUE YIELD --------- --------- --------- --------- --------- --------- U.S. TREASURY Within one year $ 72,013 $ 71,462 5.02% $ 380,400 $ 376,532 4.68% One to five years 7,800 7,340 5.42 816,786 778,470 5.33 Five to 10 years - - - 1,522 1,506 5.98 After 10 years - - - - - - -------- -------- ---------- ---------- Total 79,813 78,802 5.06 1,198,708 1,156,508 5.12 Average Maturity 8 mo. 1 yr. 9 mo. U.S. GOVERNMENT AGENCIES Within one year 50,035 49,623 4.90 217,552 215,710 5.05 One to five years 70,096 66,046 5.90 904,740 879,007 6.40 Five to 10 years 6,977 6,742 7.66 13,769 14,190 9.10 After 10 years 12,395 11,857 5.82 7,975 7,795 6.22 -------- -------- ---------- ---------- Total 139,503 134,268 5.62 1,144,036 1,116,702 6.17 Average Maturity 4 yr. 0 mo. 2 yr. 3 mo. OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS Within one year 1,202 1,208 9.20 50,394 49,894 5.75 One to five years 5,084 5,148 8.82 259,978 250,811 6.58 Five to 10 years 5,679 5,740 8.66 47,815 47,050 8.49 After 10 years 607 608 8.58 16,784 16,483 10.20 -------- -------- ---------- ---------- Total 12,572 12,704 8.77 374,971 364,238 6.87 Average Maturity 5 yr. 11 mo. 3 yr. 8 mo. OTHER Within one year 289 273 8.48 12,295 12,156 5.85 One to five years 107 108 6.06 18,726 18,372 5.17 Five to 10 years 181 179 9.62 1,508 1,484 6.69 After 10 years 4,539 4,418 9.34 - - - -------- -------- ---------- ---------- Total 5,116 4,978 9.23 32,529 32,012 5.50 -------- -------- ---------- ---------- Average Maturity 21 yr. 10 mo. 1 yr. 3 mo. TOTAL INTEREST-EARNING INVESTMENTS Within one year 123,539 122,566 5.02 660,641 654,292 4.90 One to five years 83,087 78,642 6.03 2,000,230 1,926,660 5.97 Five to 10 years 12,837 12,661 8.13 64,614 64,230 8.52 After 10 years 17,541 16,883 6.83 24,759 24,278 8.91 -------- -------- ---------- ---------- Total 237,004 230,752 5.68 2,750,244 2,669,460 5.80 Average Maturity 3 yr. 5 mo. 2 yr. 2 mo. FEDERAL RESERVE BANK STOCK AND OTHER EQUITY INVESTMENTS 39,222 38,480 6.72 - - - -------- -------- ---------- ---------- TOTAL PORTFOLIO $276,226 $269,232 5.83 $2,750,244 $2,669,460 5.80 ======== ======== ========== ========== This exhibit excludes trading securities, which are reported at estimated fair value on the Consolidated Balance Sheet. Trading securities totaled $14,299,000, $15,735,000 and $17,684,000 at December 31, 1994, 1993 and 1992, respectively. Taxable-equivalent basis. Maturities of asset-backed obligations are based on the remaining weighted average maturities. ----------------------------------------------------------------------------------------------------------------------------------
10 12 ---------------------------------------------------------------------------------------------------------------------------------- SHORT-TERM BORROWINGS ($ IN THOUSANDS)
1994 1993 1992 --------------------------- -------------------------- -------------------------- AVERAGE AVERAGE AVERAGE AMOUNT RATE MATURITY AMOUNT RATE MATURITY AMOUNT RATE MATURITY ------ ---- -------- ------ ---- -------- ------ ---- -------- AT YEAR-END Federal funds purchased and repurchase agreements $1,382,519 5.47% 5 DAYS $ 602,997 2.56% 3 days $744,101 2.62% 9 days Treasury tax and loan notes 160,379 5.27 3 DAYS 502,260 2.75 3 days 215,521 2.62 4 days Commercial paper 26,800 5.97 20 DAYS 18,390 3.25 18 days 9,198 3.32 19 days Other short-term borrowings 13,001 6.65 173 DAYS - - N/A 16,574 7.60 124 days ---------- ---------- -------- Total Short-term Borrowings $1,582,699 5.47 7 DAYS $1,123,647 2.66 3 days $985,394 2.71 10 days ========== ========== ======== AVERAGE FOR THE YEAR Federal funds purchased and repurchase agreements $ 806,508 4.36% $546,099 2.92% $623,554 3.48% Treasury tax and loan notes 207,176 3.75 239,643 2.65 141,737 3.29 Commercial paper 26,487 4.53 22,629 3.24 11,924 3.49 Other short-term borrowings 3,311 4.17 9,618 7.11 43,813 8.20 ---------- -------- -------- Total Short-term Borrowings $1,043,482 4.24 $817,989 2.90 $821,028 3.70 ========== ======== ======== MAXIMUM MONTH-END BALANCE Federal funds purchased and repurchase agreements $1,382,519 $794,217 $873,449 Treasury tax and loan notes 601,896 506,836 213,262 Commercial paper 37,406 32,621 16,025 Other short-term borrowings 13,001 33,190 66,497 ------------------------------------------------------------------------------------------------------------------------------------
11 13 ITEM 2. PROPERTIES Mercantile and Mercantile Bank occupy 22 stories of the Mercantile Tower, a 35-story building owned by Mercantile Bank and located at Seventh and Washington Streets in St. Louis, Missouri. Among the other properties owned by Mercantile Bank are a four-story, 91,170 usable square foot off-site office building located at 12443 Olive Boulevard, Creve Coeur, Missouri, which houses Mercantile's credit card, mortgage loan, and asset- based lending operations; a four-story, 222,400 usable square foot off-site processing center located at 1005 Convention Plaza in St. Louis, Missouri, which houses most other operational functions of Mercantile; and a four-story building located at 721 Locust Street, St. Louis, Missouri, which has 101,827 square feet of usable office space and houses Mercantile Bank. Mercantile's subsidiaries own and lease other facilities in Missouri, Illinois, Kansas and Iowa. See Note G to the consolidated financial statements included on page 54 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT See Part III, Item 10. 12 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Information concerning the Common Stock of the Registrant, included on page 68 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data, included as Exhibit 1 on page 14 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations, included on pages 14 through 41 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements, included in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, are incorporated herein by reference.
ANNUAL REPORT STATEMENT REFERENCE --------- ------------- Independent Auditors' Report Page 43 Consolidated Statement of Income - Years ended December 31, 1994, 1993 and 1992. Page 44 Consolidated Balance Sheet - December 31, 1994, 1993 and 1992. Page 45 Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 1994, 1993 and 1992. Page 46 Consolidated Statement of Cash Flows - Years ended December 31, 1994, 1993 and 1992. Page 47 Notes to Consolidated Financial Statements. Pages 48 - 63
Selected Quarterly Financial Data, included as Exhibit 36 on page 41 in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is contained in "Election of Directors" and "Beneficial Ownership of Stock by Management," included in the Proxy Statement for the 1995 Annual Meeting of Shareholders, which information is incorporated herein by reference. The following is a list, as of March 10, 1995, of the names and ages of the executive officers of Mercantile and all positions and offices with Mercantile presently held by the person named. There is no family relationship between any of the named persons. 13 15
ALL POSITIONS AND OFFICES NAME AGE HELD WITH MERCANTILE ---- --- ------------------------- Thomas H. Jacobsen 55 Chairman of the Board and Chief Executive Officer Ralph W. Babb, Jr. 46 Vice Chairman W. Randolph Adams 50 Senior Executive Vice President and Chief Financial Officer John Q. Arnold 51 Senior Executive Vice President and Chief Credit Officer John H. Beirise 49 President, Mercantile Bank Richard H. Goldberg 54 Executive Vice President Michael J. Gorman 58 Chairman, Mercantile Bank Richard C. King 50 President and Chief Executive Officer, Mercantile Bank of Kansas City President and Chief Executive Officer, Mercantile Bank of Kansas John W. McClure 49 Senior Executive Vice President Jon W. Bilstrom 48 General Counsel and Secretary Jon P. Pierce 54 Executive Vice President Patrick Strickler 51 Executive Vice President Arthur G. Heise 46 Senior Vice President and Auditor Michael T. Normile 45 Senior Vice President, Finance and Control
The executive officers were appointed by and serve at the pleasure of the Board of Directors of Mercantile. Each of the officers named above, except Messrs. Heise and Normile, serve on the Mercantile Management Executive Committee. Messrs. Jacobsen, Babb, McClure, Bilstrom, Pierce, Strickler, Heise and Normile have served as executive officers of either Mercantile or Mercantile Bank for the last five years. From 1974 until his start with Mercantile in February 1991, Mr. Adams was employed by the international consulting firm, CRESAP, a Towers Perrin Company, most recently as Vice President/Partner in charge of its financial institutions practice. Mr. Arnold was employed by Harris Trust & Savings Bank for twenty-four years, most recently as Senior Vice President and Deputy Chief Credit Officer, before joining Mercantile in February 1991. Prior to joining Mercantile in April 1992, Mr. Beirise was employed by Continental Bank N.A. for twenty-four years, most recently as Managing Director, Corporate Banking. Mr. Goldberg was President and Chairman of ARTIS Ltd., a satellite based communications company, from August 1991 through August 1992. From 1985 through August 1991 he served as Vice President of TBG Inc., a multi-national information systems company, and as President of CLSI, a library automation company. Mr. Gorman was Executive Vice President and Secretary of UPSA from 1971 through July 1991. From August 1991 through January 1994, he was President and Chief Executive Officer of UPSA. Mr. King served as Chairman of the Board, Chief Executive Officer and President of MidAmerican Corporation from 1989 until January 1993. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is contained in "Compensation of Executive Officers," included in the Proxy Statement for the 1995 Annual Meeting of Shareholders, which is incorporated herein by reference. 14 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is contained in "Voting Securities and Principal Holders Thereof" and "Beneficial Ownership of Stock by Management," included in the Proxy Statement for the 1995 Annual Meeting of Shareholders, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is contained in "Interest of Management and Others in Certain Transactions," included in the Proxy Statement for the 1995 Annual Meeting of Shareholders, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements: Incorporated herein by reference, are listed in Item 8 hereof. (2) Financial Statement Schedules: None. (3) Exhibits: No. 3-1 Restated Articles of Incorporation of the Registrant, as amended and currently in effect, filed as Exhibit 3.1 to Regis- trant's Registration Statement No. 33- 63196, are incorporated herein by reference. No. 3-2 By-Laws of the Registrant, as amended and currently in effect, filed as Exhibit 3.2 to Registrant's Registration Statement 33-57489 are incorporated herein by reference. No. 4-1 Form of Indenture Regarding Subordinated Securities between the Registrant and The First National Bank of Chicago as Trustee, filed on March 31, 1992 as Exhibit 4.1 to Registrant's Report on Form 8-K dated September 24, 1992, is incorporated herein by reference. No. 4-2 Rights Agreement dated as of May 23, 1988, between Registrant and Mercantile Bank, as Rights Agent (including as exhibits thereto the form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and the form of Rights Certificate), filed as Exhibits 1 and 2 to Registrant's Registration Statement on Form 8-A, dated May 24, 1998, is incorporated herein by reference. No. 10-1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10-3 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. No. 10-2 Retirement Plan for Directors of Mercantile Bancorporation Inc, filed as Exhibit 10-5 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. No. 10-3 The Mercantile Bancorporation Inc. Execu- tive Incentive Compensation Plan, filed as Appendix C to Registrant's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. No. 10-4 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 15 17 No. 10-5 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to Registrant's Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. No. 10-6 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan. No. 10-7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan, filed as Appendix B to Registrant's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. No. 10-8 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan for Non-Employee Directors, filed as Appendix E to Registrant's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. No. 10-9 The Mercantile Bancorporation Inc. Voluntary Deferred Compensation Plan, filed as Appendix D to Registrant's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. No. 10-10 Form of Employment Agreement for Thomas H. Jacobsen, as amended, filed as Exhibit 10-8 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. No. 10-11 Form of Employment Agreement for Ralph W. Babb, Jr., John W. McClure, W. Randolph Adams, John Q. Arnold and Certain Other Executive Officers, filed as Exhibit 10-9 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. No. 10-12 Form of Change of Control Employ- ment Agreement for Ralph W. Babb, Jr., John W. McClure, W. Randolph Adams, John Q. Arnold and Certain Other Executive Officers, filed as Exhibit 10-10 to Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. No. 10-13 Agreement and Plan of Reorganization dated August 17, 1993, by and among Registrant and United Postal Bancorp, Inc.; filed as Exhibit 2.1 to Registrant's Registration Statement No. 33-50981, is incorporated herein by reference. No. 10-14 Amended and Restated Agreement and Plan of Reorganization dated as of December 2, 1994 by and among Mercantile Bancorporation Inc. and TCBankshares, Inc., filed as Exhibit 2.1 to Registrant's Report on Form 8-K dated December 21, 1994, is incorporated herein by reference. No. 10-15 Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to Registrant's Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. No. 13 Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994. No. 21 Subsidiaries of the Registrant as of March 10, 1995. No. 23 Consent of KPMG Peat Marwick LLP. No. 24 Power of Attorney (on signature page) No. 27 Financial Data Schedule. 16 18 (b) Reports on Form 8-K: Registrant filed a Report on Form 8-K dated December 21, 1994. Under Item 5 of that Report, Registrant disclosed that it had entered into, and briefly described the terms of, an Agreement and Plan of Reorganization ("Agreement") with TCBankshares, Inc. ("TCB"), an Arkansas bank holding company. Pursuant to the Agreement, Registrant will acquire TCB through merger of TCB with and into a wholly owned subsidiary of Registrant, with the shareholders of TCB to receive an aggregate of approximately 4,750,000 shares of Registrant Common Stock, par value $5.00 per share. In addition, holders of TCB Series A and Series B Preferred Stock would receive an aggregate of 5,306 shares of Registrant Series B-1 Preferred Stock and 9,500 shares of Registrant Series B-2 Preferred Stock, respectively, in exchange for their shares of TCB Series A and Series B Preferred Stock. Also under Item 5, and as referenced in Item 7, the Registrant included in the Report the Report of Independent Auditors of TCB and the following historical financial statements of TCB: Consolidated Balance Sheets as of December 31, 1993 and 1992 Consolidated Statements of Income for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements--December 31, 1993 Consolidated Balance Sheets as of September 30, 1994 and 1993 (Unaudited) Consolidated Statements of Income for the Nine Months Ended September 30, 1994 and 1993 (Unaudited) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1994 and 1993 (Unaudited) Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 1994 and 1993 (Unaudited) 17 19 SIGNATURES Pursuant to the requirements of Section 13 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. MERCANTILE BANCORPORATION INC. (Registrant) Date: March 30, 1995 By: s/Thomas H. Jacobsen ------------------------------------ Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned officers and directors of Mercantile Bancorporation, Inc., hereby severally and individually constitute and appoint Thomas H. Jacobsen and W. Randolph Adams, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- s/Thomas H. Jacobsen Chairman of the Board, President, March 30, 1995 ----------------------------------- Chief Executive Officer and Director (Thomas H. Jacobsen) Principal Executive Officer s/W. Randolph Adams Senior Executive Vice President March 30, 1995 ----------------------------------- and Chief Financial Officer (W. Randolph Adams) Principal Financial Officer s/Michael T. Normile Senior Vice President, March 30, 1995 ----------------------------------- Finance and Control (Michael T. Normile) Principal Accounting Officer s/ Richard Conerly Director March 28, 1995 ----------------------------------- (Richard P. Conerly) s/Harry M. Cornell, Jr. Director March 28, 1995 ----------------------------------- (Harry M. Cornell, Jr.) s/Earl K. Dille Director March 24, 1995 ----------------------------------- (Earl K. Dille) 18 20 s/J. Cliff Eason Director March 24, 1995 ----------------------------------- (J. Cliff Eason) Director March --, 1995 ----------------------------------- (Bernard A. Edison) s/William A. Hall Director March 27, 1995 ----------------------------------- (William A. Hall) s/Thomas A. Hays Director March 28, 1995 ----------------------------------- (Thomas A. Hays) s/William G. Heckman Director March 31, 1995 ----------------------------------- (William G. Heckman) s/James B. Malloy Director March 24, 1995 ----------------------------------- (James B. Malloy) Director March --, 1995 ----------------------------------- (Charles H. Price II) s/Harvey Saligman Director March 24, 1995 ----------------------------------- (Harvey Saligman) s/Craig D. Schnuck Director March 27, 1995 ----------------------------------- (Craig D. Schnuck) s/Robert W. Staley Director March 29, 1995 ----------------------------------- (Robert W. Staley) s/Robert L. Stark Director March 28, 1995 ----------------------------------- (Robert L. Stark) s/Patrick T. Stokes Director March 27, 1995 ----------------------------------- (Patrick T. Stokes) s/Francis A. Stroble Director March 30, 1995 ----------------------------------- (Francis A. Stroble) Director March --, 1995 ----------------------------------- (Joseph G. Werner) s/John A. Wright Director March 26, 1995 ----------------------------------- (John A. Wright)
19 21 EXHIBIT INDEX -------------
Exhibit No. Description ----------- ------------ No. 10-6 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan No. 13 Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994. No. 21 Subsidiaries of the Registrant as of March 10, 1995. No. 23 Consent of KPMG Peat Marwick LLP. No. 24 Power of Attorney (on Signature Page). No. 27 Financial Data Schedule.
20 EX-10 2 MATERIAL CONTRACTS 1 EXHIBIT NO. 10-6 AMENDMENT NUMBER ONE TO THE MERCANTILE BANCORPORATION INC. 1991 EMPLOYEE INCENTIVE PLAN Sections 7.7 and 7.9 of the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan are amended and restated in their entirety to read as follows: 7.7 Termination of Employment Due to Death or Disability. ----------------------------------------------------- If the Participant's employment with all members of the Group is terminated by reason of the Participant's death or disability, any outstanding Options of such Participant then exercisable shall terminate upon the expiration date of the Options, or eighteen months after the date of termination of employment by reason of the Participant's death or twelve months after the date of termination of employment by reason of the Participant's disability, whichever first occurs. However, in the case of incentive stock options, the favorable tax treatment prescribed under Section 422 of the Code shall not be available if such Options are not exercised within three months after date of termination, or twelve months after termination on account of disability. If an incentive stock option is not exercised within three months of termination due to death, it shall be treated as a nonstatutory stock option for the remainder of its allowable exercise period. 7.9 Retirement or Other Termination of Employment. If ---------------------------------------------- the Participant's employment with all members of the Group is terminated by reason of Retirement, any outstanding Options of such Participant then exercisable shall terminate upon the expiration date of the Options or thirty-six months after such date of retirement, whichever first occurs. If a Participant's employment with all members of the Group is terminated for any reason other than Retirement and other than for reasons described in Section 7.7 and 7.8 of this Plan, any outstanding Options of such Participant then exercisable shall terminate upon the expiration of the Options or three months after such date of termination of employment, whichever first occurs. IN WITNESS WHEREOF, Mercantile Bancorporation Inc. has caused this amendment to be executed and attested, and its corporate seal to be affixed by its duly authorized officers this 15th day of March, 1995. (SEAL) ATTEST MERCANTILE BANCORPORATION INC. By: s/Michael J. Marshall By: s/Jon W. Bilstrom ------------------------- ------------------------------- Michael J. Marshall Jon W. Bilstrom Assistant Secretrary General Counsel and Secretary 21 EX-13 3 ANNUAL REPORT 1 MERCANTILE BANCORPORATION INC. MERCANTILE'S MISSION IS TO BE A PREMIER BANKING ORGANIZATION IN THE U.S. ANNUAL REPORT 1994 2 ---------------------------------------------------------------------- CORPORATE DESCRIPTION At the end of 1994, Mercantile Bancorporation Inc., headquartered in St. Louis, was the parent company of 40 banks in Missouri, Kansas, Illinois and Iowa, and other subsidiaries providing specialized financial services. Early in 1995, Mercantile completed the affiliations of Wedge Bank in Alton, Illinois and UNSL Financial Corp, holding company for United Savings Bank, a Lebanon, Missouri savings and loan association. Mercantile currently has acquisitions pending with financial institutions in Missouri and Iowa, as well as its first merger in Arkansas. The organization's focus is on retail, institutional and corporate markets in its primary midwest market area and clients with ties to the Midwest. Mercantile's main subsidiary is Mercantile Bank of St. Louis N.A., which traces its beginnings to 1855, when its first predecessor opened for business. The holding company was organized in 1971, providing the vehicle to expand the Mercantile banking concept. Mercantile's first acquisition outside its home state was completed in early 1987, just after Missouri adopted limited interstate banking legislation. Mercantile banks deliver services to customers through a network of 249 banking offices and 249 Fingertip Banking(R) Automated Teller Machines, which also belong to the regional BankMate(R) and international Cirrus(R) networks. Mercantile's broad range of services are concentrated in four major lines of business-retail, corporate and investment banking, and trust. Non-banking subsidiaries which provide related financial services include Mississippi Valley Advisors Inc., for investment research and asset management, Mercantile Investment Services, Inc., for brokerage services, and Mercantile Business Credit, Inc., an asset-based lender. CORPORATE ADDRESS One Mercantile Center P.O. Box 524 St. Louis, MO 63166-0524 INDEPENDENT ACCOUNTANTS KPMG Peat Marwick LLP 1010 Market Street St. Louis, MO 63101-2085 GENERAL COUNSEL Thompson & Mitchell One Mercantile Center St. Louis, MO 63101-1693 TRANSFER AGENT KeyCorp Shareholder Services, Inc. P.O. Box 6477 Cleveland, OH 44101-1477 TABLE OF CONTENTS
Highlights........................................................ 1 Letter to Shareholders............................................ 2 Achievements, Advancements and Innovations........................ 5 Banks and Other Subsidiaries......................................12 Financial Discussion and Report...................................13 Investor Information..............................................68 Directors and Executive Officers..................................69
3 HIGHLIGHTS
PERCENT CHANGE ----------------- 1993 TO 1992 TO ($ IN THOUSANDS EXCEPT PER SHARE DATA) 1994 1993 1992 1994 1993 ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net income $ 3.74 $ 2.80 $ 2.36 33.6% 18.6% Dividends declared 1.12 .99 .93 13.1 6.5 Book value at December 31 24.72 22.40 20.25 10.4 10.6 Market price at December 31 31 1/4 30 1/8 32 1/8 3.7 (6.2) Average common shares outstanding 43,091,152 42,439,298 39,492,237 1.5 7.5 ------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Taxable-equivalent net interest income $519,777 $510,770 $465,659 1.8% 9.7% Tax-equivalent adjustment 9,114 9,574 9,570 (4.8) - Net interest income 510,663 501,196 456,089 1.9 9.9 Provision for possible loan losses 33,472 61,013 74,579 (45.1) (18.2) Other income 188,296 199,158 183,944 (5.5) 8.3 Other expense 412,369 444,909 418,068 (7.3) 6.4 Income taxes 92,089 75,568 52,346 21.9 44.4 Net income 161,029 118,864 95,040 35.5 25.1 ------------------------------------------------------------------------------------------------------------------------------- ENDING BALANCES Total assets $12,241,794 $12,141,127 $12,273,028 .8% (1.1)% Loans and leases 8,114,845 7,381,774 7,499,221 9.9 (1.6) Deposits 9,053,859 9,602,083 9,927,959 (5.7) (3.3) Shareholders' equity 1,068,250 958,557 851,324 11.4 12.6 Reserve for possible loan losses 170,940 168,651 165,575 1.4 1.9 ------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Total assets $12,138,914 $12,215,514 $11,815,859 (.6)% 3.4% Earning assets 11,120,640 11,123,837 10,750,502 - 3.5 Loans and leases 7,622,125 7,412,810 7,443,980 2.8 (.4) Deposits 9,590,178 10,002,563 9,749,860 (4.1) 2.6 Shareholders' equity 1,017,790 914,335 795,532 11.3 14.9 ------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on assets 1.33% .97% .80% Return on equity 15.82 13.00 11.95 Overhead ratio 58.24 62.67 64.36 Other expense to average assets 3.40 3.64 3.54 Net interest rate margin 4.67 4.59 4.33 Equity to assets 8.73 7.90 6.94 Tier I capital to risk-adjusted assets 11.87 11.06 9.75 Total capital to risk-adjusted assets 15.78 14.54 14.32 Leverage 8.32 7.33 6.39 Reserve for possible loan losses to outstanding loans 2.11 2.28 2.21 Reserve for possible loan losses to non-performing loans 675.57 293.39 156.85 Non-performing assets to outstanding loans and foreclosed assets .46 1.26 2.18 Dividend payout 29.95 35.36 39.41 ------------------------------------------------------------------------------------------------------------------------------- SELECTED DATA Shareholders of record 13,585 13,778 14,469 Employees 5,656 5,978 5,901 Banks 40 42 41 Banking offices 249 249 236 Automated Teller Machines 249 242 224 ------------------------------------------------------------------------------------------------------------------------------- Full-time equivalent employees. Member of BankMate(R) and Cirrus(R) Automated Teller Machine networks.
MERCANTILE BANCORPORATION INC. 1 4 BANKS AND OTHER SUBSIDIARIES
DECEMBER 31, 1994 ($ IN THOUSANDS) ------------------------------ LOCATIONS SHARE- RETURN ON ---------------------------- HOLDER'S AVERAGE BANK CHIEF EXECUTIVE OFFICER MAIN OFFICE TOTAL ASSETS EQUITY ASSETS ----------------------- ----------- ----- ------ -------- --------- Mercantile Bank of St. Louis N.A. Thomas H. Jacobsen St. Louis, MO 54 $6,351,671 $524,064 1.31% Mercantile Bank of Kansas City Richard C. King Kansas City, MO 17 777,385 69,778 1.31 Mercantile Bank of Kansas Richard C. King Overland Park, KS 18 590,521 49,350 1.21 Mercantile Bank of Illinois N.A. A. Jesse Hopkins Alton, IL 15 455,261 35,565 2.42 Mercantile Bank of Joplin Larry L. Gilb Joplin, MO 11 387,641 34,526 1.70 Mercantile Bank of Northern Iowa Daniel B. Watters Waterloo, IA 7 364,669 31,813 1.28 Mercantile Bank of St. Joseph Thomas B. Fitzsimmons St. Joseph, MO 9 329,228 28,770 1.33 Mercantile Bank of Springfield David W. Felske Springfield, MO 9 305,782 24,773 1.66 Mercantile Bank of Lawrence John R. Elmore Lawrence, KS 12 233,657 24,310 1.51 Mercantile Bank of Jefferson County William C. Heady High Ridge, MO 5 211,200 18,723 1.60 Mercantile Bank of Topeka Charles N. Johns Topeka, KS 12 197,692 17,244 1.16 Mercantile Bank of Cape Girardeau O. J. Miller Cape Girardeau, MO 3 170,976 13,208 1.18 Mercantile Bank of Franklin County Thomas M. Metzger Washington, MO 4 161,611 13,020 1.74 Mercantile Bank of the Mineral Area Lowell C. Peterson Farmington, MO 3 160,033 13,138 2.05 Mercantile Bank of North Central Missouri Loren E. Jensen Macon, MO 5 157,904 13,229 1.50 Mercantile Bank of West Central Missouri Phillip M. Hunt Sedalia, MO 8 147,535 14,464 1.18 Mercantile Bank of Lake of the Ozarks Jerry A. Setser Eldon, MO 4 124,501 11,118 1.68 Mercantile Bank of Poplar Bluff Melvin D. Brown Poplar Bluff, MO 4 104,210 9,230 1.37 Mercantile Bank of Mt. Vernon David P. Strautz Mt. Vernon, IL 5 91,630 8,107 1.11 Mercantile Bank of Centralia Harry N. Harrison Centralia, IL 3 91,419 9,811 1.35 Mercantile Bank of Missouri Valley R. Scott Weston Richmond, MO 2 86,618 7,313 1.33 Mercantile Bank of Stoddard/Bollinger Counties John S. Davis Dexter, MO 4 79,511 6,763 1.43 Mercantile Bank of Monett Jerry L. LeClair Monett, MO 5 79,228 6,971 1.48 Mercantile Bank of Trenton Jan O. Humphreys Trenton, MO 3 78,572 9,824 1.36 Mercantile Bank of Perryville Mark D. Grieshaber Perryville, MO 1 69,163 6,198 1.35 Mercantile Bank of Flora Martin P. Tudor Flora, IL 1 68,242 8,668 1.27 Mercantile Bank of Phelps County Robert R. Thompson Rolla, MO 2 67,161 5,468 .99 Mercantile Bank of Pike County Darrell L. Denish Bowling Green, MO 2 58,020 4,512 1.38 Mercantile Bank of Memphis Robert L. Henselman Memphis, MO 1 51,304 4,331 2.10 Mercantile Bank of Doniphan William R. Orendorff Doniphan, MO 2 50,292 5,080 1.54 Mercantile Bank of Boone County Terry W. Coffelt Columbia, MO 2 49,564 4,000 .73 Mercantile Bank of East Central Missouri Stanley B. Bonnes Montgomery City, MO 2 49,051 4,154 1.66 Mercantile Bank of Ste. Genevieve Samuel F. Berendzen Ste. Genevieve, MO 1 48,125 4,034 1.14 Mercantile Bank of Northwest Missouri Coby D. Lamb Maryville, MO 4 43,358 4,463 .95 Mercantile Bank of Willow Springs Jerry H. Abbott Willow Springs, MO 1 39,195 3,504 2.31 Mercantile Bank of Sikeston Mark E. Nelson Sikeston, MO 1 39,161 3,665 1.34 Mercantile Bank of Wright County Thomas F. Zinnert Hartville, MO 1 38,443 3,385 1.49 Mercantile Bank of Carlyle Gregory A. Meyer Carlyle, IL 3 37,975 3,842 1.04 Mercantile Bank of Plattsburg Alan L. Hall Plattsburg, MO 3 37,288 3,836 1.56 Mercantile Trust Company N.A. W. Randolph Adams St. Louis, MO - 8,002 7,471 - -------------------------------------------------------------------------------------------------------------------------------
ASSET-BASED LENDING Mercantile Business Credit, Inc. 12443 Olive Blvd. St. Louis, MO 63141-6432 BROKERAGE SERVICES Mercantile Investment Services, Inc. Mercantile Tower St. Louis, MO 63101-1643 CREDIT CARD SERVICES Mercantile Card Services Inc. 12443 Olive Blvd. St. Louis, MO 63141-6432 CREDIT LIFE INSURANCE Mississippi Valley Life Insurance Co. Mercantile Tower St. Louis, MO 63101-1643 INSURANCE AGENCY Mercantile Insurance Services, Inc. Mercantile Tower St. Louis, MO 63101-1643 INVESTMENT MANAGEMENT Mississippi Valley Advisors Inc. Mercantile Tower St. Louis, MO 63101-1643 OFF-SHORE BRANCH Mercantile Bank of St. Louis N.A. Cayman Branch Grand Cayman, B.W.I. RECENT MERGERS UNSL Financial Corp Lebanon, MO (completed January 3, 1995) Wedge Bank Alton, IL (completed January 3, 1995) PENDING AFFILIATIONS Central Mortgage Bancshares, Inc. Kansas City, MO TCBankshares, Inc. North Little Rock, AR Plains Spirit Financial Corporation Davenport, IA Southwest Bancshares, Inc. Springfield, MO MERCANTILE BANCORPORATION INC. 12 5 FINANCIAL DISCUSSION AND REPORT TABLE OF CONTENTS
Financial Commentary..............................................14 Performance Summary..............................................14 Net Interest Income..............................................18 Liquidity........................................................20 Interest Rate Sensitivity........................................22 Deposits.........................................................23 Short-Term Borrowed Funds and Short-Term Investments..................................... 25 Capital Resources................................................25 Investments in Debt and Equity Securities........................28 Loans............................................................29 Risk Management and the Reserve for Possible Loan Losses............................... 31 Non-Performing Assets............................................34 Off-Balance-Sheet Risk...........................................35 Other Income.....................................................36 Other Expense....................................................37 Income Taxes.....................................................39 Fourth Quarter Results...........................................40 Management Report on Consolidated Financial Statements.............................................42 Audited Financial Statements Independent Auditors' Report.....................................43 Mercantile Bancorporation Inc. and Subsidiaries Consolidated Financial Statements........................................... 44 Notes to Consolidated Financial Statements.......................48 Six Year Consolidated Financial Statements........................64 Investor Information..............................................68
13 6 FINANCIAL COMMENTARY PERFORMANCE SUMMARY Net income for Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") was a record $161,029,000 in 1994, a 35.5% improvement from the $118,864,000 recorded in 1993. Per share net income was $3.74, up 33.6% from the $2.80 earned last year. All prior year figures have been restated to include the results of operations and financial positions of Metro Bancorporation ("Metro") and United Postal Bancorp, Inc. ("United Postal"), which were merged with Mercantile on January 3, 1994 and February 1, 1994, respectively, in transactions accounted for as poolings-of-interests. Included in those restated 1993 figures was a $16.5 million after-tax charge for these two acquired companies to conform their accounting and credit policies regarding loan, other real estate and other asset valuations to those of Mercantile. Compared with the originally reported 1993 figure, 1994 earnings per share improved by 12.7%. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 1 SELECTED FINANCIAL DATA
GROWTH RATES --------------------- 1994 1993 1992 1991 1990 1989 ONE YEAR FIVE YEARS ---- ---- ---- ---- ---- ---- -------- ---------- PER SHARE DATA Net income $ 3.74 $ 2.80 $ 2.36 $ 2.37 $ 2.18 $ .29 33.6% 66.8% Dividends declared 1.12 .99 .93 .93 .93 .93 13.1 3.8 Book value at year-end 24.72 22.40 20.25 18.86 17.14 15.86 10.4 9.3 Market price at year-end 31 1/4 30 1/8 32 1/8 25 1/8 14 17 3/8 3.7 12.5 Average common shares outstanding (thousands) 43,091 42,439 39,492 31,791 30,144 29,092 1.5 8.2 OPERATING RESULTS (THOUSANDS) Taxable-equivalent net interest income $519,777 $510,770 $465,659 $381,067 $341,293 $322,938 1.8 10.0 Tax-equivalent adjustment 9,114 9,574 9,570 8,512 11,376 14,500 (4.8) (8.9) -------- -------- -------- -------- -------- -------- Net interest income 510,663 501,196 456,089 372,555 329,917 308,438 1.9 10.6 Provision for possible loan losses 33,472 61,013 74,579 58,076 50,886 104,708 (45.1) (20.4) Other income 188,296 199,158 183,944 155,696 137,356 150,038 (5.5) 4.6 Other expense 412,369 444,909 418,068 383,348 318,887 335,266 (7.3) 4.2 Income taxes (credits) 92,089 75,568 52,346 18,673 27,658 (1,804) 21.9 - -------- -------- -------- -------- -------- --------- Net income $161,029 $118,864 $ 95,040 $ 68,154 $ 69,842 $ 20,306 35.5 51.3 ======== ======== ======== ======== ======== ======== ENDING BALANCE SHEET (MILLIONS) Total assets $12,242 $12,141 $12,273 $10,765 $10,137 $9,536 .8 5.1 Earning assets 11,261 11,114 11,186 9,827 9,016 8,477 1.3 5.8 Loans and leases 8,115 7,382 7,499 6,946 6,884 6,358 9.9 5.0 Investments in debt and equity securities 3,034 3,401 3,401 2,475 1,886 1,904 (10.8) 9.8 Deposits 9,054 9,602 9,928 8,776 8,278 7,601 (5.7) 3.6 Long-term debt 287 273 299 203 233 308 5.3 (1.4) Shareholders' equity 1,068 959 851 690 581 536 11.4 14.8 Reserve for possible loan losses 171 169 166 146 149 149 1.4 2.7 AVERAGE BALANCE SHEET (MILLIONS) Total assets $12,139 $12,216 $11,816 $10,196 $9,546 $8,886 (.6) 6.4 Earning assets 11,121 11,124 10,751 9,243 8,598 7,891 - 7.1 Loans and leases 7,622 7,413 7,444 6,789 6,485 6,000 2.8 4.9 Investments in debt and equity securities 3,272 3,392 2,989 2,072 1,888 1,712 (3.5) 13.8 Deposits 9,590 10,003 9,750 8,386 7,802 7,184 (4.1) 5.9 Long-term debt 292 275 237 226 253 244 6.3 3.6 Shareholders' equity 1,018 914 796 648 558 532 11.3 13.8 -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 14 7 When compared with last year, 1994 results reflected continued improvement in the levels of net interest income, and lower levels of both operating expenses and the provision for loan losses, partially offset by a small decrease in other income. The key measurements of profitability also showed improvement in 1994, as return on average assets was a record 1.33% compared with the 1993 restated .97% and originally reported 1.11%, while return on equity was 15.82% versus the prior year's restated 13.00% and originally reported 14.87%. Financial highlights for the past six years are presented in Exhibits 1 and 2. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 2 SELECTED RATIOS
1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- Return on assets 1.33% .97% .80% .67% .73% .23% Return on equity 15.82 13.00 11.95 10.52 12.51 3.81 Overhead ratio 58.24 62.67 64.36 71.42 66.62 70.88 Other expense to average assets 3.40 3.64 3.54 3.76 3.34 3.77 Dividend yield 3.58 3.29 2.89 3.70 6.64 5.35 Dividend payout 29.95 35.36 39.41 39.24 42.66 - Equity to assets 8.73 7.90 6.94 6.41 5.73 5.62 Tier I capital to risk-adjusted assets 11.87 11.06 9.75 8.33 6.52 6.41 Total capital to risk-adjusted assets 15.78 14.54 14.32 10.39 8.38 8.37 Leverage 8.32 7.33 6.39 5.99 5.02 4.88 Loans to deposits (average) 79.48 74.11 76.35 80.96 83.13 83.52 Reserve for possible loan losses to outstanding loans 2.11 2.28 2.21 2.10 2.16 2.35 Reserve for possible loan losses to non-performing loans 675.57 293.39 156.85 113.14 119.68 121.55 Non-performing loans to outstanding loans .31 .78 1.41 1.86 1.80 1.93 Non-performing assets to outstanding loans and foreclosed assets .46 1.26 2.18 2.97 2.75 2.85 Net interest rate margin 4.67 4.59 4.33 4.12 3.97 4.09 -------------------------------------------------------------------------------------------------------------------------------
In 1994 Mercantile once again met its objective of emphasizing profitability while remaining receptive to opportunities for growth. Mercantile's corporate strategy for growth is to concentrate on its existing natural markets. To this end, Mercantile continually evaluates and pursues expansion opportunities to enhance its competitive position in its existing markets of Missouri, Illinois, Kansas and Iowa, as well as in major markets in the states contiguous to Missouri. Such opportunities currently include the acquisition of banks or thrift institutions, and the establishment of new branches. On July 6, 1994, Mercantile announced plans to expand its banking operations in southwestern Illinois through the acquisition of Wedge Bank ("Wedge"), a $196 million-asset bank headquartered in Alton, Illinois. One week later, the Corporation reached an agreement to acquire UNSL Financial Corp of Lebanon, Missouri ("UNSL"), holding company for the $508 million-asset United Savings Bank in southwestern and central Missouri. On September 21, 1994, Mercantile announced plans to acquire Central Mortgage Bancshares, Inc. of Kansas City, Missouri ("Central"), a $650 million-asset bank holding company with three banking subsidiaries, while on December 5, 1994, the Corporation announced plans to expand into Arkansas through a merger with TCBankshares, Inc. ("TCBankshares"), a $1.4 billion- asset, six-bank holding company based in North Little Rock. Additionally, on January 27, 1995, Mercantile signed a definitive agreement to merge with Southwest Bancshares, Inc., headquartered in Springfield, Missouri. All these transactions will be accounted for as poolings-of-interests. On December 23, 1994, the Corporation announced plans to further expand in Iowa with the acquisition of Plains Spirit Financial Corporation ("Plains Spirit"), a $439 million-asset savings bank in Davenport, Iowa. That transaction is expected to close mid-year 1995 and will be accounted for as a purchase. 15 8 FINANCIAL COMMENTARY (CONT'D) ------------------------------------------------------------------------------------------------------------------------------- Exhibit 3 ACQUISITIONS
ORIGINAL CONSIDERATION INTANGIBLE ----------------- ACCOUNTING DATE ASSETS DEPOSITS ASSET CASH SHARES METHOD ---- ------ -------- ---------- ---- ------ ---------- ($ in Thousands) ACQUISITIONS COMPLETED United Postal Bancorp, Inc. Feb. 1, 1994 $1,260,765 $1,025,252 $ - $ 39 5,631,953 Pooling Metro Bancorporation Jan. 3, 1994 370,175 333,183 - 6 1,638,278 Pooling Mt. Vernon Bancorp, Inc. Sept. 1, 1993 113,128 100,695 4,700 1,805 216,936 Purchase First National Bank of Flora Apr. 1, 1993 70,725 61,661 2,549 3,004 232,503 Purchase MidAmerican Corporation and Johnson County Bankshares, Inc. Jan. 4, 1993 1,102,906 956,578 - 12 4,736,424 Pooling Ameribanc, Inc. Apr. 30, 1992 1,177,825 1,035,561 - 8,851 1,975,421 Purchase RESOLUTION TRUST CORPORATION TRANSACTIONS COMPLETED First State Savings Association of Sedalia Apr. 3, 1992 156,818 163,055 2,186 2,186 - Purchase Home Federal Savings Association branches Mar. 27, 1992 470 222,304 3,227 3,227 - Purchase RECENTLY COMPLETED ACQUISITIONS UNSL Financial Corp Jan. 3, 1995 508,346 380,716 - 11 1,578,107 Pooling Wedge Bank Jan. 3, 1995 195,716 152,865 - 1 969,954 Pooling ACQUISITIONS PENDING Central Mortgage Bancshares, Inc. Mar. 1995 650,214 565,986 - - 2,625,000 Pooling TCBankshares, Inc. 2nd Qtr. 1995 1,411,791 1,178,414 - - 4,750,000, Pooling Plains Spirit Financial Corporation 2nd Qtr. 1995 438,679 265,822 N/A Purchase Southwest Bancshares, Inc. 3rd Qtr. 1995 175,759 146,103 - - 675,000 Pooling Estimated shares to be issued in acquisition. In addition to Mercantile common stock issued, the Corporation will assume, through an exchange, the outstanding, non-convertible preferred stock of TCBankshares, Inc. The value of the consideration will total $64 million, which includes up to 1,400,000 shares of Mercantile common stock. -------------------------------------------------------------------------------------------------------------------------------
The Wedge and UNSL transactions closed on January 3, 1995. Wedge will be merged with the existing Mercantile Bank in Alton, Illinois, and the UNSL merger will result in a new Mercantile bank headquartered in Lebanon, Missouri and the integration of certain other branches into Mercantile banks in other common markets. The Central acquisition is anticipated to close during the first quarter of 1995. Approximately two-thirds of the assets of Central are in the Kansas City area and it is anticipated that those operations will be merged into the Mercantile Bank in Kansas City, Missouri. The TCBankshares merger is expected to be closed in the second quarter of 1995. These transactions should bring total assets at mid-year 1995 to approximately $15 billion. Merger activity for the past three years is summarized in Exhibit 3. It is not anticipated that any of the recently completed or pending acquisitions will have a significant impact on liquidity, capital ratios or expected trends in the results of operations of the Corporation. During 1994 the total number of banking offices increased from an originally reported 220 to 249. There were 17 locations added from mergers, 15 new offices opened and three offices closed during the year, as the Corporation continued to monitor the profitability and growth opportunities of each of its locations. After all announced acquisitions previously discussed are closed during 1995, Mercantile will be operating approximately 320 branches. Net interest income for 1994 increased 1.9% over the prior year to $510,663,000. The net interest rate margin was 4.67% in 1994 compared with 4.59% in 1993, and it benefited primarily from continued wide interest rate spreads, as average earning assets remained at the same relative level as in 1993. Average loans grew by $209,315,000 or 2.8%, short-term investments decreased by $92,896,000 or 29.1% and investment securities were down by $119,616,000 or 3.5%. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 16 9 Other income was $188,296,000 in 1994, a decrease of $10,862,000 or 5.5% from a year ago. Modest growth in credit card and letters of credit fees were offset by declines in all other categories of non- interest income. Other expense was down 7.3% from a year ago and totaled $412,369,000 compared with $444,909,000 last year. The reduction in expense levels resulted primarily from the realization of synergies from mergers completed in prior years, restructuring costs of $12,053,000 included in 1993 results and significantly lower foreclosed property costs. The result was an improvement in the overhead ratio to 58.24% in 1994 compared with 62.67% in 1993 and 64.36% in 1992. The provision for possible loan losses for 1994 was $33,472,000 compared with $61,013,000 the prior year, a decline of 45.1%, and was indicative of the improvements in the Corporation's credit quality. The ratio of net charge-offs to average loans for 1994 was .41% compared with .81% last year. The net charge-off figures were $31,183,000 and $60,179,000, respectively. At December 31, 1994, the reserve for possible loan losses was $170,940,000 and represented 2.11% of loans compared with 2.28% last year. The reserve covered 675.57% of non-performing loans versus the 293.39% coverage ratio at December 31, 1993. Non-performing loans as of December 31, 1994 declined by $32,180,000 or 56.0% to $25,303,000 or .31% of total loans from $57,483,000 or .78% at December 31, 1993. Foreclosed assets, including in-substance foreclosures, declined by $23,667,000 or 65.7% to $12,347,000 compared with $36,014,000 at the end of 1993. Consolidated assets at December 31, 1994 were $12.2 billion compared with $12.1 billion at year-end 1993. Core deposits declined by 8.2% to $8.4 billion, loans were $8.1 billion, up 9.9% from last year, and shareholders' equity of $1.1 billion was up 11.4% from year to year. The 1994 year-end equity to assets ratio improved to 8.73% from 7.90% the prior year, and the Tier I and Total risk-based capital ratios increased to 11.87% and 15.78%, respectively, from 11.06% and 14.54% at December 31, 1993. Net income in the St. Louis Area (Mercantile Bank of St. Louis N.A. and Mercantile Trust Company N.A.) for 1994 was $88,564,000 compared with $60,677,000 in 1993, an increase of 46.0%. These results reflected stable net interest income, and significant reductions in operating and foreclosed property expenses and the provision for loan losses, partially offset by reduced other income. Return on average assets was 1.40% compared with .95% last year. Year-end assets were $6.4 billion, up .7% from a year earlier, and loans of $3.9 billion increased 9.2%, while deposits of $3.9 billion were down 10.9% from December 31, 1993. The St. Louis Area represents approximately one-half of the Corporation's assets. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 4 ORGANIZATIONAL CONTRIBUTION
DECEMBER 31, 1994 ------------------------------------------------------------------------ KANSAS PARENT ST. LOUIS CITY COMMUNITY COMPANY AND AREA AREA BANKS ELIMINATIONS CONSOLIDATED --------- ------ --------- -------------- ------------ ($ in Thousands) Net income $ 88,564 $ 20,969 $ 67,371 $ (15,875) $ 161,029 Average assets 6,347,624 1,613,626 4,403,987 (226,323) 12,138,914 Return on assets 1.40% 1.30% 1.53% 1.33% Net interest rate margin 4.14 4.82 5.23 4.67 Overhead ratio 55.00 59.11 54.41 58.24 Other expense to average assets 2.94 3.41 3.45 3.40 Equity to assets 8.36 8.96 8.76 8.73 Reserve for possible loan losses to outstanding loans 1.98 2.17 2.24 2.11 Reserve for possible loan losses to non- performing loans 748.62 598.80 632.17 675.57 Non-performing loans to outstanding loans .26 .36 .35 .31 Non-performing assets to outstanding loans and foreclosed assets .41 .48 .45 .46 Includes the results of Mercantile Bank of St. Louis N.A., Mercantile Trust Company N.A., Mercantile Business Credit, Inc. (asset-based lending), Mercantile Investment Services, Inc. (brokerage), Mississippi Valley Advisors Inc. (investment management) and Merc Mortgage (mortgage banking). -------------------------------------------------------------------------------------------------------------------------------
17 10 FINANCIAL COMMENTARY (CONT'D) [EXHIBIT 5 NET INTEREST RATE MARGIN (%) GRAPH] Net interest income in the St. Louis Area improved by .1% as the volume of average earning assets declined by $18,326,000 or .3%, while the net interest rate margin increased by one basis point to 4.14%. Average outstanding loans grew by $78,549,000 or 2.1%, while the investment portfolio declined by 5.2%. Average core deposits declined by $393,567,000 or 8.8%. Non-interest expenses were down 13.8%, while the overhead ratio improved to 55.00% from 61.73% for the prior year. Other income declined $11,236,000 or 9.3%, due largely to a higher level of securities gains during 1993 at United Postal, which was merged into Mercantile Bank of St. Louis N.A. on August 16, 1994. The provision for possible loan losses in the St. Louis Area was $11,300,000 compared with $29,281,000 in 1993, a decline of $17,981,000 or 61.4%. During the fourth quarter of 1993, United Postal recorded a $7,500,000 provision to conform its credit policies to those of Mercantile. This factor, as well as significantly lower levels of non-performing loans, allowed for the lower provision. The reserve for possible loan losses as a percentage of total loans was 1.98% at December 31, 1994 versus 2.06% at December 31, 1993, while the reserve coverage of non-performing loans was strengthened to 748.62% compared with 217.88% at December 31, 1993. In the 35 Community Banks (all banks other than the three banks in the Kansas City Area and the two in St. Louis), 1994 net income was $67,371,000, a 15.2% improvement over the $58,492,000 earned in 1993. Year-end assets were $4.5 billion, up 1.1%, while total deposits were down 2.1% and loans increased by 9.0% or $267,042,000. Return on average assets improved to 1.53% compared with 1.32% last year. The Community Bank network only had three banks with a return on assets less than one percent and two of those earned in the .90% range. Net interest income in the Community Banks increased by $4,624,000 or 2.2% during 1994, as average earning assets were relatively flat with 1993 and the net interest rate margin increased by eleven basis points to 5.23%. The provision for possible loan losses in the Community Banks declined by 33.5% to $18,421,000, as credit quality significantly improved and some substantial recoveries on previously charged-off loans were realized. The reserve as a percentage of loans outstanding was 2.24% compared with 2.44% a year earlier, while the reserve coverage of non-performing loans was 632.17% at the end of 1994 versus 400.95% at December 31, 1993. Other income grew by 3.2%, led by improvements in service charge income and credit card fees. Other expense growth was 1.2%, while the overhead ratio dropped to 54.41% versus 55.04% in 1993. The three banks in the Kansas City Area, with year-end assets of $1.6 billion, earned $20,969,000 in 1994, a 19.2% increase when compared with the $17,590,000 earned in 1993. Return on average assets grew to 1.30% compared with 1.09% the previous year. Net interest income increased by $2,343,000 or 3.4% during 1994 as average earning assets grew by $7,942,000 or .5% and the net interest rate margin increased by 13 basis points to 4.82%. The provision for possible loan losses declined by 6.7% to $3,751,000, and at year-end 1994, the reserve as a percentage of loans outstanding was 2.17%, while the reserve coverage of non-performing loans was 598.80% compared with 413.31% last year-end. Other income declined by 9.3%, primarily due to declines in service charge income and trust revenues. Operating expenses were well controlled, declining by 8.0%, resulting in an overhead ratio of 59.11% compared with 64.39% in 1993. Exhibit 4 summarizes some key ratios representing the organizational contribution and financial condition of the three reporting Mercantile units. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial condition of the Corporation. It should be read in conjunction with the audited Consolidated Financial Statements and related notes. NET INTEREST INCOME Net interest income, the difference between total interest income on earning assets and total interest expense, the cost of funds supporting those assets, is Mercantile's primary source of earnings. Representing the Corporation's gross profit from lending, investing, deposit gathering and borrowing activities, net interest income is affected by three variables: the volume of funds, the mix of those funds, and the rates earned and paid on those funds. The net interest rate margin is net interest income on a fully taxable-equivalent basis as a percentage of average earning assets. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 18 11 [EXHIBIT 7 TAXABLE-EQUIVALENT NET INTEREST INCOME GRAPH] In 1994 net interest income was $510,663,000, a 1.9% increase over the $501,196,000 earned last year. This improvement was attained as a result of the widening of the net interest rate margin by eight basis points from 4.59% in 1993 to 4.67%, while average earning assets remained relatively stable. Specific factors contributing to the higher net interest rate margin in 1994 included higher levels of shareholders' equity, a continued decline in non-performing assets, a decrease in higher-costing retail certificates of deposit as a percentage of total funding, a contraction in lower-yielding short- term investments, volume growth in the higher-yielding consumer loan categories, and the generally upward trend in interest rates throughout 1994. Interest rates began increasing late in the first quarter of 1994 and continued to rise throughout the year as the prime rate rose to 8.50% at year-end from 6.00% in January 1994. Mercantile's asset/ liability management strategies and continued wide market spreads allowed the Corporation to improve its net interest rate margin during the current year to 4.67% compared with the 1991, 1992 and 1993 respective margins of 4.12%, 4.33% and 4.59%. Using 1995 budgeted balance sheet levels, current model projections indicate that a 200 basis point change in market interest rates impact net interest income by less than one percent when compared to a stable rate environment. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 6 SUMMARY OF OPERATIONS RELATED TO AVERAGE ASSETS
1994 1993 1992 ---- ---- ---- (Taxable-equivalent Basis) NET INTEREST MARGIN 4.28% 4.18% 3.94% PROVISION FOR POSSIBLE LOAN LOSSES .28 .50 .63 OTHER INCOME Trust .49 .50 .49 Service charges .47 .48 .47 Credit card fees .20 .20 .18 Mortgage banking .05 .09 .06 Investment banking .07 .07 .08 Securities gains - .03 .02 Other .27 .26 .26 ---- ---- ---- Total Other Income 1.55 1.63 1.56 OTHER EXPENSE Personnel expense 1.82 1.76 1.63 Net occupancy and equipment .49 .51 .47 Other 1.09 1.37 1.44 ---- ---- ---- Total Other Expense 3.40 3.64 3.54 ---- ---- ---- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 2.15 1.67 1.33 Income taxes .75 .62 .45 Tax-equivalent adjustment .07 .08 .08 ---- ---- ---- NET INCOME 1.33% .97% .80% ==== ==== ==== -------------------------------------------------------------------------------------------------------------------------------
Average earning assets for 1994 were relatively flat compared with 1993. Average loans grew by $209,315,000 or 2.8%, funded by a decline of $92,896,000 or 29.1% in short-term investments and a contraction of $119,616,000 or 3.5% in the investment portfolio. As loan demand increased, the ratio of loans to earning assets grew to 68.54% in 1994 compared with 66.64% in 1993, and from an overall yield perspective the mix of loans continued to change favorably. As loans are the highest yielding earning asset, this shift in mix aided the net interest rate margin. Average shareholders' equity grew by $103,455,000 or 11.3%, providing the Corporation's banks with a supplemental source of non- interest bearing funds, as non-interest bearing deposit volumes contracted. The cost to fund non-performing assets was down significantly once again in 1994, thereby adding to the margin as declines in both the absolute and relative levels of non-performing assets further reduced the cost of funding those assets. As summarized in Exhibit 29, $2,257,000 of interest income was not recognized during 1994 because of the non-performing classification of certain loans. Interest lost reduced the 1994 rate margin by only two basis points compared with a reduction of four basis points in 1993, and reduced earnings per share by only $.03 in 1994 compared with $.07 the previous year. The interest-lost figures shown in the table were calculated only on non- performing loans outstanding at the end of each year. There were also significant changes in the mix of deposits, reflecting the continued disintermediation of retail certificates of deposit into savings and transaction accounts. Average core deposits declined 5.1% and represented 94.08% of total deposits compared with 95.09% a year ago. Retail certificates of deposit, the most costly source of core funds, declined by $414,482,000 and represented 33.99% of total core deposits versus 36.60% in 1993, as customers preferred maturity flexibility with their investments. 19 12 FINANCIAL COMMENTARY (CONT'D) ------------------------------------------------------------------------------------------------------------------------------- Exhibit 8 AVERAGE BALANCE SHEET SUMMARY
AVERAGE VOLUME AVERAGE RATE ---------------------------------- -------------------------------- 1994 1993 1992 1994 1993 1992 ---- ---- ---- ---- ---- ---- ($ in Thousands) EARNING ASSETS Loans and leases $ 7,622,125 $ 7,412,810 $ 7,443,980 8.52% 8.43% 8.80% Investments in debt and equity securities Trading 10,947 14,008 11,510 5.12 5.32 5.75 Taxable 3,021,178 3,143,876 2,786,173 5.46 5.84 7.01 Tax-exempt 240,065 233,922 191,414 8.06 8.41 9.40 ----------- ----------- ----------- Total 3,272,190 3,391,806 2,989,097 5.65 6.01 7.16 Short-term investments 226,325 319,221 317,425 4.22 3.37 4.41 ----------- ----------- ----------- Total Earning Assets $11,120,640 $11,123,837 $10,750,502 7.59 7.55 8.21 =========== =========== =========== ACQUIRED FUNDS Core deposits $ 9,022,452 $ 9,511,535 $ 9,176,915 3.23 3.48 4.50 Purchased deposits 567,726 491,028 572,945 4.36 3.91 4.62 ----------- ----------- ----------- Total Deposits 9,590,178 10,002,563 9,749,860 3.32 3.51 4.51 Short-term borrowings 1,043,482 817,989 821,028 4.24 2.90 3.70 Bank notes 12,603 - - 6.19 - - Long-term debt 292,056 274,718 237,011 7.62 8.02 8.95 ----------- ----------- ----------- Total Acquired Funds $10,938,319 $11,095,270 $10,807,899 3.57 3.59 4.55 =========== =========== =========== NET INTEREST RATE SPREAD 4.02 3.96 3.66 NET INTEREST RATE MARGIN 4.67 4.59 4.33 Taxable-equivalent basis. Includes tax-equivalent adjustments of $9,114,000, $9,574,000 and $9,570,000 for 1994, 1993 and 1992, respectively, based on Federal income tax rates of 35% for 1994 and 1993, and 34% for 1992. Income from loans on non-accrual status is included in income on a cash basis, while non-accrual loan balances are included in average volume. -------------------------------------------------------------------------------------------------------------------------------
In the St. Louis Area, net interest income improved by .1%. A one- basis-point increase in the net interest rate margin to 4.14%, offset by a .3% decline in the volume of average earning assets, accounted for the slight increase. The effect of a 5.2% decline in average investment securities was offset by an increase in average loans and a more favorable mix of interest bearing liabilities. In the Community Banks, net interest income improved by 2.2%. Average earning assets grew by $1,781,000, while the net interest rate margin expanded eleven basis points to 5.23%. Net interest income for the three banks in the Kansas City Area for 1994 increased by $2,343,000, an improvement of 3.4%. The net interest rate margin increased by 13 basis points to 4.82%, while average earning assets grew by $7,942,000 or .5%. The subsequent discussions on liquidity and interest rate sensitivity, deposits, securities, and loans further detail the changes in net interest income and the net interest rate margin for the years 1994, 1993 and 1992. LIQUIDITY Mercantile's Asset/Liability Management Committee meets weekly to formulate guidelines for and to monitor the composition of assets and liabilities. Its objective is to meet earnings goals by producing the optimal yield and maturity mix consistent with interest rate expectations and projected liquidity needs within the constraints of capital levels. Key to these goals is liquidity management, which ensures that Mercantile has ready access to sufficient funds at reasonable rates to meet both existing commitments and future financial obligations. Liquidity management also is necessary to withstand fluctuations in deposit levels and to provide for customers' credit needs in a timely and cost-effective manner. Liquidity management is viewed from a long-term and short-term perspective, as well as from a liability and asset perspective. There are distinct approaches within policy guidelines being used by Mercantile Bank of St. Louis N.A., the Community Banks and the Kansas City Area banks individually, and the Parent Company. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 20 13 Long-term liquidity is a function of a strong capital position and a large core deposit base. Growth and stability of both of these components during recent years formed the foundation for Mercantile's long-term liquidity strength. Short-term liquidity needs arise from the continuous fluctuations in the flow of funds on both sides of the balance sheet, and to a lesser extent from seasonal and cyclical customer demands. The most important source of liquidity for Mercantile is liability liquidity, which is the ability to raise new funds and renew maturing liabilities in a variety of markets. The most critical factor in assuring liability liquidity is maintaining the confidence of suppliers of funds in Mercantile. The Corporation has a current liability liquidity position in line with established strategic objectives. Certain of these objectives emphasize significant core deposit funding of subsidiary banks, corporate and subsidiary performance goals, and capital positions well in excess of regulatory guidelines. A prime example of liability liquidity was a transaction structured in the fourth quarter of 1994, whereby five of the larger Mercantile banks, led by Mercantile Bank of St. Louis N.A., initiated a $1 billion bank note program. Through this program, bank notes can be sold to institutional investors at various maturities, depending on the liquidity and interest sensitivity needs of the Corporation. The only borrowing to date under the program was $100,000,000 in November 1994 for two years at floating rates. The Corporation also has access to the Federal Home Loan Bank for funds at a wide range of maturities. Asset liquidity is provided through the maturities of various assets, the net cash flow of fee-based businesses, the ability to convert quality loans and maturing investments into cash, the availability of proceeds from the sale of investment securities classified as available-for-sale, and securities that are available for collateralized borrowing in repurchase agreements. Also, asset securitization is currently being studied by Mercantile as yet another potential source of asset liquidity. The reputation of Mercantile Bank of St. Louis N.A., as well as its financial strength and numerous long-term customer relationships, enable it to raise funds as needed in various markets. Historically, these funds have been purchased locally, nationally and internationally in the federal funds market and via large certificates of deposit and Eurodollar transactions, capitalizing on relationships maintained with investment banks, money center banks and money market funds. Mercantile Bank of St. Louis N.A.'s large correspondent bank customer base is an important additional source of funds in the local and regional markets. The Community Banks and Kansas City Area banks control their own asset/liability mixes with guidance from the Asset/Liability Management Committee, and within the guidelines of corporate policy, their individual loan demand and their deposit structures. As these banks do not generally borrow funds from outside sources due to a higher proportion of stable core deposits to total liabilities, their short-term liquidity needs are provided by Mercantile Bank of St. Louis N.A. or the Parent Company. Their core deposit base and business mix also lessen their need to borrow federal funds or issue certificates of deposit of $100,000 or more, other than in the normal course of business from local customers. Intra-company loan participations are a corporate strategy to provide Mercantile banks with earning assets as an incentive for gathering lower-cost retail core deposits in their local markets. As core deposits are considered the most stable source of funds and are generally the least costly, this strategy adds to liquidity and benefits net interest income for the Corporation. The respective ratios of average core deposits to earning assets for the Community Banks and Kansas City Area were relatively stable at 87.97% and 86.15%, respectively, for 1994 compared with 89.24% and 89.35%, respectively, in 1993. At December 31, 1994, the Parent Company held $94,963,000 in cash, liquid money market investments, U.S. Government securities and available-for-sale securities compared with $64,973,000 the prior year-end. The Parent Company's cash requirements consist primarily of operating expenses, dividends to shareholders, and principal and interest payments on debt. Operating expenses are funded by subsidiary bank management fees, while shareholder dividends and debt service are satisfied by quarterly subsidiary bank dividends. In addition, at December 31, 1994, $326,911,000 in additional liquidity from the subsidiary banks was available to the Parent Company as dividends, without prior regulatory approval or without reducing the capital of any subsidiary bank below current regulatory guidelines. The Parent Company also borrows funds in the commercial paper market, which are loaned to subsidiaries, and it also has access to long-term capital markets. Maintaining favorable debt ratings is critical to liquidity because these ratings affect the availability and cost of funds to the Corporation. These public ratings are indicated in the Investor Information summary on Page 68. 21 14 FINANCIAL COMMENTARY (CONT'D) Net cash provided by operating activities in 1994 was $287,535,000. Net income of $161,029,000 and non-cash charges of $50,748,000 largely accounted for the net cash provided by operating activities. Net cash used by investing activities was $511,429,000 in 1994. The largest component of cash used by investing activities was a net increase in loans of $1.03 billion. Investment securities totaling $847,046,000 were purchased in 1994. Net cash used for financing activities in 1994 was $17,272,000, with the largest component being the net change in core deposits other than retail certificates and other time deposits. INTEREST RATE SENSITIVITY Interest sensitivity is related to liquidity, as each is affected by maturing assets and sources of funds. Interest sensitivity, however, also takes into consideration those assets and liabilities with interest rates which are subject to change prior to maturity. The objective and primary focus of interest sensitivity management is to optimize earnings results, while managing, within internal policy constraints, interest rate risk. Mercantile's policy on rate sensitivity is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly aided or restricted by interest rate movements. The total absence of risk, as well as excessive risk, will result in less than acceptable returns; therefore, Mercantile manages its interest sensitivity risk between those two extremes. The slight growth and stability of the net interest rate margin throughout 1993 and 1994 were consistent with this objective. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 9 INTEREST RATE SENSITIVITY
DECEMBER 31, 1994 TOTAL VARIABLE 1-3 4-6 7-12 1 YEAR OVER RATE MONTHS MONTHS MONTHS OR LESS 1 YEAR TOTAL -------- ------ ------ ------ ------- ------ ----- ($ in Millions) EARNING ASSETS Loans and leases $1,409 $2,137 $637 $1,186 $5,369 $2,746 $ 8,115 Investments in debt and equity securities 15 313 244 396 968 2,066 3,034 Short-term investments 104 8 - - 112 - 112 ------ ------ ---- ------ ------ ------ ------- Total Earning Assets $1,528 $2,458 $881 $1,582 $6,449 $4,812 $11,261 ====== ====== ==== ====== ====== ====== ======= ACQUIRED FUNDS Interest bearing core deposits $2,115 $ 673 $525 $520 $3,833 $3,035 $ 6,868 Purchased deposits - 448 75 71 594 63 657 Short-term borrowings 1,356 191 14 17 1,578 5 1,583 Bank notes - 100 - - 100 - 100 Long-term debt - - 9 - 9 278 287 ------ ------ ---- ---- ------ ------ ------- Total Interest Bearing Acquired Funds 3,471 1,412 623 608 6,114 3,381 9,495 Non-interest bearing deposits 294 - - - 294 1,235 1,529 ------ ------ ---- ---- ------ ------ ------- Total Acquired Funds $3,765 $1,412 $623 $608 $6,408 $4,616 $11,024 ====== ====== ==== ==== ====== ====== ======= GAP ANALYSIS Interest sensitivity gap $(2,237) $1,046 $258 $974 $41 ======= ====== ==== ==== === Cumulative interest sensitivity gap $(2,237) $(1,191) $(933) $41 ======= ======= ===== === Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities .41 .77 .84 1.01 Non-accrual loans are reported in the "Over 1 Year" category. Mercantile's experience with interest bearing demand, money market accounts, savings and non-interest bearing deposits has been that, although these deposits are subject to immediate withdrawal, a portion of the balances has remained relatively constant in periods of both rising and falling rates. Therefore, a portion of these deposits is included in the "Over 1 Year" category. If these deposits were all included in the "Total 1 Year or Less" category, the cumulative ratio of interest-sensitive assets to interest- sensitive liabilities would be .69. -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 22 15 [EXHIBIT 11 SOURCES OF FUNDS GRAPH] Interest rate risk at a given point in time can be represented by an interest rate sensitivity position ("gap"). Exhibit 9 presents a summary balance sheet at December 31, 1994 with an interest rate gap analysis that shows the difference between the amount of assets and liabilities maturing or subject to repricing in given time periods. The cumulative gap represents the net position of assets and liabilities subject to repricing over specified time periods. A static gap report is one measure of the risk inherent in the existing balance sheet structure as it relates to potential changes in net interest income, and it indicates that the Corporation maintained a relatively balanced position at December 31, 1994. Because that portrayal does not capture many of the factors which determine interest rate risk, Mercantile places more emphasis on the use of a simulation model to measure changes in net interest income which might occur due to changes in interest rates. Using future balance sheet trends and different patterns of rate movements, these projections enable the Corporation to adjust its strategies to protect the net interest rate margin against significant interest rate fluctuations. Uniform sensitivity reports and guidelines are used by the St. Louis Area, Community and Kansas City Area banks. Another tool Mercantile uses to control interest rate risk is an extensive internal transfer pricing system at Mercantile Bank of St. Louis N.A. This system basically centralizes the management of interest rate risk, since the bank is the major corporate source of managing short-term changes in interest rate sensitivity, due to its access to external markets that can be used to rapidly adjust its interest sensitivity position. The Community Banks and Kansas City Area banks do not enjoy the overall flexibility of Mercantile Bank of St. Louis N.A. in managing their interest-sensitivity positions because of the basic retail and corporate middle-market nature of their businesses and their high percentages of core deposits. However, their positions are reviewed monthly by the corporate Asset/ Liability Management Committee and no individual bank is permitted to maintain an overly sensitive position for an extended period. The Corporation has been successful in meeting its interest sensitivity objectives, primarily by adjusting the interest rate maturities of its assets and liabilities, and not through the use of various off- balance-sheet instruments such as derivatives. Current model projections indicate minimal change in the level of net interest income if interest rates should rise or fall moderately from current levels. Within certain limits, in a declining interest rate environment, net interest income will be enhanced with a negative interest sensitivity gap position, while if rates trend upward, net interest income will be negatively impacted. The potential impacts on net interest income would be the opposite with a positive gap position. Management believes the Corporation is appropriately positioned for subsequent rate movements taking into consideration the current economic environment. DEPOSITS Deposits are the primary funding source for the Corporation's banks and are acquired from a broad base of local markets, including individual and corporate customers. Total deposits at year-end were $9.1 billion, a 5.7% decline from the $9.6 billion of a year ago. On average, total deposits declined by $412,385,000 or 4.1%. The decline is largely attributable to the disintermediation of deposits into higher-yielding alternatives. Exhibit 10 details the components of the Corporation's deposit mix at December 31 for the past five years. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 10 DEPOSITS
DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (Thousands) Non-interest bearing $1,529,052 $1,713,275 $1,532,477 $1,392,094 $1,490,726 Interest bearing demand 1,528,792 1,604,111 1,489,481 1,055,006 849,826 Money market accounts 1,457,832 1,642,448 1,696,595 1,280,410 1,094,242 Savings 845,311 902,849 813,403 587,643 479,865 Consumer time certificates under $100,000 3,002,659 3,248,202 3,775,591 3,787,726 3,632,284 Other time 33,026 35,438 123,669 75,180 66,243 ---------- ---------- ---------- ---------- ---------- Total Core Deposits 8,396,672 9,146,323 9,431,216 8,178,059 7,613,186 Time certificates $100,000 and over 438,052 429,675 477,093 584,425 653,753 Foreign 219,135 26,085 19,650 13,937 11,014 ---------- ---------- ---------- ---------- ---------- Total Purchased Deposits 657,187 455,760 496,743 598,362 664,767 ---------- ---------- ---------- ---------- ---------- Total Deposits $9,053,859 $9,602,083 $9,927,959 $8,776,421 $8,277,953 ========== ========== ========== ========== ========== -------------------------------------------------------------------------------------------------------------------------------
23 16 FINANCIAL COMMENTARY (CONT'D) [EXHIBIT 14 CORE DEPOSITS GRAPH] ------------------------------------------------------------------------------------------------------------------------------- Exhibit 12 FUNDING MIX
COMPONENTS OF SOURCES TO FUND EARNING ASSETS ACQUIRED FUNDS 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Deposits Non-interest bearing 16.52% 17.38% 15.25% 13.88% 14.93% Interest bearing demand 14.06 13.55 11.94 10.02 9.77 Money market accounts 14.54 14.77 14.26 12.50 11.98 Savings 8.13 7.78 6.85 5.73 5.57 Consumer time certificates under $100,000 27.58 31.30 36.07 40.92 39.18 Other time .30 .73 .99 .84 1.02 ------ ------ ------ ------ ------ Total Core Deposits 81.13 85.51 85.36 83.89 82.45 Time certificates $100,000 and over 4.13 4.13 5.11 6.50 7.75 Foreign .98 .28 .22 .34 .55 ------ ------ ------ ------ ------ Total Purchased Deposits 5.11 4.41 5.33 6.84 8.30 ------ ------ ------ ------ ------ Total Deposits 86.24 89.92 90.69 90.73 90.75 Short-term borrowings 9.38 7.35 7.64 8.23 8.94 Bank notes .11 - - - - Long-term debt 2.63 2.47 2.20 2.44 2.94 ------ ------ ------ ------ ------ Total Acquired Funds 98.36 99.74 100.53 101.40 102.63 Other (7.51) (7.96) (7.93) (8.41) (9.12) SHAREHOLDERS' EQUITY 9.15 8.22 7.40 7.01 6.49 ------ ------ ------ ------ ------ Total Sources to Fund Earning Assets 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ====== Based on average balances. -------------------------------------------------------------------------------------------------------------------------------
Core deposits remain Mercantile's largest, most reliable and most important funding source. Core deposits include both interest bearing and non-interest bearing demand deposits, money market and savings deposits, consumer certificates of deposit and other time deposits. Average core deposits for 1994 decreased by $489,083,000 or 5.1% and represented 81.13% of earning assets compared with 85.51% last year. Changes in the mix of deposits reflected the continuing strategy to be substantially funded by core deposits, and the disintermediation of retail certificates of deposit into interest bearing demand and savings accounts. Due primarily to higher interest rates, and thus their greater value as compensating balances, average non-interest bearing deposits decreased by $97,052,000 or 5.0% in 1994 and represented only 16.52% of average earning assets versus 17.38% in 1993. Average savings and interest bearing demand accounts grew by $39,279,000 or 4.5% and $56,775,000 or 3.8%, respectively. Average money market accounts declined by $25,736,000 or 1.6%. These three lower-cost sources of funds grew to 36.73% of earning assets from 36.10% in 1993. Other time deposits largely represent public funds and declined by $47,867,000 or 58.5%. These funds are solicited as an alternative source of market-priced funds. Average consumer time certificates declined by $414,482,000 or 11.9% and represented 27.58% of earning assets. The majority of the decline in consumer certificates occurred early in 1994 when loan demand was not as strong and Mercantile had elected not to aggressively price these deposits. A portion of these funds also moved to savings and interest-bearing demand accounts, as ------------------------------------------------------------------------------------------------------------------------------- Exhibit 13 MATURITY OF DOMESTIC TIME DEPOSITS $100,000 AND OVER
DECEMBER 31, 1994 CERTIFICATES OTHER TIME OF DEPOSIT DEPOSITS TOTAL ------------ ---------- ----- (Thousands) Three months or less $244,223 $11,028 $255,251 Over three through six months 59,845 7,587 67,432 Over six through twelve months 70,531 13,482 84,013 Over twelve months 63,453 - 63,453 -------- ------- -------- Total $438,052 $32,097 $470,149 ======== ======= ======== -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 24 17 described above, and some left Mercantile and the banking system due to a shift in customer preference towards alternative investments. Mercantile investment products, such as the proprietary ARCH mutual funds, attracted a portion of these deposits, benefiting future non- interest income. In September 1994, when loan demand significantly increased, the Corporation altered its pricing strategy and retail certificates began to increase. Purchased certificates of deposit greater than $100,000 and foreign branch deposits increased by 15.6% to $567,726,000, and represented 5.11% of earning assets during 1994. Most of the large domestic deposits were gathered from the local retail, commercial and institutional customer base, which provided a natural access to purchased funds and, accordingly, tended to be less volatile than other categories of purchased funds. Exhibit 13 portrays the maturities of domestic time deposits $100,000 and over. SHORT-TERM BORROWED FUNDS AND SHORT-TERM INVESTMENTS Average short-term borrowed funds increased by $225,493,000 or 27.6% during 1994, while average short-term investments declined by $92,896,000 or 29.1%. These funding changes coincided with the growth in loans, the decline in core deposits, and with liquidity goals and balance sheet management strategies which were consistent with the strategies employed in prior years. Short-term borrowings are an alternative to other funding sources, such as large certificates of deposit and Eurodollar deposits, and consist primarily of federal funds purchased, treasury tax and loan note option accounts, securities sold under agreements to repurchase and commercial paper. These sources of funding are utilized primarily by Mercantile Bank of St. Louis N.A., and volumes are monitored by the Asset/Liability Management Committee. As a major bank in the Midwest with a significant correspondent bank network and corporate account base, Mercantile Bank of St. Louis N.A. purchases excess funds from correspondent banks and borrows on a short-term basis from commercial customers. Accordingly, some of Mercantile's short-term borrowings can be considered as a stable source of funds, similar to core deposits. Depending on funding requirements and liquidity strategies employed by the Asset/Liability Management Committee, these funds are either used internally or redeployed as short-term investments. Mercantile's commercial paper is rated TBW-1 by Thomson BankWatch, P-2 by Moody's and A-2 by Standard & Poor's, and has primarily been used as an additional funding source for Mercantile Bank of St. Louis N.A. The paper is issued principally in the local St. Louis market. The average volume of paper issued in 1994 was $26,487,000. The Corporation has backup lines of credit totaling $40,000,000 with unaffiliated banks in support of its commercial paper. Short-term investments include interest-bearing deposits, federal funds sold and securities purchased under agreements to resell. The 1994 average volume of short-term investments decreased by $92,896,000 or 29.1% from 1993, as the spread earned on these investments compared with the rate paid on short-term borrowed funds was a negative two basis points in contrast with a positive 47 in 1993. Short-term investments are primarily used for excess liquidity or as investment vehicles to meet overall interest sensitivity objectives. Short-term borrowings, net of short-term investments, averaged $817,157,000 during 1994 compared with $498,768,000 in 1993, and were 7.34% of 1994 average earning assets compared with 4.48% in 1993. CAPITAL RESOURCES Consistent with the objective of operating a premier banking organization, Mercantile maintains a strong capital base which provides a solid foundation for anticipated future asset growth and promotes depositor and investor confidence. Capital management is a continuous process at Mercantile, and ensures that capital is provided for current needs and anticipated growth. Mercantile's strong capital position has enabled it to profitably expand its asset and deposit bases, while maintaining capital ratios at levels comparable to that of other quality banking organizations, and substantially in excess of regulatory standards. Mercantile continued to strengthen its capital position during 1994, as shareholders' equity grew to $1.1 billion, an increase of 11.4% from last year-end. Retained earnings accounted for the majority of the increase. Equity grew to 8.73% of assets at December 31, 1994 compared with 7.90% a year ago. Mercantile's Tier I capital to risk-adjusted assets ratio was 11.87% at December 31, 1994, while the Total capital ratio was 15.78%. These ratios compared favorably with established regulatory minimums and the December 31, 1993 ratios of 11.06% and 14.54%, respectively. The regulatory leverage ratio, which places a constraint on the degree to which a banking company can leverage its equity 25 18 FINANCIAL COMMENTARY (CONT'D) ------------------------------------------------------------------------------------------------------------------------------- Exhibit 15 REGULATORY CAPITAL
DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (Thousands) Shareholders' equity $1,068,250 $ 958,557 $ 851,324 $690,262 $580,913 Total intangible assets (64,271) (71,759) (72,806) (64,716) (90,186) Net fair value adjustment for securities available-for-sale under FAS 115 4,546 (3,636) - - - ---------- ---------- ---------- -------- -------- Tier I capital 1,008,525 883,162 778,518 625,546 490,727 Tier II capital 332,821 277,909 365,608 154,147 139,448 ---------- ---------- ---------- -------- -------- Total Risk-based Capital $1,341,346 $1,161,071 $1,144,126 $779,693 $630,175 ========== ========== ========== ======== ======== Risk-adjusted assets $8,498,260 $7,985,847 $7,986,938 $7,506,103 $7,521,736 ========== ========== ========== ========== ========== Quarterly average tangible assets $12,120,864 $12,044,225 $12,185,092 $10,444,069 $9,767,705 =========== =========== =========== =========== ========== -------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------- Exhibit 16 CAPITAL RATIOS
DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Tier I capital to risk-adjusted assets 11.87% 11.06% 9.75% 8.33% 6.52% Total capital to risk-adjusted assets 15.78 14.54 14.32 10.39 8.38 Leverage 8.32 7.33 6.39 5.99 5.02 Equity to assets Consolidated 8.73 7.90 6.94 6.41 5.73 Combined bank subsidiaries 8.58 8.10 7.28 6.37 6.29 Double leverage 108.18 111.97 114.36 109.20 121.46 Long-term debt to total capitalization 21.20 22.15 26.00 22.75 28.66 -------------------------------------------------------------------------------------------------------------------------------
capital base, was 8.32% at December 31, 1994, well in excess of the regulatory minimum and an increase from last year's ratio of 7.33%. Changes have been proposed to the risk-based capital computations to incorporate interest rate risk. As currently proposed, the Corporation does not believe these changes would have a material impact on its capital ratios. The equity to assets ratios for Mercantile Bank of St. Louis N.A., the Community Banks and the Kansas City Area banks at year-end 1994 were 8.25%, 8.76% and 8.96%, respectively. Tier I risk-based capital at Mercantile Bank of St. Louis N.A. was 11.50% of risk-adjusted assets, and in the Community Banks and Kansas City Area banks the range was from 9.85% to 25.62% at December 31, 1994. The Total capital ratio was 14.40% at Mercantile Bank of St. Louis N.A., with a range of 11.10% to 26.89% in the Community Banks and Kansas City Area banks. All were above the present levels required by regulatory authorities and are monitored individually by the Corporation based on risk and deposit growth potential. At December 31, 1994, all Mercantile banks exceeded both the Tier I and Total "well- capitalized" minimums of 6.0% and 10.0%, respectively. Due to the strength of the capital base at the individual bank subsidiaries, $326,911,000 was available for distribution through dividends to the Parent Company without prior regulatory approval and without reducing the capital of the respective subsidiary banks below present minimum standards. An additional $93,310,000 would be available in the form of loans to the Parent Company under current regulations. The ratio of long-term debt to total capitalization at December 31, 1994 declined to 21.20% from 22.15% at December 31, 1993. A total of $54,753,000 of long-term debt was repaid during 1994 as Mercantile Bank of St. Louis N.A. issued $75,000,000 of 10-year, MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 26 19 [EXHIBIT 19 EARNING ASSETS GRAPH] non-callable subordinated debt and used the proceeds to pay off higher-coupon senior debt and a mortgage on its headquarters building. No significant amount of debt is now scheduled to mature until 1999, except for the $8,822,000 of convertible notes which mature on April 1, 1995. Mercantile's publicly held debt ratings are summarized on page 68 of this report. The Parent Company's double leverage ratio, which measures the extent to which the equity capital of its subsidiaries is supported by Parent Company debt rather than equity, decreased to 108.18% from 111.97% at December 31, 1993, the lowest level in recent history. Intangible assets, which consisted largely of goodwill, are summarized in Exhibit 17, and totaled $64,271,000 at December 31, 1994 compared with $71,759,000 a year ago, a decline of 10.4%. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 17 INTANGIBLE ASSETS
DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (Thousands) Goodwill $51,281 $56,882 $56,206 $48,719 $72,749 Core deposit premium 7,923 11,187 13,444 12,879 14,831 Other 5,067 3,690 3,156 3,118 2,606 ------- ------- ------- ------- ------- Total $64,271 $71,759 $72,806 $64,716 $90,186 ======= ======= ======= ======= ======= -------------------------------------------------------------------------------------------------------------------------------
Book value per share at December 31, 1994 was $24.72 compared with $22.40 at the prior year end, an increase of 10.4%. The equity formation rate (defined as net income less dividends divided by average equity) increased to 11.07% in 1994 from 8.73% in 1993. A cash dividend totaling $1.12 per share was declared and paid, a 13.1% increase from last year's dividend of $.99. In addition, on February 9, 1995, the quarterly dividend payable April 3, 1995 was increased 17.9% to $.33 per share. Additional data relating to Mercantile's common stock is included in the Investor Information summary on Page 68 of this report. Management has established financial objectives designed to generate future capital through various means, including increasing the returns on assets and equity. Mercantile's dividend policy is influenced by the belief that most shareholders are interested in long-term ------------------------------------------------------------------------------------------------------------------------------- Exhibit 18 EARNING ASSET MIX
COMPONENTS OF EARNING ASSETS ------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- LOANS AND LEASES Commercial 18.68% 18.06% 19.08% 21.34% 22.96% Real estate-commercial 11.33 11.69 12.24 12.52 10.92 Real estate-construction 1.56 1.40 1.55 1.63 2.32 Foreign - .01 .02 .02 - ------ ------ ------ ------ ------ Total Commercial-related Loans 31.57 31.16 32.89 35.51 36.20 Real estate-residential 20.97 21.10 22.93 23.70 23.15 Consumer 9.25 8.40 8.57 9.61 11.21 Credit card 6.75 5.98 4.85 4.63 4.87 ------ ------ ------ ------ ------ Total Consumer-related Loans 36.97 35.48 36.35 37.94 39.23 ------ ------ ------ ------ ------ Total Loans and Leases 68.54 66.64 69.24 73.45 75.43 INVESTMENTS IN DEBT AND EQUITY SECURITIES Trading .10 .13 .11 .21 .15 Taxable 27.16 28.26 25.92 20.66 19.76 Tax-exempt 2.16 2.10 1.78 1.56 2.05 ------ ------ ------ ------ ------ Total 29.42 30.49 27.81 22.43 21.96 SHORT-TERM INVESTMENTS 2.04 2.87 2.95 4.12 2.61 ------ ------ ------ ------ ------ Total Earning Assets 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ====== Based on average balances. -------------------------------------------------------------------------------------------------------------------------------
27 20 FINANCIAL COMMENTARY (CONT'D) performance as well as current yield. The current dividend pay-out level is considered sustainable given the Corporation's present cash flow position, level of earnings, capital position and the strength of its subsidiary banks' capital. Future dividends will be determined based on Mercantile's results of operations, growth expectations, financial condition, regulatory constraints and other factors deemed relevant by the Board of Directors. Exhibits 15 and 16 summarize the capital base of Mercantile and provide details of the five-year history of capital and equity ratios, and the significant enhancement of those ratios. INVESTMENTS IN DEBT AND EQUITY SECURITIES Mercantile's investment portfolio serves three important functions. First, it is a vehicle for adjusting balance sheet rate sensitivity and protecting against the impact of changes in interest rate movements by managing the purchases and maturities of securities; second, it is a means for investment of excess funds, depending on loan demand; and, third, the available-for-sale portion provides potential immediate liquidity. The investment portfolio is structured to maximize the return on invested funds within acceptable interest rate risk guidelines and to meet pledging requirements, while giving consideration to loan demand, credit risk, future liquidity needs, balance sheet strategies and the outlook for trends in interest rates. After loans, securities are the largest category of earning assets. During 1994, average securities represented 29.42% of earning assets compared with 30.49% for 1993 and 27.81% for 1992. Investment securities totaled $3.0 billion at December 31, 1994 compared with $3.4 billion at December 31, 1993, a decrease of $367,403,000 or 10.8%. On December 31, 1993, Mercantile adopted Financial Accounting Standard ("FAS") 115, "Accounting for Certain Investments in Debt and Equity Securities." FAS 115 requires investment securities be classified into three categories: trading, available-for-sale and held-to-maturity. On December 31, 1994, $269,232,000 of securities, primarily short-term U.S. Government, were identified for the available-for-sale category. Such securities represented 8.87% of the year-end investment portfolio and had an after-tax depreciation in fair value of $8,182,000 during 1994, which was accounted for as a reduction of shareholders' equity. Note E to the Consolidated Financial Statements thoroughly describes FAS 115 and provides a detailed breakout of the components of the investment portfolio. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 20 INVESTMENTS IN DEBT AND EQUITY SECURITIES
DECEMBER 31 1994 1993 1992 ---- ---- ---- (Thousands) AVAILABLE-FOR-SALE (ESTIMATED FAIR VALUE) U.S. government $213,070 $361,047 $89,424 State and political subdivisions-tax-exempt 12,704 15,173 - Other 43,458 39,063 - -------- -------- ------- Total $269,232 $415,283 $89,424 ======== ======== ======= HELD-TO-MATURITY (AMORTIZED COST) U.S. government $2,342,744 $2,492,458 $2,664,816 State and political subdivisions: Tax-exempt 217,059 235,030 216,060 Taxable 157,912 101,467 12,195 ---------- ---------- ---------- Total State and Political Subdivisions 374,971 336,497 228,255 Other 32,529 141,205 401,098 ---------- ---------- ---------- Total $2,750,244 $2,970,160 $3,294,169 ========== ========== ========== This exhibit excludes trading securities, which are reported at estimated fair value on the Consolidated Balance Sheet. Trading securities totaled $14,299,000, $15,735,000 and $17,684,000 at December 31, 1994, 1993 and 1992, respectively. -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 28 21 [EXHIBIT 22 LOANS AND LEASES GRAPH] The year-end held-to-maturity and available-for-sale portfolios were composed of 84.64% in U.S. Treasury and other government agency securities, including 18.79% in mortgage-related issues; 12.84% was invested in state and municipal securities, and 2.52% consisted of other miscellaneous securities, primarily high-grade asset-backed securities. The comparable distributions at year-end 1993 were 84.29%, 10.39% and 5.32%, respectively. The average stated maturity of the overall portfolio declined slightly at the end of 1994 to two years from two years and two months at year-end 1993. As loan demand increased and core funding decreased, the overall size of the portfolio was reduced. Securities were generally added with maturities of two to four years to match the expected average maturity of retail deposits, and to fit within the projected interest sensitivity position of the Corporation. The overall tax-equivalent yield of the portfolio decreased during 1994 to 5.65% from 6.01% in 1993, but rose significantly to 6.01% during the month of December 1994, due to both higher interest rates and a steady volume of maturing securities. Exhibit 21 presents the distribution of state and municipal securities by investment grade. As noted, 86.40% of the state and municipal securities held were rated A or higher by Moody's Investors Service. Of the remaining securities, most were non-rated bonds because of the smaller size of the issue and the expense associated with obtaining a rating. These bonds generally represented local issues purchased by subsidiary banks, which are evaluated internally for creditworthiness on an ongoing basis, similar to loans. Mercantile's commitment to its expanding region continued to be reflected by the holdings of securities of Missouri, Illinois, Kansas and Iowa, and their local governmental units, although securities of many other states were also held in the portfolio. At December 31, 1994, investments in securities of those four states and their political subdivisions amounted to $133,790,000 or 34.51% of total state and municipal securities. However, securities of any one single political subdivision in any of these states did not exceed 1.23% of shareholders' equity at December 31, 1994. Outside of those four states, securities of no single issuer exceeded 1.13% of shareholders' equity. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 21 SECURITIES OF STATE AND POLITICAL SUBDIVISIONS BY QUALITY RATING
DECEMBER 31 1994 1993 1992 ------------------------ ---- ---- MOODY'S PAR RATINGS VALUE PERCENT PERCENT PERCENT -------- ----- ------- ------- ------- ($ in Thousands) Aaa $152,700 39.59 36.97 18.34 Aa 96,825 25.11 20.50 26.18 A1 54,235 14.07 15.62 19.63 A 29,405 7.63 11.14 13.92 -------- ------ ------ ------ Subtotal 333,165 86.40 84.23 78.07 Baa 1 2,860 .74 .98 1.79 Baa 2,045 .53 .73 .53 Ba - - - .10 Not rated 47,531 12.33 14.06 19.51 -------- ------ ------ ------ Total $385,601 100.00 100.00 100.00 ======== ====== ====== ====== -------------------------------------------------------------------------------------------------------------------------------
LOANS Loans are the primary earning asset of the Corporation and were $8.1 billion at December 31, 1994, up $733,071,000 or 9.9% from year-end 1993. The growth was broad-based, with all classifications showing increases except commercial real estate mortgages, which were even with year-end 1993. The vast majority of the Corporation's loans are extended in its natural trade areas, which now include four states. The Corporation's diversified loan portfolio spreads the risk and reduces exposure to economic downturns which may occur in different segments of the economy or in different industries. At December 31, 1994, the portfolio was 44.17% commercial and 55.83% consumer- related, compared with 45.55% and 54.45% at December 31, 1993. Note M provides more details on concentrations of credit and the overall loan portfolio. The portfolio mix has undergone a favorable shift in recent years as business development efforts have focused on expanding middle-market commercial and consumer loans. Lower-risk residential mortgage loans are now the dominant asset, comprising nearly one-third of the loan portfolio. This shift has been complemented by consumer and middle-market portfolios added in mergers. 29 22 FINANCIAL COMMENTARY (CONT'D) ------------------------------------------------------------------------------------------------------------------------------- Exhibit 23 LOAN AND LEASE PORTFOLIO MATURITIES
ONE TO FIVE YEARS OVER FIVE YEARS ----------------- ----------------- UNDER FIXED FLOATING FIXED FLOATING DECEMBER 31 ONE YEAR RATE RATE RATE RATE 1994 1993 1992 1991 1990 -------- ----- -------- ----- -------- ---- ---- ---- ---- ---- (Millions) Commercial $ 809 $ 483 $ 414 $282 $ 132 $2,120 $1,933 $2,035 $2,011 $2,119 Real estate-commercial 316 390 308 78 168 1,260 1,267 1,351 1,175 1,053 Real estate-construction 97 17 73 15 2 204 163 164 159 146 Real estate-residential 127 184 63 368 1,794 2,536 2,315 2,404 2,242 2,188 Consumer 170 844 31 93 12 1,150 941 935 876 929 Credit card - 432 413 - - 845 763 610 483 449 ------ ------ ------ ---- ------ ------ ------ ------ ------ ------ Total Loans and Leases $1,519 $2,350 $1,302 $836 $2,108 $8,115 $7,382 $7,499 $6,946 $6,884 ====== ====== ====== ==== ====== ====== ====== ====== ====== ====== Non-accrual loans are reported at contractual maturities and rates. -------------------------------------------------------------------------------------------------------------------------------
The 1994 average loan to deposit ratios for the Corporation, Mercantile Bank of St. Louis N.A., the Community Banks and Kansas City Area banks were 79.48%, 84.77%, 76.93% and 62.10%, respectively, all up from 1993. Exhibit 18 portrays the components of earning assets and indicates the relative size of the loan portfolio as a percentage of earning assets over the last five years. During 1994 commercial loans averaged $2.08 billion and represented 27.24% of the loan portfolio compared with $2.01 billion and 27.10% for 1993. From year-end 1993 to year-end 1994, commercial loan volume grew by $188,039,000 or 9.7%. The growth was across the system with notable growth recorded in asset-based lending and regional banking in St. Louis, and at Mercantile Bank of Northern Iowa and Mercantile Bank of Springfield. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 24 REAL ESTATE COMMERCIAL AND CONSTRUCTION LOAN PORTFOLIO
DECEMBER 31, 1994 ---------------------------------------------------------------------------------- MISSOURI ILLINOIS KANSAS IOWA OTHER TOTAL -------- -------- ------ ---- ----- ----- (Thousands) Land and land developments $ 49,797 $ 442 $ 21,670 $ 958 $ 1,426 $ 74,293 Hotels 33,954 5,529 1,423 2,000 12,139 55,045 Apartments 95,573 6,748 28,809 458 10,534 142,122 Retail/shopping centers 90,106 4,358 23,903 3,470 29,468 151,305 Office buildings and warehouses 177,766 5,913 69,002 3,234 24,515 280,430 Nursing homes, restaurants and other 278,516 13,122 60,391 11,178 12,243 375,450 ---------- ------- -------- ------- ------- ---------- Total Urban Banks 725,712 36,112 205,198 21,298 90,325 1,078,645 Total Rural Banks 349,517 35,726 - - - 385,243 ---------- ------- -------- ------- ------- ---------- Total $1,075,229 $71,838 $205,198 $21,298 $90,325 $1,463,888 ========== ======= ======== ======= ======= ========== -------------------------------------------------------------------------------------------------------------------------------
Average commercial real estate mortgage and construction loans decreased by $23,159,000 or 1.6%, and contracted to 18.81% of the total loan portfolio compared to 19.65% in 1993. Commercial mortgage and construction loans held by Mercantile Bank of St. Louis N.A. represented 30.58% of the portfolio, with the rest, relating largely to projects in Missouri, Illinois, Kansas and Iowa, originated by the Corporation's other banks. Once again, few construction loans were made in 1994 as excess office and industrial capacity, while contracting, still existed in most of the Corporation's markets. The stronger economy in the second half of the year began to reverse this trend. Commercial mortgage loans continued to pay down in 1994 as well, although new loans offset the paydowns, resulting in an average balance relatively even in comparison with 1993. Commercial real estate loans are generally secured by the underlying property at a 75% to 80% loan-to-appraised value, and are typically supported by guarantees from the project developers. Additional collateral may be taken as deemed necessary. Exhibit 24 summarizes the distribution of commercial and construction real estate loans by collateral and state. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 30 23 Average residential real estate mortgage loan volume was relatively flat with 1993 and represented 30.60% of the loan portfolio compared with 31.66% during 1993. From year-end 1993 to year-end 1994, however, residential mortgage loan volume grew significantly by $220,924,000 or 9.5%. The integration of the Mercantile Bank of St. Louis N.A. and United Postal mortgage operations significantly added market power in St. Louis in the second half of the year. Also, rising interest rates in that period led customers to switch from fixed-rate loans, which were sold, to adjustable-rate loans that were held in the loan portfolio. Mercantile currently services a residential real estate loan portfolio of $3.4 billion and generated approximately $1 billion in new servicing volume during 1994. The mortgage operations of Central, UNSL and Plains Spirit will add significantly to Mercantile's servicing portfolio and loan production potential as they are integrated in 1995. Average consumer loans increased $94,365,000 or 10.1% to $1.03 billion and represented 13.50% of the loan portfolio compared with 12.60% last year. The major component of this category was indirect auto lending. Mercantile Bank of St. Louis N.A. has a leadership position in the St. Louis market and has moved into the Kansas City, Springfield, and Columbia, Missouri markets, where most of the growth occurred. Mercantile Bank of Northern Iowa also experienced growth in its indirect loan portfolio. Average indirect consumer loans were up $154,225,000 or 31.2% to $648,432,000 from 1993, while direct consumer loans decreased 13.6% due to consumer preference for auto leasing, utilization of home equity lines and the availability of higher credit limits on credit card loans. Average credit card loan volume was up $85,729,000 or 12.9% when compared with 1993, and represented 9.85% of the total loan portfolio in 1994 compared with 8.98% the prior year. Selective increases in line limits, cross-selling to existing customers and favorable response to direct mail campaigns in selected Mercantile markets accounted for the growth. Mercantile has plans to establish a credit card bank during 1995 to centralize its core credit card business, as well as the activities of a recently announced co-branded credit card arrangement. The overall tax-equivalent yield of the loan portfolio increased by nine basis points to 8.52% in 1994. As shown in Exhibit 23, which portrays the maturity and interest sensitivity of the portfolio, 60.74% of loans were priced at floating rates or maturing within one year. Certain loan categories are more rate-sensitive than others and follow general rate changes more closely. RISK MANAGEMENT AND THE RESERVE FOR POSSIBLE LOAN LOSSES The underlying objectives of Mercantile's credit management are to identify and manage credit exposure, and to support the growth of a profitable and high quality loan portfolio. At Mercantile these functions are performed centrally by corporate Credit Administration, which provides management with extensive information on risk levels, trends, delinquencies, portfolio concentrations and internal ratings. Credit Administration includes corporate Credit Policy, approval of large credits and corporate Credit Review. At Mercantile Bank of St. Louis N.A., Credit Administration also provides special asset teams that promptly concentrate on identified problem loans and workout situations when necessary, as well as the management of foreclosed property. Mercantile utilizes a lender-initiated system of rating credits, which is subsequently tested by Credit Review, external auditors and bank regulators. Adversely rated credits are included on a watch list, and are reviewed at the bank level and centrally on at least a quarterly basis. The reserve for possible loan losses represents the aggregate reserves of the Corporation's banking subsidiaries and at December 31, 1994 was $170,940,000 compared with $168,651,000 at the end of 1993. Loans outstanding increased by 9.9%, which resulted in a year- end 1994 ratio of the reserve for possible loan losses to outstanding loans of 2.11% compared with 2.28% at December 31, 1993. The reserve as a percentage of non-performing loans, however, grew to 675.57% compared with 293.39% last year, as non-performing loans decreased by 56.0% from last year-end. In 1994 the provision for possible loan losses decreased by $27,541,000 or 45.1% to $33,472,000, compared with $61,013,000 last year. The provision is the annual cost of providing a reserve for anticipated future loan losses. In any accounting period, the amount of provision is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessments of loan quality, general economic factors and collateral values. All of these factors were considered in determining the Corporation's provision level, which as a percentage of average loans was .44% in 1994 versus .82% in 1993. This lower 1994 provision reflected improved asset quality, lower actual loan losses and declining levels of non-performing loans. Also, the 1993 provision included $8,750,000 to conform Metro's and United Postal's reserve policies to those of Mercantile. 31 24 FINANCIAL COMMENTARY (CONT'D) [EXHIBIT 26 NON-PERFORMING LOAN COVERAGE (%) GRAPH] ------------------------------------------------------------------------------------------------------------------------------- Exhibit 25 RESERVE FOR POSSIBLE LOAN LOSSES
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ($ in Thousands) BEGINNING BALANCE $168,651 $165,575 $146,078 $148,660 $149,282 PROVISION 33,472 61,013 74,579 58,076 50,886 CHARGE-OFFS Commercial 3,826 15,644 21,889 19,082 20,991 Real estate-commercial 5,640 30,701 35,696 26,343 14,281 Real estate-construction 2,171 344 1,487 1,158 2,075 Real estate-residential 4,253 1,690 2,197 1,500 1,155 Consumer 4,440 4,517 6,476 7,519 6,263 Credit card 41,237 30,915 20,642 21,530 17,406 -------- -------- -------- -------- -------- Total Charge-offs 61,567 83,811 88,387 77,132 62,171 RECOVERIES Commercial 6,623 11,281 5,235 6,049 5,755 Real estate-commercial 15,994 4,474 3,095 674 962 Real estate-construction 248 682 154 461 192 Real estate-residential 572 374 1,271 144 196 Consumer 2,401 2,428 2,665 1,712 1,334 Credit card 4,481 3,463 2,514 1,521 989 Foreign 65 930 383 1,216 1,235 -------- -------- -------- -------- -------- Total Recoveries 30,384 23,632 15,317 11,777 10,663 -------- -------- -------- -------- -------- NET CHARGE-OFFS 31,183 60,179 73,070 65,355 51,508 ACQUIRED RESERVES - 2,242 17,988 4,697 - -------- -------- -------- -------- -------- ENDING BALANCE $170,940 $168,651 $165,575 $146,078 $148,660 ======== ======== ======== ======== ======== LOANS AND LEASES December 31 balance $8,114,845 $7,381,774 $7,499,221 $6,945,537 $6,883,722 ========== ========== ========== ========== ========== Average balance $7,622,125 $7,412,810 $7,443,980 $6,789,408 $6,485,453 ========== ========== ========== ========== ========== RATIOS Reserve balance to outstanding loans 2.11% 2.28% 2.21% 2.10% 2.16% Reserve balance to non-performing loans 675.57 293.39 156.85 113.14 119.68 Net charge-offs to average loans .41 .81 .98 .96 .79 Earnings coverage of net charge-offs 9.19X 4.24x 3.04x 2.22x 2.88x -------------------------------------------------------------------------------------------------------------------------------
The ratio of net charge-offs to average loans for 1994 was .41% compared with .81% in 1993. The actual net charge-off figures were $31,183,000 and $60,179,000, respectively. Net charge-offs for 1994 consisted primarily of credit card net losses of $36,756,000, write- downs on three United Postal commercial real estate credits totaling $3,965,000, and a fraud perpetrated by a mortgage loan broker resulting in a net charge-off of $2,664,000 on residential mortgages. These losses were partially offset by recoveries of $13,841,000 on four commercial real estate credits at Mercantile Bank of St. Louis N.A. In 1993 net charge-offs were almost entirely attributable to three borrowers of Mercantile Bank of St. Louis N.A. and from the credit card portfolio. Exhibit 25 provides the details of charge-offs and recoveries for the past five years. In 1994 all losses were insignificant, except for those enumerated above. At Mercantile Bank of St. Louis N.A., the ratio of net charge-offs to average loans for 1994 was .19% compared with .92% in 1993. In the Kansas City Area, the ratio of net charge-offs to average loans was .59% versus .47% last year. For the Community Banks as a group, the comparative ratios were .63% and .77% during 1994 and 1993, respectively. Credit card losses had a significant impact on all these ratios. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 32 25 Credit card losses were 4.89% of average credit card loans for 1994 compared with 4.13% in 1993, as net credit card charge-offs were $36,756,000 for 1994 compared with $27,452,000 last year. By credit policy, losses are taken after six cycles of non-payment or notice of personal bankruptcy, if earlier. Exclusive of credit card losses, Mercantile had net recoveries of $5,573,000 in 1994. The Corporation evaluates the reserves of all banks quarterly to ensure the timely charge-off of loans and the adequacy of each bank's reserve for possible loan losses. This review is performed by each bank preliminarily, and is validated by both corporate Credit Review and a Credit Committee chaired by the Chief Credit Officer. Factors considered include: volumes and trends in delinquencies and non- performing loans; specific loan ratings and outstandings; historical and projected loss experience based on volumes and types of loans; the results of independent internal loan ratings or external credit reviews; industrial or geographic concentrations; national, regional and/or specific industry economic conditions; off-balance-sheet risk; and other subjective factors. Every significant criticized credit is reviewed initially by the respective bank, and a secondary review is performed quarterly to confirm the risk rating, proper accounting, adequacy of strategy and loan loss reserve. In addition to specific allocations, reserve allocations are made based on percentage guidelines for all individually rated loans, whether criticized or not. Additionally, allocations are made for unrated loans, such as residential mortgage, credit card and other consumer loans, based on historical loss experience adjusted for portfolio activity and current economic trends. These allocated reserves are further supplemented by unallocated reserves in each bank based on judgments regarding risk of error, local economic conditions and any other relevant factors. At December 31, 1994, the level of the individual Community Bank reserves as a percentage of total loans outstanding ranged from 1.47% to 6.48% with a combined ratio of 2.24%. The coverage of non- performing loans was 632.17%. The Mercantile Bank of St. Louis N.A. reserve was 1.98% of loans with a coverage ratio of 748.62%, while the Kansas City Area combined reserve was 2.17% with a coverage ratio of 598.80%. In Exhibit 27, the Corporation has estimated an allocation of the reserve for possible loan losses to the various loan categories. Consideration for making such allocations is consistent with the factors discussed above, and all of those factors are subject to change; thus the allocation is not necessarily indicative of the loan categories in which future losses will occur. The total reserve is available to absorb losses from any portion of the loan portfolio. Management believes the consolidated reserve of 2.11% of total loans outstanding and 675.57% of non-performing loans was adequate based on the risks identified at such date in the loan portfolios, and is not aware of any significant risks in the loan portfolio due to concentrations within any particular industry. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 27 ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
DECEMBER 31 1994 1993 1992 1991 1990 -------------------- --------------------- -------------------- --------------------- -------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED TO TOTAL ALLOCATED TO TOTAL RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS RESERVE LOANS --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ($ in Thousands) Commercial $ 23,389 26.13 $ 19,431 26.18 $ 29,138 27.14 $ 27,072 28.94 $ 31,694 30.77 Real estate- commercial 28,215 15.52 32,044 17.17 38,983 18.01 46,381 16.92 43,633 15.30 Real estate- construction 2,254 2.52 1,579 2.20 4,296 2.18 5,244 2.29 5,506 2.13 Real estate- residential 6,847 31.25 4,752 31.36 4,020 32.06 2,789 32.28 2,119 31.79 Consumer 6,438 14.17 5,678 12.75 8,266 12.47 6,849 12.61 5,825 13.49 Credit card 36,827 10.41 31,285 10.34 25,169 8.14 16,861 6.96 17,102 6.52 Unallocated 66,970 N/A 73,882 N/A 55,703 N/A 40,882 N/A 42,781 N/A -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total $170,940 100.00 $168,651 100.00 $165,575 100.00 $146,078 100.00 $148,660 100.00 ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== -------------------------------------------------------------------------------------------------------------------------------
33 26 FINANCIAL COMMENTARY (CONT'D) NON-PERFORMING ASSETS Non-performing assets consist of non-accrual loans, renegotiated loans and foreclosed property. A summary of these assets for the past five years is presented in Exhibit 28. Effective January 1, 1995, the Corporation will adopt FAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118. As a result of applying the new rules, certain impaired loans will be reported at the present value of future cash flows. Mercantile does not expect the adoption of this standard to have a material impact on its financial condition or results of operations. By the Corporation's definition, all non- accrual and renegotiated commercial loans will be considered impaired. Non-performing loans (non-accrual and renegotiated) declined $32,180,000 or 56.0% to $25,303,000 at December 31, 1994 and represented .31% of total loans. Foreclosed assets, including in-substance foreclosures, at December 31, 1994 declined by 65.7% to $12,347,000 compared with $36,014,000 last year. The ratio of non- performing assets to outstanding loans plus foreclosed assets declined to .46% at December 31, 1994 compared with 1.26% last year. These reductions were indicative of the continued effectiveness of Credit Administration and the asset workout teams, and reflected a favorable trend in credit quality, as non-performing asset levels have trended downward for the past three years. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 28 NON-PERFORMING ASSETS
DECEMBER 31 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ($ in Thousands) NON-ACCRUAL LOANS Commercial $ 4,102 $11,949 $ 36,528 $ 37,816 $ 41,850 Real estate-commercial 10,171 25,059 36,776 69,092 47,947 Real estate-construction 129 785 4,457 4,031 1,564 Real estate-residential 6,792 9,407 11,458 13,450 12,490 Consumer 1,447 1,818 2,460 1,115 2,726 ------- ------- -------- -------- -------- TOTAL NON-ACCRUAL LOANS 22,641 49,018 91,679 125,504 106,577 RENEGOTIATED LOANS 2,662 8,465 13,881 3,606 17,634 ------- ------- -------- -------- -------- TOTAL NON-PERFORMING LOANS $25,303 $57,483 $105,560 $129,110 $124,211 ======= ======= ======== ======== ======== FORECLOSED ASSETS Foreclosed real estate $ 8,661 $16,771 $51,603 $63,031 $51,657 In-substance foreclosures 1,546 18,044 4,412 11,351 12,524 Other foreclosed assets 2,140 1,199 3,229 4,822 2,676 ------- ------- ------- ------- ------- TOTAL FORECLOSED ASSETS $12,347 $36,014 $59,244 $79,204 $66,857 ======= ======= ======= ======= ======= TOTAL NON-PERFORMING ASSETS $37,650 $93,497 $164,804 $208,314 $191,068 ======= ======= ======== ======== ======== PAST-DUE LOANS (90 DAYS OR MORE) $18,160 $14,096 $12,325 $8,712 $14,560 ======= ======= ======= ====== ======= RATIOS Non-performing loans to outstanding loans .31% .78% 1.41% 1.86% 1.80% Non-performing assets to outstanding loans and foreclosed assets .46 1.26 2.18 2.97 2.75 Non-performing assets to total assets .31 .77 1.34 1.94 1.88 -------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans are those for which, in the opinion of management, the timely or ultimate collection of principal and/or interest is unlikely or problematic. Note A to the Consolidated Financial Statements further details the Corporation's policy on accounting for non-accrual loans. As noted in Exhibit 28, non-accrual loans declined by $26,377,000 or 53.8% from last year and totaled $22,641,000 at year-end 1994. Paydowns and some restructurings in both the commercial and commercial real estate categories at Mercantile Bank of St. Louis N.A. largely accounted for the change in 1994, although non-accrual loan levels in the Community Banks and the Kansas City Area likewise declined to historical low levels. The largest non- accrual loan at year-end was $912,000, and only two other non-accrual loans have balances owed in excess of $500,000. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 34 27 Renegotiated loans are those for which the terms have been restructured beyond those available in the market, in order to aid the borrower by providing a reduction or deferral of interest and/or principal. Renegotiations usually result from a deterioration in the financial condition of the borrower. Renegotiated loans have declined to $2,662,000 from $8,465,000 at year-end 1993, a decline of 68.6%. All loans classified as renegotiated were paying in accordance with their modified terms. Loans past due 90 days or more and still accruing interest were $18,160,000 compared with $14,096,000 last year. This classification consisted largely of credit card loans and residential mortgage loans. Credit card loans are fully charged off after six cycles or 180 days of delinquency and losses on residential mortgage loans generally are minimal. Foreclosed assets and in-substance foreclosures declined to $12,347,000 at December 31, 1994 from the 1993 year-end level of $36,014,000, due primarily to sales. Foreclosed assets consisted primarily of real estate and were recorded at the lower of cost or fair value less estimated costs to sell. At year-end 1994, the carrying values of all properties were less than appraised value and the Corporation did not hold any properties with book values in excess of $2,000,000. With the adoption of FAS 114 in 1995, the in-substance foreclosure classification will no longer be utilized. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 29 INTEREST NOT RECORDED ON NON-PERFORMING LOANS
1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (Thousands except per share data) Interest not accrued $2,338 $4,404 $8,432 $11,385 $9,510 Less cash-basis income 81 153 399 1,849 419 ------ ------ ------ ------- ------ Effect on income before income taxes $2,257 $4,251 $8,033 $ 9,536 $9,091 ====== ====== ====== ======= ====== Effect on net income $1,467 $2,763 $5,302 $6,294 $6,000 ====== ====== ====== ====== ====== Effect on net income per share $.03 $.07 $.13 $.20 $.20 ==== ==== ==== ==== ==== Interest collected applied to principal $851 $2,984 $4,424 $2,738 $2,037 ==== ====== ====== ====== ====== -------------------------------------------------------------------------------------------------------------------------------
"Potential problem loans" at December 31, 1994 amounted to $24,502,000. These are defined as loans and commitments not included in any of the three basic non-performing loan categories discussed above, but about which management, through normal internal credit review procedures, has developed information regarding possible credit problems which could cause the borrowers future difficulties in complying with present loan repayment terms. There were no loans classified for regulatory purposes as loss or doubtful that were not included above or which caused management to have serious doubts as to the ability of such borrowers to comply with repayment terms. In addition, there were no material commitments to lend additional funds to borrowers whose loans were classified as non-performing. OFF-BALANCE-SHEET RISK In the normal course of business, there are various commitments and contingent liabilities outstanding which are properly not recorded on the balance sheet, such as letters of credit, commitments under operating leases, commitments to extend credit and interest rate swaps. Many of these arrangements are complementary to the loan and deposit products which are accounted for on the balance sheet. The Corporation's activities in foreign exchange, interest rate swaps, futures contracts and forward commitments are minimal. Mercantile offers these products as a financial intermediary, yet at present it does not use any financial derivatives to manage its own interest rate exposure other than three interest rate swaps with a notional value of $21,000,000 acquired in the United Postal merger and $4,299,000 in forward delivery contracts to partially hedge fixed- rate production in the residential loan pipeline. Standby letters of credit and similar arrangements issued primarily to support corporate obligations commit Mercantile to make payments on behalf of customers contingent upon the occurrence of future specified events. Standbys outstanding were primarily related to customer obligations, such as industrial revenue financings, as well as other financial and performance-related obligations. At December 31, 1994, the Corporation's commitments under standbys aggregated approximately $201,585,000, with $126,927,000 expiring within one year, $48,555,000 expiring within one to five years and $26,103,000 expiring after five years. 35 28 FINANCIAL COMMENTARY (CONT'D) [EXHIBIT 32 OTHER INCOME GRAPH] At year-end 1994, Mercantile subsidiary banks had outstanding unused loan commitments of $5.60 billion, including $3.35 billion in credit card lines and $337 million in home equity credit lines. The remaining commitments were largely to commercial customers in the primary service area of Missouri and its contiguous states. Management does not anticipate any losses which would materially affect the financial position or results of operations of the Corporation as a result of such commitments and contingent liabilities. Note N to the Consolidated Financial Statements provides further discussion on these off-balance-sheet activities and information as to the estimated fair values of all financial instruments, including the new disclosure related to the adoption of FAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." OTHER INCOME Non-interest income for 1994 was $188,296,000, down $10,862,000 or 5.5% from the $199,158,000 reported in 1993. Non-interest income as a percentage of average assets was 1.55% compared with 1.63% in 1993 and 1.56% in 1992, and was 26.59% of total adjusted operating income in 1994 versus 28.05% last year. As shown in Exhibit 30, credit card and letters of credit fees both improved from last year, while trust fees, service charges, investment banking revenue, mortgage banking income and miscellaneous income declined. Net securities gains were only $405,000 this year compared with $3,742,000 last year. Trust fees continued to be the largest source of non-interest income in 1994 and were $59,824,000, decreasing $1,314,000 or 2.1% from the $61,138,000 reported in 1993. This follows a 6.3% growth rate in 1993 over 1992. Personal trust fees generated in the St. Louis Area were the largest source of trust revenue in 1994 at $19,559,000 and represented 32.69% of trust income, while declining 2.4% from 1993. The decline is due to reduced termination fees and weaknesses in the stock and bond markets during the second half of the year that lowered the value of assets managed, a significant basis for fees. Trust fees in the Kansas City Area and Community Banks, which accounted for 27.20% of total trust revenues, are also largely personal trust fees and declined by 3.6% in 1994, also due to the lower asset values. Personal trust assets under management totaled $6.4 billion at December 31, 1994. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 30 OTHER INCOME
1994 1993 CHANGE 1992 ---- ---- ------ ---- ($ in Thousands) Trust $ 59,824 $ 61,138 (2.1)% $ 57,501 Service charges 57,593 58,511 (1.6) 55,399 Credit card fees 24,691 24,060 2.6 21,487 Mortgage banking 6,580 10,541 (37.6) 7,452 Investment banking 8,057 8,486 (5.1) 8,918 Letters of credit fees 6,679 6,223 7.3 6,774 Foreclosed property income 2,297 2,283 .6 4,341 Securities gains 405 3,742 (89.2) 2,909 Other 22,170 24,174 (8.3) 19,163 -------- -------- -------- Total Other Income $188,296 $199,158 (5.5) $183,944 ======== ======== ======== -------------------------------------------------------------------------------------------------------------------------------
Trust income generated by Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile Bank of St. Louis N.A., fell by 1.2% as fund management fees, new business and revenues from investment services continued to meet growth objectives, but were offset by the loss of business due to corporate mergers and lower asset values. These fees represented 21.00% of 1994 trust income. Mississippi Valley Advisors Inc. manages the nine Mercantile proprietary mutual funds-the ARCH Funds. These funds had assets of $1.675 billion at December 31, 1994. Fund results once again experienced good performance relative to popular market indices and peer group comparisons. Institutional and corporate trust service fees were even when compared with last year and represented 19.11% of total trust fees for 1994. At December 31, 1994, the Corporation held $12.0 billion in assets under investment management and $4.6 billion in non-managed assets, decreases of .8% and 4.2%, respectively, from year-end 1993. Exhibit 31 further details comparative trust revenue by line of business for the last three years. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 31 TRUST INCOME
1994 1993 CHANGE 1992 ---- ---- ------ ---- ($ in Thousands) Personal trust--St. Louis Area banks $19,559 $20,044 (2.4)% $20,539 Mississippi Valley Advisors Inc. 12,566 12,721 (1.2) 11,117 Corporate and institutional services 11,430 11,491 (.5) 9,899 Kansas City Area banks and Community Banks 16,269 16,882 (3.6) 15,946 ------- ------- ------- Total Trust Income $59,824 $61,138 (2.1) $57,501 ======= ======= ======= -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 36 29 Service charge income of $57,593,000 decreased 1.6% from 1993 to 1994, following a 5.6% growth in 1993. Deposit volumes were below 1993 levels and some corporate customers opted to use compensating deposit balances in the higher rate environment to offset account analysis charges rather than pay fees. Credit card fees were $24,691,000 in 1994, a 2.6% increase from 1993. Credit card income primarily represents fees charged merchants for processing credit card transactions, fees received on transactions of Mercantile cardholders and cardholders' annual fees. Competitive market factors have tightened credit card fee and transaction pricing significantly. Mortgage banking is now a significant line of business for Mercantile, with the merger of United Postal; total mortgage loans serviced exceeded $3.4 billion at December 31, 1994. Mortgage banking revenues decreased by $3,961,000 or 37.6% from 1993 due to lower origination volume and decreased net gains on the sale of loans; both factors were attributable to higher interest rates in 1994. Servicing fee revenue grew by 12.1%, however. A breakout of mortgage banking revenues is provided in Exhibit 33. Investment banking fees and commissions were $8,057,000 for 1994, down 5.1% from 1993 after a 4.8% decline in 1993. This income represents fees for services performed as a dealer bank for individual customers and corporate customers, including sales of annuities and mutual funds, profits earned on limited trading positions, and foreign exchange commissions. This source of revenue can vary depending on movements in interest rates and overall market conditions. In the third quarter of 1994, Mercantile discontinued providing institutional bond sales services and revenue was impacted accordingly. Also, higher interest rates made certificates of deposit more attractive to retail customers, slowing mutual fund sales. The 7.3% increase in letters of credit fees was due largely to a volume increase in standby letters of credit fees during 1994. Note N to the Consolidated Financial Statements and the discussion of Off- Balance-Sheet Risk on Page 35 summarize the Corporation's commitments under letters of credit. ---------------------------------------------------------------------- Exhibit 33 MORTGAGE BANKING INCOME
1994 1993 CHANGE 1992 ---- ---- ------ ---- ($ in Thousands) Servicing fees $5,013 $ 4,472 12.1 % $3,114 Gains on sales of loans 383 4,572 (91.6) 1,992 Origination fees 336 625 (46.2) 1,400 Other 848 872 (2.8) 946 ------ ------- ------ Total Mortgage Banking Income $6,580 $10,541 (37.6) $7,452 ====== ======= ====== -------------------------------------------------------------------------------------------------------------------------------
Securities gains declined by $3,337,000 from 1993, when United Postal sold significant volumes of securities at gains in a portfolio restructuring prior to the merger. All other non-interest income was down 7.5%, as 1993 included significant lease termination gains. OTHER EXPENSE Non-interest expenses decreased 7.3% in 1994 following a 6.4% increase in 1993. Total operating expenses were 3.40% of average assets in 1994 compared with 3.64% in 1993 and 3.54% in 1992, while the overhead ratio, defined as operating expenses as a percentage of taxable-equivalent net interest income and other income, improved to 58.24% in 1994 versus the restated 62.67% last year and 64.36% in 1992. Further reduction of both ratios over time remains a key strategic objective of the Corporation. Included in fourth quarter 1993 other expense is $12,053,000 of restructuring costs and conforming accounting entries, such as investment banking fees, foreclosed property write-downs and various synergy-related accruals for United Postal and Metro. If those costs were excluded from the 1993 restated figures, non-interest expenses declined by 4.7% in 1994. The largest category of non-interest expense was personnel costs, which in 1994 accounted for 53.58% of total non-interest expense and amounted to $220,950,000 compared with 48.40% and $215,333,000 last year. Salaries increased 2.9% and reflected the costs of staffing additional offices, higher incentive pay and merit increases, offset by lower relative headcount due to productivity gains. Benefit costs were well controlled and rose 1.5%, in line with the increase in salaries. 37 30 FINANCIAL COMMENTARY (CONT'D) [EXHIBIT 35 OTHER EXPENSE GRAPH] At December 31, 1994, Mercantile employed 5,656 full-time equivalent staff compared with the originally reported 5,261 at year-end 1993 and 4,839 at December 31, 1992. On a restated basis, staff count has declined from 5,901 at December 31, 1992 and 5,978 last year-end to 5,656 at December 31, 1994. These decreases were principally due to staff reductions derived both from acquisition-related synergies and increasing economies of scale. Net income per average employee, on an originally reported basis, grew to $28,000 in 1994 from $22,000 in 1993 and $18,000 in 1992, while average assets per average employee improved to $2,105,000 in 1994 from $2,053,000 last year and $2,043,000 in 1992. FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which was adopted in 1993, required the recording of the unrecognized transitional obligation for postretirement benefits other than pensions. That liability approximated $28,470,000 at December 31, 1994 and will be amortized over the next 18 years. FAS 112, "Employers' Accounting for Postemployment Benefits," was effective in 1994 and it relates to accounting for benefits provided to former or inactive employees after employment, but before retirement. The adoption of this statement was immaterial to the financial condition or results of operations of Mercantile. Occupancy and equipment expenses declined 5.3% in 1994, reflecting both productivity gains, as duplicative equipment was eliminated, and overlapping United Postal offices were closed. The savings were partially offset by the costs of opening additional offices, as well as a consistent program to upgrade systems and equipment to further enhance productivity. Total capital expenditures were $35,101,000, $26,551,000 and $29,589,000 in 1994, 1993 and 1992, respectively. The major components of all other operating expenses for the past three years are shown in Exhibit 34. Advertising declined for the second year in a row as Mercantile continued to assess the appropriate level of this discretionary expense. Office supplies declined due to the rebidding of services and consolidated purchasing. Postage increased due to the volume of customer accounts and increased direct mail promotions. Investment in telecommunications technology accounted for the increase in 1994 communications expense levels. Legal and professional fees declined with the drop in foreclosed property. Credit card processing expenses declined due to the selection of a new low cost provider. FDIC insurance costs decreased as the assessable deposit base declined and all Mercantile banks in 1994 are paying premiums at the lowest $.23 rate. Net foreclosed property costs reflected a recovery of $4,636,000 in 1994 compared with an expense of $10,497,000 in 1993 for a change of $15,133,000. Excluding net foreclosed property expenses from both years and restructuring costs from 1993, there was a $5,354,000 or 1.3% decline in non-interest expenses for 1994 compared with the 7.3% decrease reported. ------------------------------------------------------------------------------------------------------------------------------- Exhibit 34 OTHER EXPENSE
1994 1993 CHANGE 1992 ---- ---- ------ ---- ($ in Thousands) Salaries $176,957 $171,970 2.9% $158,390 Employee benefits 43,993 43,363 1.5 33,625 -------- -------- -------- Total Personnel Expense 220,950 215,333 2.6 192,015 Net occupancy 26,319 27,628 (4.7) 24,511 Equipment 32,987 35,010 (5.8) 31,077 Advertising/business development 9,611 10,426 (7.8) 11,120 Postage and freight 14,750 13,605 8.4 12,516 Office supplies 8,266 9,018 (8.3) 8,887 Communications 6,897 6,563 5.1 6,237 Legal and professional 9,274 10,382 (10.7) 11,510 Credit card 10,710 11,205 (4.4) 7,347 FDIC insurance 20,877 21,487 (2.8) 21,488 Foreclosed property expense (4,636) 10,497 - 13,474 Intangible asset amortization 6,843 6,732 1.6 9,056 Other 49,521 67,023 (26.1) 68,830 -------- -------- -------- Total Other Expense $412,369 $444,909 (7.3) $418,068 ======== ======== ======== RATIOS Overhead ratio 58.24% 62.67% 64.36% Other expense to average assets 3.40 3.64 3.54 -------------------------------------------------------------------------------------------------------------------------------
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 38 31 INCOME TAXES For the year ended December 31, 1994, the Corporation recorded income tax expense of $92,089,000 compared with $75,568,000 in 1993 and $52,346,000 in 1992. The effective tax rate for 1994 was 36.38% compared with 38.87% last year and 35.52% in 1992. The 1993 expense and effective rate both were impacted by a $6,070,000 additional provision for the statutory recapture of the United Postal reserve for loan losses. No deferred taxes had been previously provided. Excluding that provision, the effective tax rate would have been 35.74% in 1993. Both tax expense and the higher effective tax rates were indicative of the combined effects of growing levels of taxable income and a continued reduction in tax-exempt income as a percentage of pre-tax income. During the first quarter of 1993, the Corporation adopted FAS 109,"Accounting for Income Taxes." FAS 109 modified the accounting and reporting for the effects of income taxes. This standard mandates an asset and liability approach that requires recognition of the amount of taxes payable or refundable in the current year, and deferred tax assets and liabilities for the tax consequences of future events that have been previously recognized differently in financial statements and tax returns. The adoption of FAS 109 resulted in a reduction to retained earnings of $6,900,000 for the tax effects of transactions that occurred prior to January 1, 1988. FAS 109 had no material impact on income tax expense for the years 1992, 1993 or 1994. A three-year summary of significant income tax data is presented in Note J to the Consolidated Financial Statements, which provides an analysis of deferred income taxes, as well as a reconciliation between the amount of taxes computed using the statutory rate and the amount actually recorded. As disclosed, Mercantile had a net deferred asset of $12,983,000 at December 31, 1994. Due to the significant amount of taxes paid for the past three years and the forecast for 1995, no valuation reserve is deemed necessary. The Corporation's federal returns have been reviewed through 1990 by the Internal Revenue Service. 39 32 FINANCIAL COMMENTARY (CONT'D) FOURTH QUARTER RESULTS Mercantile earned $40,928,000 in the fourth quarter of 1994, which was more than double the $16,391,000 earned last year. On a per share basis, earnings increased to $.95 from $.38 the prior year. The return on average assets was 1.34% during the quarter compared with .54% in 1993's fourth quarter, while return on equity was 15.45% versus 6.85% last year. Prior year figures included after-tax charges of approximately $16.5 million to conform the accounting and credit policies of United Postal and Metro to those of Mercantile. Exhibit 36 presents condensed quarterly financial data for the last two years. A more meaningful comparison of the financial indicators would be with originally reported fourth quarter 1993 results. Earnings per share of $.95 was up 6.7% from the $.89 originally reported last year, while return on assets of 1.34% in the current quarter compared with 1.20% in 1993. Net interest income improved by $3,128,000 or 2.5% to $128,927,000, as the net interest rate margin increased from 4.64% to 4.67%, and the volume of average earning assets increased by 1.8%. Average loan volume was up $600,924,000 or 8.2%, as loan demand improved in all sectors except commercial real estate. This loan growth was partially funded by a decline of $289,486,000 or 8.5% in the investment portfolio, and a drop in short-term investments of $107,159,000. Other income decreased by 9.4% from the fourth quarter of 1993, as the growth in credit card fees and letters of credit fees were more than offset by declines in all other categories of fee income. Other operating expenses were down $21,110,000 or 17.1% from a year ago, which included $12,053,000 of non-recurring restructuring charges related to the mergers. The overhead ratio was 57.93% in the current quarter compared with 69.23% last year and 61.83% on an originally reported basis. The provision for possible loan losses for the fourth quarter was $8,563,000 compared with $19,573,000 the prior year. Last year's provision included $8,750,000 to conform the acquired companies' reserve policies to those of Mercantile. Net charge-offs were $9,314,000 or .47% of average loans for the quarter compared with the year-earlier $11,054,000 or .60%. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 40 33 ------------------------------------------------------------------------------------------------------------------------------- Exhibit 36 QUARTERLY FINANCIAL SUMMARY
1993 1994 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA Net income $ .79 $ .80 $ .84 $ .38 $ .91 $ .93 $ .95 $ .95 Dividends declared .24 3/4 .24 3/4 .24 3/4 .24 3/4 .28 .28 .28 .28 Book value at period-end 20.83 21.50 22.19 22.40 22.94 23.49 24.12 24.72 Market price at period-end 34 5/8 32 7/8 33 5/8 30 1/8 31 7/8 35 1/8 36 7/8 31 1/4 Average common shares outstanding (thousands) 42,078 42,406 42,527 42,737 42,858 43,037 43,204 43,260 OPERATING RESULTS (THOUSANDS) Taxable-equivalent net interest income $126,877 $128,299 $127,455 $128,139 $127,702 $129,013 $131,854 $131,208 Tax-equivalent adjustment 2,497 2,307 2,430 2,340 2,309 2,288 2,236 2,281 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income 124,380 125,992 125,025 125,799 125,393 126,725 129,618 128,927 Provision for possible loan losses 14,049 14,485 12,906 19,573 8,383 8,015 8,511 8,563 Other income 49,640 50,232 49,063 50,223 48,922 47,016 46,851 45,507 Other expense 107,361 108,015 106,057 123,476 103,824 102,663 103,516 102,366 Income taxes 19,545 19,877 19,564 16,582 23,253 22,860 23,399 22,577 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 33,065 $ 33,847 $ 35,561 $ 16,391 $ 38,855 $ 40,203 $ 41,043 $ 40,928 ======== ======== ======== ======== ======== ======== ======== ======== AVERAGE BALANCE SHEET (MILLIONS) Total assets $12,265 $12,230 $12,254 $12,115 $12,214 $12,047 $12,109 $12,186 Earning assets 11,198 11,114 11,139 11,046 11,144 10,987 11,099 11,250 Loans and leases 7,452 7,495 7,349 7,357 7,361 7,460 7,702 7,958 Investments in debt and equity securities 3,433 3,397 3,342 3,397 3,381 3,363 3,241 3,107 Deposits 10,051 10,014 9,985 9,961 9,938 9,712 9,543 9,177 Long-term debt 277 274 274 274 299 292 289 288 Shareholders' equity 865 903 931 957 976 1,002 1,033 1,060 SELECTED RATIOS Return on assets 1.08% 1.11% 1.16% .54% 1.27% 1.33% 1.36% 1.34% Return on equity 15.29 14.99 15.28 6.85 15.93 16.05 15.89 15.45 Overhead ratio 60.82 60.50 60.08 69.23 58.78 58.32 57.93 57.93 Other expense to average assets 3.50 3.53 3.46 4.08 3.40 3.41 3.42 3.36 Net interest rate margin 4.53 4.62 4.58 4.64 4.58 4.70 4.75 4.67 Equity to assets 7.40 7.75 7.96 7.90 8.26 8.49 8.52 8.73 Tier I capital to risk-adjusted assets 10.30 10.53 11.02 11.06 11.56 11.58 11.64 11.87 Total capital to risk-adjusted assets 13.92 14.05 14.56 14.54 15.68 15.61 15.58 15.78 Leverage 6.61 6.93 7.19 7.33 7.52 7.90 8.14 8.32 Loans to deposits (average) 74.14 74.84 73.59 73.86 74.07 76.81 80.71 86.73 Reserve for possible loan losses to outstanding loans 2.09 2.03 2.17 2.28 2.20 2.26 2.18 2.11 Reserve for possible loan losses to non-performing loans 194.45 238.41 286.22 293.39 404.93 495.20 585.44 675.57 Non-performing loans to outstanding loans 1.07 .85 .76 .78 .54 .46 .37 .31 Non-performing assets to outstanding loans and foreclosed assets 1.68 1.60 1.39 1.26 1.00 .87 .76 .46 -------------------------------------------------------------------------------------------------------------------------------
41 34 MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS MERCANTILE BANK The management of Mercantile Bancorporation Inc. is responsible for the preparation, and the integrity and objectivity of the accompanying financial statements. These statements were prepared in accordance with generally accepted accounting principles and practices applicable to the banking industry applied on a consistent basis and reflect, in all material respects, the substance of all reportable events and transactions occurring during the periods presented. Related financial information in other sections of this annual report, which has been prepared consistently with the content of the financial statements, is similarly the responsibility of management. The financial statements necessarily include amounts that are based on management's best estimates and judgments. Future economic conditions and events, and the economic prospects of the Corporation's borrowers, create the possibility that such estimates and judgments may be subject to review and revision. The financial statements were audited by KPMG Peat Marwick LLP, independent auditors, in accordance with generally accepted auditing standards. Management has made available to the independent auditors the Corporation's financial records and related data, as well as minutes of the meetings of shareholders and the Board of Directors. The Corporation maintains an accounting system and related internal controls that have been deemed sufficient to provide reasonable assurance that the financial records are reliable for preparing the financial statements and maintaining accountability for assets. The concept of reasonable assurance is based upon the recognition that the cost of a system of internal control must be related to the benefits derived, and that the balancing of those factors requires estimates and judgments. The system of internal controls includes written policies and procedures, proper delegation of authority, and segregation of duties. In addition, written Standards of Conduct adopted by the Corporation help to ensure the highest standards of ethical conduct by all employees. Management continually monitors compliance with the system of internal controls, primarily through an extensive program of internal audits. The system of internal controls and compliance therewith are considered by independent auditors, in accordance with generally accepted auditing standards, to the extent necessary to render an opinion on the financial statements, and by regulatory examiners. The Board of Directors discharges its responsibility for the financial statements through its Audit Committee. The committee, composed solely of outside directors, meets with the independent auditors, internal auditors and management periodically to review the work of each and to ensure that each is properly discharging its responsibilities. To ensure complete independence, the independent auditors meet with the Audit Committee, without management representatives present, to discuss the results of their audit and their opinions on the adequacy of internal controls and the quality of financial reporting. The independent auditors and the internal auditors each have unrestricted access to the Audit Committee. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 42 35 INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP 1010 Market Street St. Louis, MO 63101-2085 Shareholders and Board of Directors Mercantile Bancorporation Inc.: We have audited the accompanying consolidated balance sheets of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1994, 1993 and 1992, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company'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 Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1994, 1993 and 1992, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 12, 1995 43 36 CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1994 1993 1992 ---- ---- ---- (Thousands except per share data) INTEREST INCOME Interest and fees on loans and leases $647,004 $621,986 $651,616 Investments in debt and equity securities Trading 527 678 593 Taxable 164,746 183,233 194,932 Tax-exempt 13,189 13,289 12,319 -------- -------- -------- Total 178,462 197,200 207,844 Due from banks-interest bearing 1,857 2,609 5,900 Federal funds sold and repurchase agreements 7,683 8,135 8,087 -------- -------- -------- Total Interest Income 835,006 829,930 873,447 INTEREST EXPENSE Interest bearing deposits 251,635 281,621 364,897 Foreign deposits 5,397 1,363 870 Short-term borrowings 44,281 23,709 30,368 Bank notes 780 - - Long-term debt 22,250 22,041 21,223 -------- -------- -------- Total Interest Expense 324,343 328,734 417,358 -------- -------- -------- NET INTEREST INCOME 510,663 501,196 456,089 PROVISION FOR POSSIBLE LOAN LOSSES 33,472 61,013 74,579 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 477,191 440,183 381,510 OTHER INCOME Trust 59,824 61,138 57,501 Service charges 57,593 58,511 55,399 Credit card fees 24,691 24,060 21,487 Mortgage banking 6,580 10,541 7,452 Investment banking 8,057 8,486 8,918 Securities gains 405 3,742 2,909 Other 31,146 32,680 30,278 -------- -------- -------- Total Other Income 188,296 199,158 183,944 OTHER EXPENSE Salaries 176,957 171,970 158,390 Employee benefits 43,993 43,363 33,625 Net occupancy 26,319 27,628 24,511 Equipment 32,987 35,010 31,077 Other 132,113 166,938 170,465 -------- -------- -------- Total Other Expense 412,369 444,909 418,068 -------- -------- -------- INCOME BEFORE INCOME TAXES 253,118 194,432 147,386 INCOME TAXES 92,089 75,568 52,346 -------- -------- -------- NET INCOME $161,029 $118,864 $ 95,040 ======== ======== ======== PER SHARE DATA Average common shares outstanding 43,091,152 42,439,298 39,492,237 Net income $3.74 $2.80 $2.36 Dividends declared 1.12 .99 .93
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 44 37 CONSOLIDATED BALANCE SHEET
DECEMBER 31 1994 1993 1992 ---- ---- ---- (Thousands) ASSETS Cash and due from banks $ 683,259 $ 705,673 $ 686,352 Due from banks-interest bearing 234 144,538 43,184 Federal funds sold and repurchase agreements 112,514 186,962 241,972 Investments in debt and equity securities Trading 14,299 15,735 17,684 Available-for-sale 269,232 415,283 89,424 Held-to-maturity (Estimated fair value of $2,669,460, $3,020,591 and $3,366,147, respectively) 2,750,244 2,970,160 3,294,169 ----------- ----------- ----------- Total 3,033,775 3,401,178 3,401,277 Loans held-for-sale 17,398 117,290 20,925 Loans and leases, net of unearned income 8,097,447 7,264,484 7,478,296 ----------- ----------- ----------- Total Loans and Leases 8,114,845 7,381,774 7,499,221 Reserve for possible loan losses (170,940) (168,651) (165,575) ----------- ----------- ----------- Net Loans and Leases 7,943,905 7,213,123 7,333,646 Bank premises and equipment 202,889 199,363 200,552 Due from customers on acceptances 6,609 11,923 7,451 Other assets 258,609 278,367 358,594 ----------- ----------- ----------- Total Assets $12,241,794 $12,141,127 $12,273,028 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $ 1,529,052 $ 1,713,275 $ 1,532,477 Interest bearing 7,305,672 7,862,723 8,375,832 Foreign 219,135 26,085 19,650 ----------- ----------- ----------- Total Deposits 9,053,859 9,602,083 9,927,959 Federal funds purchased and repurchase agreements 1,382,519 602,997 744,101 Other short-term borrowings 200,180 520,650 241,293 Bank notes 100,000 - - Long-term debt 287,345 272,778 299,109 Bank acceptances outstanding 6,609 11,923 7,451 Other liabilities 143,032 172,139 201,791 ----------- ----------- ----------- Total Liabilities 11,173,544 11,182,570 11,421,704 Commitments and contingent liabilities - - - SHAREHOLDERS' EQUITY 1994 1993 1992 ---- ---- ---- Preferred stock- no par value Shares authorized 5,000 5,000 5,000 Shares issued - - - - - - Common stock- $5.00 par value Shares authorized 100,000 70,000 70,000 Shares issued 43,208 42,802 42,032 216,506 214,012 210,160 Capital surplus 170,083 164,448 148,089 Retained earnings 684,615 580,097 493,075 Treasury stock, at cost 94 - - (2,954) - - ----------- ----------- ----------- Total Shareholders' Equity 1,068,250 958,557 851,324 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $12,241,794 $12,141,127 $12,273,028 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 45 38 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ------------------------ TOTAL OUTSTANDING CAPITAL RETAINED TREASURY SHAREHOLDERS' SHARES DOLLARS SURPLUS EARNINGS STOCK EQUITY ----------- ------- ------- -------- ------- ---------- ($ in Thousands) BALANCE AT DECEMBER 31, 1991 AS REPORTED 32,013,551 $160,068 $ 96,347 $349,823 $ - $ 606,238 Adjustment to reflect poolings-of- interests 1,625,697 8,128 (1,223) 77,119 84,024 ---------- -------- -------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1991 AS RESTATED 33,639,248 168,196 95,124 426,942 - 690,262 Net income 95,040 95,040 Dividends declared Mercantile Bancorporation Inc.- $.93 per share (27,506) (27,506) Pooled companies prior to acquisition (2,923) (2,923) Issuance of common stock Acquisition of Ameribanc, Inc. 1,975,421 9,877 41,418 51,295 Employee incentive plans 195,679 978 2,854 3,832 Warrants and convertible notes 347,143 1,736 7,272 9,008 Change in valuation allowance for marketable equity securities 1,522 1,522 Initial public offering of United Postal Bancorp, Inc. 5,537,405 27,688 (818) 26,870 Other pre-merger transactions of pooled companies 337,077 1,685 2,239 3,924 ---------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 1992 42,031,973 210,160 148,089 493,075 - 851,324 Net income 118,864 118,864 Dividends declared Mercantile Bancorporation Inc.- $.99 per share (34,840) (34,840) Pooled companies prior to acquisition (4,195) (4,195) Issuance of common stock Acquisition of First National Bank of Flora 232,503 1,162 6,879 8,041 Acquisition of Mt. Vernon Bancorp, Inc. 216,936 1,085 6,056 7,141 Employee incentive plans 161,912 809 1,929 2,738 Convertible notes 73,360 367 1,536 1,903 Change in valuation allowance for marketable equity securities prior to the adoption of FAS 115 3,554 3,554 Net fair value adjustment for available-for-sale securities 3,636 3,636 Pre-merger transactions of pooled companies and other 85,638 429 (41) 3 391 ---------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 1993 42,802,322 214,012 164,448 580,097 - 958,557 NET INCOME 161,029 161,029 DIVIDENDS DECLARED-$1.12 PER SHARE (48,329) (48,329) ISSUANCE OF COMMON STOCK EMPLOYEE INCENTIVE PLANS 308,112 1,541 1,683 3,224 CONVERTIBLE NOTES 181,092 905 3,793 4,698 NET FAIR VALUE ADJUSTMENT FOR AVAILABLE-FOR-SALE SECURITIES (8,182) (8,182) PURCHASE OF TREASURY STOCK (93,500) (2,954) (2,954) PRE-MERGER TRANSACTIONS OF POOLED COMPANIES AND OTHER 9,498 48 159 207 ---------- -------- -------- -------- ------- ---------- BALANCE AT DECEMBER 31, 1994 43,207,524 $216,506 $170,083 $684,615 $(2,954) $1,068,250 ========== ======== ======== ======== ======= ==========
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 46 39 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1994 1993 1992 ---- ---- ---- (Thousands) OPERATING ACTIVITIES Net income $ 161,029 $ 118,864 $ 95,040 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 33,472 61,013 74,579 Depreciation and amortization 26,668 26,491 24,809 Provision for deferred income taxes (credits) (9,392) 6,241 1,248 Net change in trading securities 1,436 1,949 5,953 Net change in loans held-for-sale 99,892 (96,365) 22,255 Net change in accrued interest receivable (12,506) 8,505 8,844 Net change in accrued interest payable (505) (7,396) (18,922) Net change in accrued taxes payable (9,572) (10,515) 10,038 Other, net (2,987) 58,976 33,653 ----------- ----------- ----------- Net Cash Provided by Operating Activities 287,535 167,763 257,497 INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (847,046) (1,435,988) (1,693,288) Proceeds from maturities 1,110,446 1,464,157 1,010,084 Proceeds from sales of: Held-to-maturity securities - 27,970 166,118 Available-for-sale securities 1,358 27,141 7,953 Securities from acquired entities 79,388 14,491 58,219 Net change in loans and leases (1,032,861) (13,994) 84,718 Purchases of loans and leases (20,063) (84,134) (113,311) Proceeds from sales of loans and leases 156,243 258,769 81,410 Purchases of premises and equipment (35,101) (26,551) (29,589) Proceeds from sales of premises and equipment 4,936 480 2,722 Proceeds from sales of foreclosed property 40,887 44,974 5,559 Cash and cash equivalents from acquisitions, net of cash paid - 11,085 401,312 Other, net 30,384 23,632 15,317 ----------- ----------- ----------- Net Cash Provided (Used) by Investing Activities (511,429) 312,032 (2,776) FINANCING ACTIVITIES Net change in time certificates of deposit under $100,000 (245,543) (572,890) (819,135) Net change in time certificates of deposit $100,000 and over 8,377 (58,082) (143,041) Net change in other time deposits (2,412) (88,231) 45,411 Net change in foreign deposits 193,050 6,435 5,713 Net change in other deposits (501,696) 238,651 514,545 Sale of branch deposits, net of premium received - (14,130) - Net change in short-term borrowings 459,052 138,253 35,377 Issuance of bank notes 100,000 - - Issuance of long-term debt 75,000 - 163,152 Principal payments on long-term debt (54,753) (27,738) (83,324) Cash dividends paid (48,329) (39,035) (30,429) Proceeds from issuance of common stock Employee incentive plans and warrants 2,729 2,203 3,904 Initial public offering of United Postal Bancorp, Inc. - - 26,870 Purchase of treasury stock (2,954) - - Other, net 207 434 1,724 ----------- ----------- ----------- Net Cash Used by Financing Activities (17,272) (414,130) (279,233) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (241,166) 65,665 (24,512) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,037,173 971,508 996,020 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 796,007 $ 1,037,173 $ 971,508 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 47 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A ACCOUNTING POLICIES Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry. The significant accounting policies are summarized below. Basis of Presentation: Consolidation: The Consolidated Financial Statements include the accounts of Mercantile Bancorporation Inc. and its subsidiaries. All subsidiaries are wholly-owned. Material intercompany transactions are eliminated. Restatements: On January 3, 1994, Mercantile acquired Metro Bancorporation ("Metro") and on February 1, 1994, the Corporation acquired United Postal Bancorp, Inc. ("United Postal"), in transactions accounted for as poolings-of-interests. Accordingly, prior period financial statements have been restated as if the combining entities had been consolidated for all periods. Reclassification: Certain reclassifications have been made to the 1993 and 1992 historical financial statements to conform with the 1994 presentation. New Accounting Standards: Financial Accounting Standard ("FAS") 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," effective for fiscal years ending after December 15, 1994, has been adopted by the Corporation with the related disclosure included in Note N to the Consolidated Financial Statements. FAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118, effective for fiscal years beginning after December 15, 1994, requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. The adoption of FAS 114 is not expected to have a material impact on the Corporation's financial condition or results of operations. Earnings per Common Share: Earnings per common share data is based on the weighted average number of common shares outstanding during the period. Earnings of United Postal are excluded from the earnings per share calculation from January 1, 1992 through March 20, 1992, which is the date United Postal made its initial public offering of common stock. Also on March 20, 1992, United Postal Savings Association ("UPSA"), a wholly-owned subsidiary of United Postal, converted from a Missouri state-chartered mutual savings association to a Missouri state-chartered stock association. Investments in Debt and Equity Securities: Trading securities, which include any security held primarily for near-term sale, are valued at fair value. Gains and losses on trading securities, both realized and unrealized, are recorded in investment banking income. Available-for-sale securities, which include any security for which the Corporation has no immediate plan to sell but which may be sold in the future under different circumstances, are valued at fair value. Realized gains and losses, based on the amortized cost of the specific security, are included in other income as securities gains. Unrealized gains and losses are recorded, net of related income tax effects, in retained earnings. Held-to-maturity securities, which include any security for which the Corporation has the positive intent and ability to hold until maturity, are valued at historical cost adjusted for amortization of premiums and accretion of discounts computed by the level-yield method. Prior to December 31, 1993, realized gains and losses, based on the amortized cost of the specific security, were included in other income as securities gains. Prior to December 31, 1993, marketable equity securities were stated at the lower of cost or fair value. Changes in the valuation of marketable equity securities which were considered to be temporary were recorded as adjustments to retained earnings. Since December 31, 1993, these securities have been classified as available-for-sale and accounted for as stated above. Loans Held-for-Sale: In its lending activities, the Corporation originates residential and student loans with the intent to be sold in the secondary market. Loans held-for-sale are carried at the lower of cost or fair value which is determined on an aggregate basis. Gains or losses on the sale of loans held-for-sale are determined on a specific identification method. Loans and Leases: Interest income on loans not discounted is generally accrued on a simple interest basis. Interest income on discounted loans is computed on the sum-of-the-months'-digits method, which approximates the interest method. Loan fees and direct costs of loan originations are deferred and amortized over the life of the loans under methods approximating the interest method. The finance method is used to account for direct and leveraged equipment lease contracts. Income is recorded over the lease periods in proportion to the unrecovered investment in the leases after consideration of investment tax credits and other related income tax effects. When, in management's opinion, the collection of interest on a loan is unlikely, or when either principal or interest is past due over 90 days, that loan is generally placed on non-accrual status. When a loan is placed on non-accrual status, accrued interest for the current year is reversed and charged against current earnings, and accrued interest from prior years is MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 48 41 charged against the reserve for possible loan losses. Interest payments received on non-accrual loans are applied to principal if there is doubt as to the collectibility of such principal; otherwise, these receipts are recorded as interest income. A loan remains on non-accrual status until the loan is current as to payment of both principal and interest, and/or the borrower demonstrates the ability to pay and remain current. Reserve for Possible Loan Losses: The reserve for possible loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. The reserve is maintained at a level considered adequate to provide for potential loan losses based on management's evaluation of current economic conditions, changes in the character and size of the portfolio, past experience, expected future losses, and other pertinent factors. Foreclosed Assets: Foreclosed assets include real estate and other assets acquired through foreclosure or other proceedings, and in-substance foreclosures. In-substance foreclosures represent loans accounted for as foreclosed assets due to the borrower having limited equity in the underlying collateral, anticipated repayment only through the operation or sale of the collateral, or the borrower either formally or effectively abandoning control of the collateral. With the adoption of FAS 114 in 1995, the in-substance foreclosure classification will no longer be utilized. Foreclosed assets are included in other assets in the Consolidated Balance Sheet. Foreclosed assets are valued at the lower of cost or fair value less estimated costs to sell. Losses arising at the time of transfer from loans are charged to the reserve for possible loan losses. Subsequent reductions in valuation based upon periodic appraisals are charged against current earnings. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Provisions for depreciation are computed principally by the straight-line method and are based on estimated useful lives of the assets. The carrying value of assets sold or retired and the related accumulated depreciation are eliminated from the accounts, and the resulting gains or losses are reflected in income. Expenditures for maintenance and repairs are charged to expense, while expenditures for major renewals are capitalized. Intangible Assets: Intangible assets, consisting primarily of goodwill and core deposit premium, are included in other assets in the Consolidated Balance Sheet. Goodwill, the excess of cost over the net assets acquired in business combinations accounted for as purchases, is amortized using the straight-line method over the estimated period to be benefited, most recently 15 years, but not exceeding 40 years. Core deposit premium represents the premiums paid, net of any rebate on assets acquired, plus the insurance funds' entrance and exit fees, for deposits acquired from failed thrift institutions in Resolution Trust Corporation-assisted transactions. This intangible asset is amortized, on an accelerated basis, over the estimated life of the core deposit base acquired, but not exceeding 10 years. Income Taxes: Deferred income taxes, computed using the asset and liability method, are provided on temporary differences between the financial reporting basis and the tax basis of the assets and liabilities of the Corporation. Treasury Stock: The purchase of the Corporation's common stock is recorded at cost. Upon subsequent reissue, the treasury stock account will be reduced by the average cost basis of such stock. Cash Equivalents: Cash and due from banks, federal funds sold, and repurchase agreements are considered cash equivalents for purposes of the Consolidated Statement of Cash Flows. Financial Instruments: Financial instruments include cash, evidence of an ownership interest in an entity or a contract that both (a) imposes on the Corporation a contractual obligation, (1) to deliver a financial instrument to another party or (2), to exchange other financial instruments on potentially unfavorable terms with another party; and (b) conveys to another party a contractual right, (1) to receive a financial instrument from the Corporation or (2), to exchange other financial instruments on potentially favorable terms with the Corporation. NOTE B SUBSIDIARIES Acquisitions: Effective January 3, 1995, the Corporation acquired UNSL Financial Corp ("UNSL"), holding company for Lebanon, Missouri-based United Savings Bank, with assets totaling $508 million. A total of 1,578,107 shares of Mercantile common stock was issued in the UNSL transaction, which was accounted for as a pooling-of-interests. This acquisition will not have a material impact on the financial condition or results of operations of the Corporation. Also effective January 3, 1995, Mercantile completed a merger with Wedge Bank ("Wedge"), an Alton, Illinois-based bank with assets totaling $196 million. A total of 969,954 shares of Mercantile common stock was 49 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) issued in the Wedge transaction. The Wedge transaction meets the requirements for treatment as a pooling-of-interests; however, due to the immateriality of Wedge's financial condition and results of operations to that of Mercantile's, the historical financial statements of the Corporation will not be restated for the Wedge pooling-of-interests transaction. Effective February 1, 1994, the Corporation acquired United Postal, holding company for St. Louis, Missouri-based UPSA, with assets totaling $1.3 billion. Effective January 3, 1994, Mercantile completed a merger with Metro, a Waterloo, Iowa-based holding company for The Waterloo Savings Bank, with assets totaling $370 million. A total of 5,631,953 and 1,638,278 shares of Mercantile common stock were issued in the United Postal and Metro transactions, respectively, which were accounted for as poolings-of- interests. Net income and net income per share for the Corporation and the pooled companies prior to restatement were as follows:
YEAR ENDED DECEMBER 31 1993 1992 ($ in Thousands except per share data) Corporation Net income $116,972 $85,295 Net income per share 3.32 2.53 United Postal Net income (loss) $ (58) $7,259 Net income (loss) per share (.01) 1.21 Metro Net income $1,950 $2,486 Net income per share 3.76 4.81
During the fourth quarter of 1993, certain adjustments were recorded by United Postal and Metro to conform their accounting and credit policies regarding loan, other real estate and other asset valuations to those of the Corporation. These adjustments amounted to $16.5 million on an after-tax basis. On September 1, 1993, Mercantile completed a merger with Mt. Vernon Bancorp, Inc., a $113,128,000-asset holding company for First Bank and Trust Co. in Mt. Vernon, Illinois. The total cost of the acquisition was $1,805,000 in cash and 216,936 shares of Mercantile common stock. The excess of the purchase price over the fair value of net assets acquired was $4,700,000. On April 1, 1993, Mercantile completed the merger with the $70,725,000-asset First National Bank of Flora in Clay County, Illinois. The total cost of the acquisition was $3,004,000 in cash and 232,503 shares of Mercantile common stock. The excess of the purchase price over the fair value of net assets acquired was $2,549,000. Both transactions were accounted for as purchases and, accordingly, the results of operations were included in the Consolidated Financial Statements from the respective acquisition dates. On January 4, 1993, the Corporation acquired MidAmerican Corporation and Johnson County Bankshares, Inc., two northeast Kansas-based holding companies with assets totaling $1.1 billion. A total of 4,736,424 shares of Mercantile common stock was issued in the transaction, which was accounted for as a pooling-of-interests. Net income and net income per share for the Corporation, MidAmerican Corporation and Johnson County Bankshares, Inc. prior to restatement were as follows:
YEAR ENDED DECEMBER 31 1992 ($ in Thousands except per share data) Corporation Net income $85,003 Net income per share 2.91 MidAmerican Corporation Net income $1,007 Net income per share .30 Johnson County Bankshares, Inc. Net loss $ (715) Net loss per share (36.70)
During the fourth quarter of 1992, certain adjustments were recorded by MidAmerican Corporation and Johnson County Bankshares, Inc. to conform their accounting and credit policies regarding loan, other real estate and other asset valuations to those of the Corporation. These adjustments amounted to $8 million on an after- tax basis. MidAmerican Corporation acquired Jayhawk Bancshares, Inc., a $52,000,000-asset, one-bank holding company in Lawrence, Kansas, in July 1992. This acquisition was accounted for as a purchase and, accordingly, the results of operations, which were not material, were included in the Consolidated Financial Statements from the acquisition date. The total cost of the acquisition was $10,872,000 in cash and $2,200,000 in notes. Upon maturity of the final $1,900,000 in notes in August 1994, $1,391,000 was offset against the fair value of net assets acquired, based upon the outcome of certain losses in the loan portfolio of the acquired bank subsidiary. The excess of the purchase price over the fair value of net assets acquired was $7,956,000. On April 30, 1992, the Corporation acquired Ameribanc, Inc., a $1.2 billion-asset, 11-bank holding company headquartered in St. Joseph, Missouri. This acquisition was accounted for as a purchase and, accordingly, the results of operations were included in the Consolidated Financial Statements from the acquisition date. The total cost of the acquisition was $8,851,000 in cash and 1,975,421 shares of Mercantile common stock. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 50 43 The following unaudited pro forma combined consolidated financial information gives effect to the April 30, 1992 acquisition of Ameribanc, Inc. as if it had been consummated on January 1, 1992.
YEAR ENDED DECEMBER 31 1992 ($ in Thousands except per share data) Net interest income $468,362 Other income 188,053 Net income 95,115 Net income per share 2.32
For all acquisitions accounted for as purchases, the unamortized excess of cost over the fair value of assets acquired was $51,281,000, $56,882,000 and $56,206,000 at December 31, 1994, 1993 and 1992, respectively. RTC Transactions: During 1992, certain subsidiaries of the Corporation acquired from the Resolution Trust Corporation the deposits and certain assets of failed thrift institutions. Transactions included: Mercantile Bank of Joplin and Mercantile Bank of Kansas City acquired $222,304,000 in deposits of two branches of the former Home Federal Savings Association in Joplin and Kansas City, Missouri in March 1992; Mercantile Bank of West Central Missouri acquired $163,055,000 in deposits and $156,818,000 in assets of First State Savings Association of Sedalia in April 1992; and UPSA acquired $79,000,000 in deposits and $80,000,000 in assets of First Federal Savings and Loan Association in Manchester, Missouri in December 1992. Unamortized core deposit premium was $7,923,000, $11,187,000 and $13,444,000 at December 31, 1994, 1993 and 1992, respectively. The effect of the Mt. Vernon, Flora, Jayhawk and Resolution Trust Corporation acquisitions on the Corporation's operating results from January 1, 1992 through the respective acquisition dates and for the years ended December 31, 1994, 1993 and 1992, was not material. Subsidiary Mergers: During 1994, the Corporation effected several reorganization transactions among certain subsidiaries. On December 9, 1994, Mercantile Bank of Table Rock Lake was merged with Mercantile Bank of Springfield. On August 16, 1994, certain assets and liabilities of UPSA, primarily those associated with its Arnold and Crystal City, Missouri branches, were sold to Mercantile Bank of Jefferson County. On the same date, UPSA was merged with Mercantile Bank of St. Louis N.A. On July 21, 1994, certain assets and liabilities of the Troy, Missouri agency office of UPSA were sold to Mercantile Bank of Pike County. Pending Acquisitions: The Corporation has entered into an agreement dated December 23, 1994 to acquire the capital stock of Plains Spirit Financial Corporation, holding company for the $439 million-asset First Federal Savings Bank of Iowa headquartered in Davenport, Iowa. The acquisition, to be accounted for as a purchase transaction, is expected to be consummated in the second quarter of 1995. The Corporation has entered into an agreement dated December 2, 1994 to acquire the capital stock of TCBankshares, Inc., a six-bank holding company with assets totaling $1.4 billion, headquartered in North Little Rock, Arkansas. The acquisition, to be accounted for as a pooling-of-interests, is expected to be consummated in the second quarter of 1995. Mercantile has also entered into an agreement dated September 21, 1994 to acquire the capital stock of Central Mortgage Bancshares, Inc., a three-bank holding company with $650 million in assets, headquartered in Kansas City, Missouri. The acquisition, to be accounted for as a pooling-of-interests, is expected to be completed in March 1995. NOTE C CASH FLOWS The Corporation paid interest on deposits, short-term borrowings, bank notes and long-term debt of $324,848,000, $335,574,000 and $429,793,000 in 1994, 1993 and 1992, respectively. The Corporation paid Federal income taxes of $91,842,000, $61,493,000 and $45,174,000 in 1994, 1993 and 1992, respectively. The following details cash and cash equivalents from acquisitions accounted for as purchases, net of cash paid:
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) Fair value of assets purchased $- $(186,391) $(1,679,456) Liabilities assumed - 166,400 1,603,529 Issuance of common stock - 15,182 51,295 -- --------- ----------- Net cash paid for acquisitions - (4,809) (24,632) Cash and cash equivalents acquired - 15,894 425,944 -- --------- ----------- CASH AND CASH EQUIVALENTS FROM ACQUISITIONS, NET OF CASH PAID $- $ 11,085 $ 401,312 == ========= ===========
NOTE D CASH AND DUE FROM BANKS RESTRICTIONS The Corporation's subsidiary banks are required to maintain average reserve balances which place withdrawal and/or usage restrictions on cash and due from banks balances. The average amount of these restricted balances for the year ended December 31, 1994 was $169,280,000. 51 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE E INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective December 31, 1993, the Corporation adopted FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," and its cumulative effect was recorded on the Consolidated Balance Sheet on that date. The most significant impact of the new accounting requirements is that unrealized holding gains and losses, net of applicable income taxes, on securities classified as available-for-sale are recorded as an adjustment to retained earnings. In 1992 these securities were classified as held-for-sale, and were carried at the lower of amortized cost or fair value, determined on an aggregate basis, with adjustments recorded in current year earnings. The adoption of FAS 115 did not have a material effect on the financial condition or results of operations for the year ended December 31, 1993, and prior year Consolidated Financial Statements have not been restated. On December 31, 1993, debt securities with an amortized cost of $2,970,160,000 were classified as held-to-maturity; and debt and equity securities with an amortized cost of $409,688,000 were classified as available-for-sale. A market valuation account of $5,595,000 was established for the available-for-sale securities to increase the recorded balance of such securities at December 31, 1993 to their estimated fair value on that date. A tax liability of $1,959,000 established the deferred tax effect of the market valuation account. The net increase resulting from the market valuation adjustment at December 31, 1993 was recorded as an adjustment to retained earnings. Available-for-Sale: The amortized cost, estimated fair values, and unrealized gains and losses of available-for-sale securities were as follows:
AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE (Thousands) DECEMBER 31, 1994 U.S. government $219,316 $ 114 $6,360 $213,070 State and political subdivisions-tax-exempt 12,572 156 24 12,704 Other 44,338 1,263 2,143 43,458 -------- ------ ------ -------- Total $276,226 $1,533 $8,527 $269,232 ======== ====== ====== ======== DECEMBER 31, 1993 U.S. government $359,362 $2,289 $ 604 $361,047 State and political subdivisions-tax-exempt 14,259 925 11 15,173 Other 36,067 4,240 1,244 39,063 -------- ------ ------ -------- Total $409,688 $7,454 $1,859 $415,283 ======== ====== ====== ======== DECEMBER 31, 1992 U.S. government $89,424 $2,672 $ - $92,096 ======= ====== === =======
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 52 45 Held-to-Maturity: The amortized cost, estimated fair values, and unrealized gains and losses of held-to-maturity securities were as follows:
AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE (Thousands) DECEMBER 31, 1994 U.S. government $2,342,744 $ 7,832 $77,366 $2,273,210 State and political subdivisions Tax-exempt 217,059 2,348 4,063 215,344 Taxable 157,912 49 9,067 148,894 ---------- ------- ------- ---------- Total State and Political Subdivisions 374,971 2,397 13,130 364,238 Other 32,529 - 517 32,012 ---------- ------- ------- ---------- Total $2,750,244 $10,229 $91,013 $2,669,460 ========== ======= ======= ========== DECEMBER 31, 1993 U.S. government $2,492,458 $42,756 $3,492 $2,531,722 State and political subdivisions Tax-exempt 235,030 10,290 272 245,048 Taxable 101,467 338 671 101,134 ---------- ------- ------ ---------- Total State and Political Subdivisions 336,497 10,628 943 346,182 Other 141,205 1,809 327 142,687 ---------- ------- ------ ---------- Total $2,970,160 $55,193 $4,762 $3,020,591 ========== ======= ====== ========== DECEMBER 31, 1992 U.S. government $2,664,816 $67,137 $7,055 $2,724,898 State and political subdivisions Tax-exempt 216,060 7,839 1,052 222,847 Taxable 12,195 317 131 12,381 ---------- ------- ------ ---------- Total State and Political Subdivisions 228,255 8,156 1,183 235,228 Other 401,098 5,782 859 406,021 ---------- ------- ------ ---------- Total $3,294,169 $81,075 $9,097 $3,366,147 ========== ======= ====== ==========
Securities with a carrying value of $1,810,635,000 at December 31, 1994, $1,963,837,000 at December 31, 1993 and $2,084,829,000 at December 31, 1992 were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for other purposes required by law. Included in other held-to-maturity securities at December 31, 1992 were marketable equity securities with a cost of $16,675,000 and a carrying value of $13,121,000. At December 31, 1993 and 1994, these same securities were classified as available-for-sale upon the adoption of FAS 115. Additional securities with carrying values of $752,000 became marketable equity securities during 1993, and at December 31, 1993 and 1994, these securities were classified as available-for-sale. The following table presents proceeds from sales of securities and the components of net securities gains. There were no securities classified as held-to-maturity during 1994 that were transferred to available-for-sale securities or sold. Held-to-maturity securities gains and losses in 1994 resulted from portfolio restructurings in connection with subsidiary bank acquisitions or calls by the security issuer prior to maturity.
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) Proceeds from sales of: Held-to-maturity securities $ - $27,970 $166,118 Available-for-sale securities 1,358 27,141 7,953 Securities from acquired entities 79,388 14,491 58,219 Securities gains on: Held-to-maturity securities $ 471 $ 1,013 $4,141 Available-for-sale securities 2,328 5,230 1,001 ------ ------- ------ Total Securities Gains 2,799 6,243 5,142 Securities losses on: Held-to-maturity securities 262 863 1,362 Available-for-sale securities 2,132 1,638 871 ------ ------- ------ Total Securities Losses 2,394 2,501 2,233 ------ ------- ------ Net Securities Gains Before Income Taxes 405 3,742 2,909 Applicable income taxes (142) (1,310) (989) ------ ------- ------ Net Securities Gains $ 263 $ 2,432 $1,920 ====== ======= ======
53 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE F LOANS AND LEASES Loans and leases consisted of the following:
DECEMBER 31 1994 1993 1992 (Thousands) Commercial $2,120,155 $1,932,116 $2,033,191 Real estate-commercial 1,259,587 1,267,085 1,350,775 Real estate-construction 204,301 162,765 163,764 Real estate-residential 2,535,983 2,315,059 2,403,917 Consumer 1,149,732 941,044 935,471 Credit card 844,662 763,243 610,429 Foreign 425 462 1,674 ---------- ---------- ---------- Loans and Leases $8,114,845 $7,381,774 $7,499,221 ========== ========== ==========
Changes in the reserve for possible loan losses were as follows:
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) Beginning Balance $168,651 $165,575 $146,078 Provision 33,472 61,013 74,579 Charge-offs (61,567) (83,811) (88,387) Recoveries 30,384 23,632 15,317 -------- -------- -------- Net Charge-offs (31,183) (60,179) (73,070) Acquired Reserves - 2,242 17,988 -------- -------- -------- Ending Balance $170,940 $168,651 $165,575 ======== ======== ========
Non-performing loans consisted of the following:
DECEMBER 31 1994 1993 1992 (Thousands) Non-accrual $22,641 $49,018 $ 91,679 Renegotiated 2,662 8,465 13,881 ------- ------- -------- Non-performing Loans $25,303 $57,483 $105,560 ======= ======= ========
Certain directors and executive officers of the Corporation and Mercantile Bank of St. Louis N.A. were loan customers of the Corporation's banks during 1994, 1993 and 1992. Such loans were made in the ordinary course of business at normal terms, including interest rate and collateralization, and did not represent more than a normal risk. Loans to those persons, their immediate families and companies in which they were principal owners were $6,067,000, $7,122,000 and $39,133,000 at December 31, 1994, 1993 and 1992, respectively. During 1994, $25,225,000 of new loans were made to these persons; repayments totaled $26,280,000. NOTE G BANK PREMISES AND EQUIPMENT Bank premises and equipment were as follows:
DECEMBER 31 1994 1993 1992 (Thousands) Land $ 35,763 $ 35,993 $ 33,901 Bank premises 201,509 200,552 194,605 Leasehold improvements 17,760 17,907 17,129 Furniture and equipment 179,786 167,856 156,658 --------- --------- --------- Total Cost 434,818 422,308 402,293 Accumulated depreciation (231,929) (222,945) (201,741) --------- --------- --------- Net Carrying Value $ 202,889 $ 199,363 $ 200,552 ========= ========= =========
At December 31, 1994, the Corporation had certain long-term leases, none of which were considered to be capital leases, which were principally related to the use of land, buildings and equipment. The following table summarizes the future minimum rental commitments for all noncancelable operating leases which had initial or remaining noncancelable lease terms in excess of one year:
PERIOD MINIMUM RENTAL (Thousands) 1995 $ 2,837 1996 2,681 1997 2,494 1998 1,250 1999 866 2000 and later 5,079 ------- Total $15,207 =======
Net rental expense for all operating leases was $6,245,000 in 1994, $6,775,000 in 1993 and $7,165,000 in 1992. NOTE H SHORT-TERM BORROWINGS Short-term borrowings were as follows:
DECEMBER 31 1994 1993 1992 (Thousands) Federal funds purchased and repurchase agreements $1,382,519 $ 602,997 $744,101 Treasury tax and loan notes 160,379 502,260 215,521 Commercial paper 26,800 18,390 9,198 Other short-term borrowings 13,001 - 16,574 ---------- ---------- -------- Total $1,582,699 $1,123,647 $985,394 ========== ========== ========
The Corporation had unused lines of credit arrangements with unaffiliated banks in support of commercial paper outstanding of $40,000,000 at December 31, 1994. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 54 47 NOTE I BANK NOTES AND LONG-TERM DEBT Bank Notes: Beginning in 1994, Mercantile Bank of St. Louis N.A., Mercantile Bank of Illinois N.A., Mercantile Bank of Kansas City, Mercantile Bank of Kansas and Mercantile Bank of Springfield may offer unsecured bank notes in aggregate principal amounts of up to $1 billion. Note maturities can range from 30 days to 15 years from the date of issue and can be issued with fixed or floating interest rates. Each bank note issued will be an obligation solely of that issuing bank and will not be an obligation of, or otherwise guaranteed by, the other issuing banks or the Corporation. The bank notes are being offered and sold only to institutional investors, and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. On November 16, 1994, Mercantile Bank of St. Louis N.A. issued $100,000,000 of two-year bank notes, with a floating interest rate equal to the three-month LIBOR plus 1/8%. The coupon rate on the issued bank notes was 5.9375% at December 31, 1994. Long-term Debt: Long-term debt consisted of the following:
DECEMBER 31 1994 1993 1992 (Thousands) MERCANTILE BANCORPORATION INC. (PARENT COMPANY ONLY) 7.625% subordinated notes, due 2002 $150,000 $150,000 $150,000 8.500% debentures, due 2004 - 30,550 31,171 8.000% convertible subordinated capital notes, due 1995 8,822 13,522 15,426 Notes issued in acquisitions - - 120 -------- -------- -------- Total 158,822 194,072 196,717 SECOND-TIER HOLDING COMPANIES - 1,905 24,850 BANKS AND OTHER SUBSIDIARIES 6.375% subordinated debt, due 2004 75,000 - - 9.000% mortgage-backed notes, due 1999 53,450 53,041 52,966 Mortgage payable - 23,653 24,337 Other 73 107 239 -------- -------- -------- Total 128,523 76,801 77,542 -------- -------- -------- Total Long-term Debt $287,345 $272,778 $299,109 ======== ======== ========
On October 15, 1992, the Corporation issued $150,000,000 of subordinated notes with a 10-year maturity and a coupon rate of 7.625% to yield 7.741%. These notes qualify as Tier II capital under current regulatory guidelines. On January 25, 1994, Mercantile Bank of St. Louis N.A. issued $75,000,000 of 6.375% 10-year, non-callable subordinated debt, due January 15, 2004. This debt qualifies as Tier II capital. The Corporation used the proceeds of this subordinated debt issue to: (1) prepay in full on February 23, 1994 the $30,550,000 8.500% unsecured debentures of the Corporation; and (2) prepay in full on February 1, 1994 the $23,653,000 8.250% mortgage secured by the Corporation's headquarters building. The 8.000% convertible subordinated capital notes were issued by Ameribanc, Inc. prior to its acquisition by the Corporation. At December 31, 1994, these notes were convertible into approximately 339,000 shares of the Corporation's common stock. Notes issued in acquisitions by the parent company with an interest rate of 6.500% matured in November 1993. All second-tier holding company debt was issued by either MidAmerican Corporation or Johnson County Bankshares, Inc. prior to their acquisition by the Corporation. Except for the notes issued in acquisitions, all second-tier holding company debt was paid off on January 5, 1993. Notes issued in acquisitions by a second-tier holding company were issued at a variable rate and matured in 1994. In July 1989, UPSA issued $100 million of 9.000% fixed-rate mortgage-backed notes with a maturity of July 1999. United Postal Savings Association used a portion of the proceeds from the sale of the notes as, or to purchase, eligible collateral which was pledged to the trustee simultaneously with the initial sale of the notes. During 1990, $46,550,000 of the mortgage-backed notes were repurchased on the open market at a discount. In 1994 the mortgage- backed securities collateralizing these notes were replaced with U.S. government securities of a like amount. 55 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) A summary of annual principal reductions of long-term debt is presented below:
ANNUAL PERIOD PRINCIPAL REDUCTIONS (Thousands) 1995 $ 8,857 1996 38 1997 - 1998 - 1999 53,450 2000 and later 225,000 -------- Total $287,345 ========
NOTE J INCOME TAXES The Corporation's results include income tax expense as follows:
CURRENT DEFERRED TOTAL (Thousands) YEAR ENDED DECEMBER 31, 1994 U.S. FEDERAL $ 90,786 $(9,036) $81,750 STATE AND LOCAL 10,695 (356) 10,339 -------- ------- ------- TOTAL $101,481 $(9,392) $92,089 ======== ======= ======= Year ended December 31, 1993 U.S. Federal $58,989 $5,479 $64,468 State and local 10,338 762 11,100 ------- ------ ------- Total $69,327 $6,241 $75,568 ======= ====== ======= Year ended December 31, 1992 U.S. Federal $44,020 $ 915 $44,935 State and local 7,078 333 7,411 ------- ------ ------- Total $51,098 $1,248 $52,346 ======= ====== =======
The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities are presented below.
DECEMBER 31 1994 1993 1992 (Thousands) Deferred tax assets Reserve for possible loan losses $ 55,008 $ 53,507 $ 54,245 Foreclosed property 2,460 2,172 2,745 Deferred compensation 2,447 2,792 1,874 Net operating losses from pooled subsidiary 1,494 4,527 10,377 Expenses not currently allowable for tax purposes 10,697 7,598 5,802 State tax liabilities 2,239 1,266 1,567 Investments in debt and equity securities-FAS 115 2,448 - - Retirement expenses in excess of tax deduction 5,182 2,312 1,578 Other 5,792 754 9,869 -------- -------- -------- Total Gross Deferred Tax Assets 87,767 74,928 88,057 Deferred tax liabilities Leasing (56,776) (55,050) (55,187) Pension settlement gain (6,005) (6,005) (5,833) Intangible assets (8,285) (8,369) (8,355) Depreciation (1,090) (2,542) (2,793) Investments in debt and equity securities-FAS 115 - (1,959) - Other (2,628) (1,819) (8,505) -------- -------- -------- Total Gross Deferred Tax Liabilities (74,784) (75,744) (80,673) -------- -------- -------- Net Deferred Tax Assets/(Liabilities) $ 12,983 $ (816) $ 7,384 ======== ======== ========
The 1992 and 1993 net deferred tax assets/(liabilities) reflect amounts attributable to entities acquired in purchase transactions. Income tax expense as reported differs from the amounts computed by applying the statutory U.S. Federal income tax rate to pretax income as follows:
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) Computed "expected" tax expense $88,591 $68,051 $50,112 Increase (reduction) in income taxes resulting from Tax-exempt income (5,196) (5,565) (4,023) State and local income taxes, net of federal income tax benefit 6,721 7,214 4,892 Thrift bad debt recapture - 6,070 - Other, net 1,973 (202) 1,365 ------- ------- ------- Total Tax Expense $92,089 $75,568 $52,346 ======= ======= =======
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 56 49 NOTE K RETIREMENT PLANS Pension Plans: The Corporation maintains both qualified and nonqualified noncontributory pension plans which cover all employees meeting certain age and service requirements. The qualified plan provides pension benefits based on the employee's length of service and compensation earned during the five years prior to retirement. The Corporation's funding policy is to contribute annually at least the minimum amount required by government funding standards but not more than is tax deductible. No contribution was required during 1994, 1993 or 1992. The net periodic pension expense related to the qualified plan included in the Consolidated Statement of Income is summarized as follows:
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) Service cost-benefits earned during the period $ 6,228 $ 4,762 $ 3,661 Interest cost on projected benefit obligation 7,926 7,293 5,811 Actual (return) loss on plan assets 1,713 (9,839) (7,807) Net amortization and deferral (13,542) (959) (1,547) -------- ------- ------- Net Periodic Pension Expense $ 2,325 $ 1,257 $ 118 ======== ======= =======
The table below sets forth the funded status and amounts recognized in the Consolidated Balance Sheet for the qualified plan:
DECEMBER 31 1994 1993 1992 (Thousands) Actuarial present value of Vested benefit obligation $74,545 $77,877 $63,328 ======= ======= ======= Accumulated benefit obligation $82,994 $84,795 $67,862 ======= ======= ======= Projected benefit obligation $ 99,366 $103,744 $ 83,237 Plan assets at fair value 116,496 118,159 112,087 -------- -------- -------- Plan assets in excess of projected benefit obligation (17,130) (14,415) (28,850) Unrecognized net gain (loss) (7,896) (10,671) 1,885 Unrecognized prior service cost 2,876 1,843 1,608 Unrecognized net asset at December 31 5,653 6,865 8,078 -------- -------- -------- Prepaid Pension $(16,497) $(16,378) $(17,279) ======== ======== ========
Assumptions used were as follows:
1994 1993 1992 Discount rate in determining benefit obligations 8.50% 7.50% 8.00% Rate of increase in compensation levels 5.00 5.00 5.25 Expected long-term rate on assets 9.00 9.00 8.50
At December 31, 1994, approximately 58% of the plan's assets were invested in listed common stocks, 36% were invested in government and corporate bonds rated A or better, and the remaining 6% were invested in short-term cash equivalents. A nominal amount of common stock of the Corporation was held by the plan. The nonqualified plans provide pension benefits which would have been provided under the qualified plan in the absence of limits placed on qualified plan benefits by the Internal Revenue Service. The Corporation's funding policy is to fund benefits as they are paid. Contributions under the nonqualified plans were not material for the three years ended December 31, 1994, 1993 and 1992. The expense related to these plans was $1,612,000 in 1994, $1,641,000 in 1993, $1,337,000 in 1992. Other Postretirement Benefits: In addition to the pension plans described above, the Corporation provides other postretirement benefits, largely medical benefits and life insurance, to its retirees. The Corporation adopted FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in the first quarter of 1993, which required the recording of the unrecognized transition obligation for postretirement benefits other than pensions. That liability is being amortized over a 20-year period. The net periodic postretirement benefit expense included in the Consolidated Statement of Income is summarized as follows:
YEAR ENDED DECEMBER 31 1994 1993 (Thousands) Service cost-benefits earned during the period $ 734 $ 591 Interest cost on accumulated postretirement benefit obligation 2,539 2,647 Net amortization and deferral 1,633 1,679 ------ ------ Net Periodic Postretirement Benefit Cost $4,906 $4,917 ====== ======
The cash basis postretirement benefit cost prior to the adoption of FAS 106 was $2,225,000 in 1992. 57 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The table below sets forth the funded status and the amount recognized in the Consolidated Balance Sheet regarding other postretirement benefits:
DECEMBER 31 1994 1993 1992 (Thousands) Accumulated postretirement benefit obligation ("APBO") Retirees $24,423 $ 25,893 $ 25,900 Active employees fully eligible for benefits 1,014 1,359 1,149 Other active employees 6,500 7,747 6,523 ------- -------- -------- Total 31,937 34,999 33,572 Assets at fair value - - - ------- -------- -------- APBO in excess of assets 31,937 34,999 33,572 Unrecognized net gain (loss) 2,436 (1,268) - Unrecognized service cost (155) - - Unrecognized transition obligation at December 31 (28,470) (30,393) (33,572) ------- -------- -------- APBO $ 5,748 $ 3,338 $ - ======= ======== ========
Assumptions used were as follows:
1994 1993 1992 Discount rate in determining benefit obligations 8.50% 7.50% 8.00% Health care cost trend First year 11.00 12.00 13.00 Ultimate (2001 and after) 6.00 6.00 6.00
An increase in the health care cost trend of one percent would increase the aggregate of service and interest cost components of net periodic postretirement benefit costs by $120,000 in 1994 compared with $136,000 in 1993. The APBO as of December 31 would increase by $1,430,000 in 1994 compared with $1,660,000 in 1993. NOTE L SHAREHOLDERS' EQUITY Common Stock: The authorized common stock of the Corporation consists of 100,000,000 shares as of December 31, 1994 and 70,000,000 shares as of December 31, 1993 and 1992, $5.00 par value, of which 43,207,524, 42,802,322 and 42,031,973 shares were outstanding at December 31, 1994, 1993 and 1992, respectively. The Corporation's Dividend Reinvestment Plan allows shareholders of record to reinvest dividends and/or make voluntary cash contributions to purchase additional shares of the Corporation's common stock. Under the Plan, stock is purchased in the open market by the Plan Trustee with no service charge to the shareholder. Preferred Stock: The authorized preferred stock of the Corporation consists of 5,000,000 shares, no par value, of which none were issued or outstanding at December 31, 1994, 1993 and 1992, although 1,000,000 shares were reserved at December 31, 1994 for issuance pursuant to the Preferred Share Purchase Rights Plan. The preferred stock, which is issuable in series, shall have specific terms, preferences and other rights as determined by the Board of Directors for each series. Preferred Share Purchase Rights Plan: One Preferred Share Purchase Right ("Right") is attached to each share of common stock and trades automatically with such shares. The Rights, which can be redeemed by the Board of Directors in certain circumstances and expire by their terms on June 3, 1998, have no voting rights. The Rights become exercisable and will trade separately from the common stock 10 days after a person or a group either becomes the beneficial owner or announces an intention to commence a tender offer for 20% or more of the Corporation's outstanding common stock. When exercisable, each Right entitles the registered holder to purchase from the Corporation 1/100 of a share of Series A Junior Participating Preferred Stock for $100 per 1/100 of a preferred share. In the event a person acquires beneficial ownership of 20% or more of the Corporation's common stock, holders of Rights (other than the acquiring person or group) may purchase, at the Rights' then current exercise price, common stock of the Corporation having a value at that time equal to twice the exercise price. In the event the Corporation merges into or otherwise transfers 50% or more of its assets or earnings power to any person after the Rights become exercisable, holders of Rights may purchase, at the then current exercise price, common stock of the acquiring entity having a value at that time equal to twice the exercise price. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 58 51 Stock Options: The Corporation had stock options outstanding under various plans at December 31, 1994, including plans assumed in acquisitions. The original Mercantile plans provide for the granting to employees of the Corporation and its subsidiaries of options to purchase shares of common stock of the Corporation over periods of up to 10 years at a price not less than the market value of the shares at the date the options are granted. The plans provide for the granting of options which either qualify or do not qualify as Incentive Stock Options as defined by Section 422 of the Internal Revenue Code of 1986, as amended. A summary of the plans follows:
SHARES PRICE ------ ----- AT DECEMBER 31, 1994 Available for grant 1,836,130 Outstanding 2,607,285 $5.41-38.88 Exercisable 1,323,272 5.41-34.33
Changes in options outstanding were as follows:
SHARES PRICE ------ ----- 1,146,711 $11.19-$21.78 BALANCE AT DECEMBER 31, 1991 Granted 1,146,347 5.41- 29.00 Exercised (320,565) 5.41- 24.09 Canceled (60,582) 17.00- 26.33 Assumed 72,223 14.60- 25.83 --------- 1,984,134 5.41- 29.00 BALANCE AT DECEMBER 31, 1992 Granted 580,419 18.01- 34.33 Exercised (261,225) 5.41- 26.33 Canceled (40,225) 17.17- 32.67 --------- 2,263,103 5.41- 34.33 BALANCE AT DECEMBER 31, 1993 GRANTED 718,489 18.44- 38.88 EXERCISED (319,080) 5.41- 32.50 CANCELED (55,227) 12.50- 32.67 --------- BALANCE AT DECEMBER 31, 1994 2,607,285 5.41- 38.88 =========
No amounts have been charged to expense in connection with any plan. Debt and Dividend Restrictions: Consolidated retained earnings at December 31, 1994 were not restricted under any debenture agreement as to payment of dividends or reacquisition of common stock. The primary source of funds for dividends paid by the Corporation to its shareholders is dividends received from bank subsidiaries. At December 31, 1994, approximately $326,911,000 of the equity of bank subsidiaries was available for distribution as dividends to the Parent Company without prior regulatory approval or without reducing the capital of the respective subsidiary banks below present minimum standards. An additional $93,310,000 would be available for loans to the Parent Company under Federal Reserve regulations. The remaining equity of bank subsidiaries approximating $668,846,000 was restricted as to transfers to the Parent Company. NOTE M CONCENTRATIONS OF CREDIT The Corporation's primary market area is the state of Missouri and the lower Midwest. At December 31, 1994, approximately 92% of the total loan portfolio, and 89% of the commercial and commercial real estate loan portfolio, were to borrowers within this region. The diversity of the region's economic base tends to provide a stable lending environment. Real estate lending constituted the only other significant concentration of credit risk. Real estate-related financial instruments (loans, commitments and standby letters of credit) comprised 33% of all such instruments of the Corporation. However, of this total, approximately 64% was consumer-related in the form of residential real estate mortgages and home equity lines of credit. The Corporation is, in general, a secured lender. At December 31, 1994, approximately 83% of the loan portfolio was secured. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. NOTE N FINANCIAL INSTRUMENTS Fair Values: Fair values for financial instruments are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, certain financial instruments and all non-financial instruments are excluded from the fair value disclosure requirements of FAS 107. Therefore, the fair values presented below should not be construed as the underlying value of the Corporation. The following methods and assumptions were used in estimating fair values for financial instruments. Cash and Due from Banks, Short-term Investments and Short-term Borrowings: The carrying values reported in the Consolidated Balance Sheet approximated fair values. Investments in Debt and Equity Securities: Fair values for held- to-maturity and available-for-sale securities were based upon quoted market prices where available. Fair values for trading securities, which also were the amounts reported in the Consolidated Balance Sheet, were based on quoted market prices where available. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. 59 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Loans and Leases: The fair values for most fixed-rate loans were estimated by utilizing discounted cash flow analysis, applying interest rates currently being offered for similar loans to borrowers with similar risk profiles. The discount rates used therefore include a credit risk premium. The fair values of variable-rate loans and residential mortgages were estimated by utilizing the same type of discounted cash flows, but over a range of interest rate scenarios, in order to incorporate the value of the options imbedded in these assets. Loans with similar characteristics were aggregated for purposes of these calculations. The fair value of credit card loans was assumed to be the same as the par value. The fair value estimate of the credit card portfolio does not include any value attributable to the ongoing cardholder relationship. That component was estimated to be approximately $150,000,000 to $185,000,000 in excess of the fair value at December 31, 1994. Deposits: The fair values disclosed for deposits generally payable on demand (i.e., interest bearing and non-interest bearing demand, savings, and money market accounts) were considered equal to their respective carrying amounts as reported in the Consolidated Balance Sheet. Fair values for certificates of deposit and foreign deposits were estimated using a discounted cash flow calculation that applied interest rates generally offered on similar certificates to a schedule of aggregated expected monthly maturities of time deposits. The fair value estimate of the deposit portfolio has not been adjusted for any value derived from the retention of those deposits for an expected future period of time. That component, commonly referred to as core deposit premium, was estimated to be approximately $165,000,000 to $250,000,000 at December 31, 1994 and was neither considered in the fair value amounts below nor recorded as an intangible asset on the Consolidated Balance Sheet. Bank Notes and Long-term Debt: The fair value of publicly traded debt was based upon quoted market prices, where available, or upon quoted market prices of comparable instruments. The fair values of bank notes and long-term debt were estimated using discounted cash flow analysis, based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet Instruments: Fair values of foreign exchange contracts and interest rate contracts were determined from quoted market prices. Fair values of commitments to extend credit, standby letters of credit and commercial letters of credit were based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standings. The estimated fair values of the Corporation's financial instruments were as follows:
DECEMBER 31 1994 1993 1992 --------------------- --------------------- --------------------- (Thousands) CARRYING FAIR CARRYING FAIR CARRYING FAIR FINANCIAL ASSETS VALUE VALUE VALUE VALUE VALUE VALUE Cash and due from banks and short-term investments $ 796,007 $ 796,007 $1,037,173 $1,037,173 $ 971,508 $ 971,508 Trading securities 14,299 14,299 15,735 15,735 17,684 17,684 Held-to-maturity securities 2,750,244 2,669,460 2,970,160 3,020,591 3,294,169 3,366,147 Available-for-sale securities 269,232 269,232 415,283 415,283 89,424 92,096 Net loans and leases 7,943,905 8,014,823 7,213,123 7,467,333 7,333,646 7,605,933 FINANCIAL LIABILITIES Deposits 9,053,859 9,050,634 9,602,083 9,658,117 9,927,959 10,007,100 Short-term borrowings 1,582,699 1,582,699 1,123,647 1,123,647 985,394 985,394 Bank notes and long-term debt 387,345 367,150 272,778 301,669 299,109 302,112 OFF-BALANCE-SHEET Foreign exchange contracts purchased $ 6,641 $ 5,375 $(2,034) Foreign exchange contracts sold (6,199) (6,890) 1,392 Interest rate contracts (184) (4,125) (5,300) Commitments to extend credit (8,817) (11,950) (9,307) Standby letters of credit (1,955) (2,247) (2,051) Commercial letters of credit (3,988) (4,321) (4,774)
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 60 53 Off-Balance-Sheet Risk: The Corporation is, in the normal course of business, a party to certain off-balance-sheet financial instruments with inherent credit and/or market risk. These instruments, which include commitments to extend credit, standby letters of credit, interest options written, interest futures contracts and foreign exchange contracts, are used by the Corporation to meet the financing needs of its customers and, to a lesser degree, to reduce its own exposure to interest rate fluctuations. These instruments involve, to varying degrees, credit and market risk in excess of the amount recognized in the Consolidated Balance Sheet. Financial instruments with off-balance-sheet credit risk for which the contract amounts represent potential credit risk were as follows:
DECEMBER 31 1994 1993 1992 (Thousands) Commitments to extend credit Commercial $1,795,720 $1,589,036 $1,567,572 Consumer 3,799,589 2,988,382 2,585,768 ---------- ---------- ---------- Total $5,595,309 $4,577,418 $4,153,340 ========== ========== ========== Standby letters of credit $201,585 $231,647 $212,179 ======== ======== ======== Interest rate contracts $21,000 $37,500 $71,000 ======= ======= =======
The Corporation's maximum exposure to credit loss under commitments to extend credit and standby letters of credit is the equivalent of the contractual amount of those instruments. The same credit policies are used by the Corporation in granting commitments and conditional obligations as are used in the extension of credit. Commitments to extend credit are legally binding agreements to lend to a borrower as long as the borrower performs in accordance with the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee. As many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Included in consumer commitments are the unused portions of lines of credit for credit card and home equity credit line loans. Standby letters of credit are commitments issued by the Corporation to guarantee specific performance of a customer to a third party. Collateral is required for both commitments and standby letters of credit in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. Collateral held varies, but may include commercial real estate, accounts receivable, inventory or equipment. Included in interest rate contracts are interest rate exchange agreements with major investment banking firms to convert short- term, variable-rate liabilities into long-term, fixed-rate liabilities, to secure interest margins and to hedge against interest rate movements. Derivative Financial Instruments: Held or Issued for Trading Purposes: In the normal course of business, the Corporation maintains minimal trading positions in a variety of derivative financial instruments. Most of the Corporation's trading activities are customer oriented, with trading positions established to meet the financing and foreign exchange transaction needs of customers. This activity complements the Corporation's traditional money and capital markets trading business, which also exists to meet customers' demands. Net revenue recognized on interest rate contracts and foreign exchange contracts totaled $2,558,000 in 1994. For interest options written, foreign exchange contracts purchased and foreign exchange contracts sold, the notional amounts of $62,725,000, $184,079,000 and $173,378,000, respectively, at December 31, 1994, do not represent exposure to credit loss. These commitments are generally entered into on behalf of customers and result in the Corporation being in a matched position. Credit risk in the transactions is minimal. The Corporation manages the potential credit exposure through established credit approvals, risk control limits and other monitoring procedures. Market risk to the Corporation could result from non-performance by a counterparty to a contract. Held or Issued for Purposes Other Than Trading: Of the commitments to extend credit discussed in the preceding paragraphs, $74,966,000 and $35,289,000 were entered into with fixed rates at December 31, 1994 for commercial and consumer (residential mortgage) loan customers, respectively. Fixed-rate commitments to extend credit are defined as fixed-rate commercial loan commitments with remaining maturities greater than one year, fixed-rate residential mortgage loan commitments, and adjustable-rate residential mortgage loan commitments for loans with adjustment periods greater than one year. Fixed-rate mortgage loans held for resale are partially hedged with contracts for forward delivery in the secondary mortgage market. This hedging activity is designed to protect the Corporation from changes in interest rates. Gains and losses from the hedging transactions on mortgage loans held for resale are deferred and included in the cost of the loans for determining the gain or loss when the loans are sold. As of December 31, 1994, the Company had $4,299,000 of forward delivery contracts outstanding. 61 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) NOTE O CONTINGENT LIABILITIES In the ordinary course of business, there are various legal proceedings pending against the Corporation and its subsidiaries. Management, after consultation with legal counsel, is of the opinion that the ultimate resolution of these proceedings will have no material adverse effect on the consolidated financial condition or results of operations of the Corporation. NOTE P PARENT COMPANY FINANCIAL INFORMATION Following are the condensed financial statements of Mercantile Bancorporation Inc. (Parent Company Only) for the periods indicated. For the Statement of Cash Flows (Parent Company Only), cash and short-term investments were considered cash equivalents. Interest paid on commercial paper and long-term debt was $15,099,000, $15,881,000 and $10,618,000 for the years ended December 31, 1994, 1993 and 1992, respectively. STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) INCOME Dividends from banking subsidiaries $104,950 $ 77,548 $44,077 Other interest and dividends 4,644 5,538 3,320 Management fees 13,879 13,392 12,320 Other 3,546 2,687 2,994 -------- -------- ------- Total Income 127,019 99,165 62,711 EXPENSE Interest on commercial paper 1,199 733 416 Interest on long-term debt 12,607 15,157 12,497 Personnel expense 14,463 11,544 10,489 Other operating expenses 16,019 14,301 15,743 -------- -------- ------- Total Expense 44,288 41,735 39,145 INCOME BEFORE INCOME TAX CREDITS AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 82,731 57,430 23,566 Income tax credits 6,482 6,708 6,469 -------- -------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 89,213 64,138 30,035 Equity in undistributed income of subsidiaries 71,816 54,726 65,005 -------- -------- ------- NET INCOME $161,029 $118,864 $95,040 ======== ======== =======
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 62 55 BALANCE SHEET
DECEMBER 31 1994 1993 1992 (Thousands) ASSETS Cash $ 11 $ 628 $ 175 Short-term investments 82,413 47,776 63,766 Available-for-sale securities 12,539 16,569 - Marketable equity securities - - 13,121 Investment in subsidiaries 1,104,351 1,016,395 917,403 Goodwill 48,557 45,912 27,383 Loans and advances to subsidiaries 26,849 53,390 44,248 Other assets 3,849 7,865 12,265 ---------- ---------- ---------- Total Assets $1,278,569 $1,188,535 $1,078,361 ========== ========== ========== LIABILITIES Commercial paper $ 26,800 $ 18,390 $ 9,198 Long-term debt 158,822 194,072 196,717 Other liabilities 24,697 17,516 21,122 ---------- ---------- ---------- Total Liabilities 210,319 229,978 227,037 SHAREHOLDERS' EQUITY 1,068,250 958,557 851,324 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,278,569 $1,188,535 $1,078,361 ========== ========== ==========
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1994 1993 1992 (Thousands) OPERATING ACTIVITIES Net income $ 161,029 $ 118,864 $ 95,040 Adjustments to reconcile net income to net cash provided by operating activities Net income of subsidiaries (176,766) (132,274) (109,082) Dividends from subsidiaries 98,666 62,430 44,077 Other, net 14,263 2,038 4,023 --------- --------- --------- Net Cash Provided by Operating Activities 97,192 51,058 34,058 INVESTING ACTIVITIES Investments in debt and equity securities Purchases (948) (2,054) (1,858) Proceeds from maturities 5,417 5,878 1,807 Contributions of capital to subsidiaries (21,505) (31,705) (31,209) Investment in note from banking subsidiary - - (35,000) Other, net 25,143 (9,280) (1,412) --------- --------- --------- Net Cash Provided (Used) by Investing Activities 8,107 (37,161) (67,672) FINANCING ACTIVITIES Cash dividends paid by Mercantile Bancorporation Inc. (48,329) (34,840) (27,506) Issuance of common stock Employee incentive plans and warrants 2,923 2,203 3,904 Purchase of treasury stock (2,954) - - Issuance of long-term debt - - 150,000 Principal payments on long-term debt (30,552) (742) (60,207) Acquisitions - (4,809) (8,347) Net change in commercial paper 8,410 9,192 1,271 Other, net (777) (438) (4,305) --------- --------- --------- Net Cash Provided (Used) by Financing Activities (71,279) (29,434) 54,810 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 34,020 (15,537) 21,196 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48,404 63,941 42,745 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 82,424 $ 48,404 $ 63,941 ========= ========= =========
63 56 SIX YEAR CONSOLIDATED STATEMENT OF INCOME ($ in Thousands except per share data)
1994 1993 1992 ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $647,004 $621,986 $651,616 Investments in debt and equity securities Trading 527 678 593 Taxable 164,746 183,233 194,932 Tax-exempt 13,189 13,289 12,319 -------- -------- -------- Total 178,462 197,200 207,844 Due from banks-interest bearing 1,857 2,609 5,900 Federal funds sold and repurchase agreements 7,683 8,135 8,087 -------- -------- -------- Total Interest Income 835,006 829,930 873,447 Tax-equivalent adjustment 9,114 9,574 9,570 -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 844,120 839,504 883,017 INTEREST EXPENSE Deposits 257,032 282,984 365,767 Borrowed funds 67,311 45,750 51,591 -------- -------- -------- Total Interest Expense 324,343 328,734 417,358 -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 519,777 510,770 465,659 PROVISION FOR POSSIBLE LOAN LOSSES 33,472 61,013 74,579 OTHER INCOME Trust 59,824 61,138 57,501 Service charges 57,593 58,511 55,399 Credit card fees 24,691 24,060 21,487 Investment banking 8,057 8,486 8,918 Securities gains 405 3,742 2,909 Other 37,726 43,221 37,730 -------- -------- -------- Total Other Income 188,296 199,158 183,944 OTHER EXPENSE Salaries 176,957 171,970 158,390 Employee benefits 43,993 43,363 33,625 Net occupancy 26,319 27,628 24,511 Equipment 32,987 35,010 31,077 Other 132,113 166,938 170,465 -------- -------- -------- Total Other Expense 412,369 444,909 418,068 -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 262,232 204,006 156,956 INCOME TAXES Income taxes (credits) 92,089 75,568 52,346 Tax-equivalent adjustment 9,114 9,574 9,570 -------- -------- -------- Adjusted Income Taxes 101,203 85,142 61,916 -------- -------- -------- NET INCOME $161,029 $118,864 $ 95,040 ======== ======== ======== PER SHARE DATA Net income $ 3.74 $ 2.80 $ 2.36 Dividends declared 1.12 .99 .93 Book value 24.72 22.40 20.25 TAX-EQUIVALENT ADJUSTMENT Loans $2,724 $2,795 $3,459 Investments in debt and equity securities 6,390 6,779 6,111 ------ ------ ------ Total Tax-equivalent Adjustment $9,114 $9,574 $9,570 ====== ====== ====== MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 64 57 1991 1990 1989 ---- ---- ---- INTEREST INCOME Interest and fees on loans and leases $679,319 $696,687 $666,152 Investments in debt and equity securities Trading 1,288 981 945 Taxable 164,628 154,178 139,911 Tax-exempt 10,315 12,145 12,989 -------- -------- -------- Total 176,231 167,304 153,845 Due from banks-interest bearing 11,075 8,621 6,379 Federal funds sold and repurchase agreements 12,846 9,536 10,070 -------- -------- -------- Total Interest Income 879,471 882,148 836,446 Tax-equivalent adjustment 8,512 11,376 14,500 -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 887,983 893,524 850,946 INTEREST EXPENSE Deposits 443,282 467,505 436,453 Borrowed funds 63,634 84,726 91,555 -------- -------- -------- Total Interest Expense 506,916 552,231 528,008 -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 381,067 341,293 322,938 PROVISION FOR POSSIBLE LOAN LOSSES 58,076 50,886 104,708 OTHER INCOME Trust 49,400 47,133 39,722 Service charges 47,504 39,464 35,064 Credit card fees 20,636 19,465 19,600 Investment banking 7,463 4,063 3,474 Securities gains 4,334 1,478 31,744 Other 26,359 25,753 20,434 -------- -------- -------- Total Other Income 155,696 137,356 150,038 OTHER EXPENSE Salaries 140,877 133,445 127,428 Employee benefits 31,278 28,206 24,527 Net occupancy 20,965 20,020 19,130 Equipment 29,133 28,059 25,601 Other 161,095 109,157 138,580 -------- -------- -------- Total Other Expense 383,348 318,887 335,266 -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 95,339 108,876 33,002 INCOME TAXES Income taxes (credits) 18,673 27,658 (1,804) Tax-equivalent adjustment 8,512 11,376 14,500 -------- -------- -------- Adjusted Income Taxes 27,185 39,034 12,696 -------- -------- -------- NET INCOME $ 68,154 $ 69,842 $ 20,306 ======== ======== ======== PER SHARE DATA Net income $ 2.37 $ 2.18 $ .29 Dividends declared .93 .93 .93 Book value 18.86 17.14 15.86 TAX-EQUIVALENT ADJUSTMENT Loans $4,179 $ 6,136 $ 8,223 Investments in debt and equity securities 4,333 5,240 6,277 ------ ------ ------ Total Tax-equivalent Adjustment $8,512 $11,376 $14,500 ====== ====== ======
GROWTH RATES -------------------------------- ONE YEAR FIVE YEARS -------- ---------- INTEREST INCOME Interest and fees on loans and leases Investments in debt and equity securities Trading Taxable Tax-exempt Total Due from banks-interest bearing Federal funds sold and repurchase agreements Total Interest Income Tax-equivalent adjustment TAXABLE-EQUIVALENT INTEREST INCOME INTEREST EXPENSE Deposits Borrowed funds Total Interest Expense TAXABLE-EQUIVALENT NET INTEREST INCOME 1.8% 10.0% PROVISION FOR POSSIBLE LOAN LOSSES (45.1) (20.4) OTHER INCOME Trust (2.1) 8.5 Service charges (1.6) 10.4 Credit card fees 2.6 4.7 Investment banking (5.1) 18.3 Securities gains (89.2) (58.2) Other (12.7) 13.0 Total Other Income (5.5) 4.6 OTHER EXPENSE Salaries 2.9 6.8 Employee benefits 1.5 12.4 Net occupancy (4.7) 6.6 Equipment (5.8) 5.2 Other (20.9) (1.0) Total Other Expense (7.3) 4.2 TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 28.5 51.4 INCOME TAXES Income taxes (credits) 21.9 - Tax-equivalent adjustment (4.8) (8.9) Adjusted Income Taxes 18.9 51.5 NET INCOME 35.5 51.3 PER SHARE DATA Net income 33.6 66.8 Dividends declared 13.1 3.8 Book value 10.4 9.3 TAX-EQUIVALENT ADJUSTMENT Loans (2.5) (19.8) Investments in debt and equity securities (5.7) .4 Total Tax-equivalent Adjustment (4.8) (8.9)
65 58 SIX YEAR CONSOLIDATED AVERAGE BALANCE SHEET ($ in Thousands)
1994 1993 1992 ---------------------- --------------------- --------------------- VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases Commercial $ 2,076,486 7.23% $ 2,008,674 6.54% $ 2,051,614 6.99% Real estate-commercial 1,260,198 8.18 1,300,835 8.00 1,315,342 8.25 Real estate-construction 173,170 8.39 155,692 7.28 167,123 7.76 Real estate-residential 2,332,233 7.55 2,346,937 7.90 2,464,935 8.72 Consumer 1,028,692 8.33 934,327 9.01 921,234 9.77 Credit card 751,047 16.01 665,318 16.27 521,343 16.31 Foreign 299 6.69 1,027 6.72 2,389 6.91 ----------- ----------- ----------- Total Loans and Leases 7,622,125 8.52 7,412,810 8.43 7,443,980 8.80 Investments in debt and equity securities Trading 10,947 5.12 14,008 5.32 11,510 5.75 Taxable 3,021,178 5.46 3,143,876 5.84 2,786,173 7.01 Tax-exempt 240,065 8.06 233,922 8.41 191,414 9.40 ----------- ----------- ----------- Total 3,272,190 5.65 3,391,806 6.01 2,989,097 7.16 Short-term investments Federal funds sold and repurchase agreements 182,311 4.21 245,606 3.31 200,213 4.04 Due from banks-interest bearing 44,014 4.22 73,615 3.54 117,212 5.03 ----------- ----------- ----------- Total Short-term Investments 226,325 4.22 319,221 3.37 317,425 4.41 ----------- ----------- ----------- Total Earning Assets 11,120,640 7.59 11,123,837 7.55 10,750,502 8.21 Non-earning Assets Cash and due from banks 705,178 721,508 659,594 Bank premises and equipment 201,258 200,338 186,334 Due from customers on acceptances 9,080 10,939 9,608 Other assets 274,669 320,119 369,267 Reserve for possible loan losses (171,911) (161,227) (159,446) ----------- ----------- ----------- Total Assets $12,138,914 $12,215,514 $11,815,859 =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 1,836,742 $ 1,933,794 $ 1,639,044 Interest bearing demand 1,563,946 1.87 1,507,171 2.11 1,283,485 2.95 Money market accounts 1,616,863 2.92 1,642,599 2.76 1,533,129 3.41 Savings 904,218 2.32 864,939 2.57 736,693 3.35 Consumer time certificates under $100,000 3,066,731 4.36 3,481,213 4.66 3,878,024 5.68 Other time 33,952 3.18 81,819 2.75 106,540 3.88 ----------- ----------- ----------- Total Core Deposits 9,022,452 3.23 9,511,535 3.48 9,176,915 4.50 Time certificates $100,000 and over 458,740 4.22 459,935 3.88 549,512 4.66 Foreign 108,986 4.95 31,093 4.38 23,433 3.72 ----------- ----------- ----------- Total Purchased Deposits 567,726 4.36 491,028 3.91 572,945 4.62 ----------- ----------- ----------- Total Deposits 9,590,178 3.32 10,002,563 3.51 9,749,860 4.51 Short-term borrowings 1,043,482 4.24 817,989 2.90 821,028 3.70 Bank notes 12,603 6.19 - - - - Long-term debt 292,056 7.62 274,718 8.02 237,011 8.95 ----------- ----------- ----------- Total Acquired Funds 10,938,319 3.57 11,095,270 3.59 10,807,899 4.55 Other Liabilities Bank acceptances outstanding 9,080 10,939 9,608 Other liabilities 173,725 194,970 202,820 ----------- ----------- ----------- Total Liabilities 11,121,124 11,301,179 11,020,327 SHAREHOLDERS' EQUITY 1,017,790 914,335 795,532 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $12,138,914 $12,215,514 $11,815,859 =========== =========== =========== Taxable-equivalent basis. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 66 59 1991 1990 1989 ---------------------- --------------------- --------------------- VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases Commercial $ 1,972,117 8.73% $1,974,283 10.45% $2,061,611 11.12% Real estate-commercial 1,157,604 9.67 938,630 10.24 741,141 10.34 Real estate-construction 150,920 9.41 199,347 10.67 306,111 10.92 Real estate-residential 2,190,296 10.08 1,990,631 10.50 1,729,018 11.07 Consumer 888,526 10.74 963,975 11.07 801,878 11.37 Credit card 427,809 16.06 418,528 15.14 349,173 14.62 Foreign 2,136 9.46 59 10.17 11,088 13.28 ----------- ----------- ----------- Total Loans and Leases 6,789,408 10.07 6,485,453 10.84 6,000,020 11.24 Investments in debt and equity securities Trading 19,041 6.95 12,528 8.22 11,621 8.34 Taxable 1,909,620 8.64 1,699,301 9.10 1,506,331 9.31 Tax-exempt 143,756 9.90 176,355 9.61 194,317 9.70 ----------- ----------- ----------- Total 2,072,417 8.71 1,888,184 9.14 1,712,269 9.35 Short-term investments Federal funds sold and repurchase agreements 222,333 5.78 124,407 7.67 106,494 9.46 Due from banks-interest bearing 158,721 6.98 99,591 8.66 72,168 8.84 ----------- ----------- ----------- Total Short-term Investments 381,054 6.28 223,998 8.11 178,662 9.21 ----------- ----------- ----------- Total Earning Assets 9,242,879 9.61 8,597,635 10.39 7,890,951 10.78 Non-earning Assets Cash and due from banks 564,550 633,588 626,800 Bank premises and equipment 159,073 161,673 161,327 Due from customers on acceptances 12,759 10,544 7,288 Other assets 364,493 296,209 319,212 Reserve for possible loan losses (147,972) (153,661) (119,840) ----------- ----------- ----------- Total Assets $10,195,782 $9,545,988 $8,885,738 =========== =========== =========== LIABILITIES Acquired Funds Deposits Non-interest bearing $ 1,283,222 $1,283,795 $1,258,647 Interest bearing demand 926,023 4.53 839,688 4.98 788,996 5.20 Money market accounts 1,155,414 5.27 1,030,315 6.23 861,288 6.56 Savings 529,452 4.77 479,276 5.07 471,854 5.21 Consumer time certificates under $100,000 3,781,945 7.23 3,368,866 8.14 2,964,177 8.25 Other time 78,376 4.80 85,938 6.11 75,118 6.31 ----------- ----------- ----------- Total Core Deposits 7,754,432 6.26 7,087,878 7.06 6,420,080 7.19 Time certificates $100,000 and over 600,830 6.02 666,506 8.11 730,055 8.52 Foreign 30,986 6.14 47,427 8.09 33,446 8.76 ----------- ----------- ----------- Total Purchased Deposits 631,816 6.02 713,933 8.11 763,501 8.53 ----------- ----------- ----------- Total Deposits 8,386,248 6.24 7,801,811 7.17 7,183,581 7.37 Short-term borrowings 760,626 5.56 768,870 7.46 770,554 8.37 Bank notes - - - - - - Long-term debt 225,852 9.44 252,899 10.84 244,380 11.06 ----------- ----------- ----------- Total Acquired Funds 9,372,726 6.27 8,823,580 7.32 8,198,515 7.61 Other Liabilities Bank acceptances outstanding 12,759 10,544 7,288 Other liabilities 162,499 153,793 147,548 ----------- ----------- ----------- Total Liabilities 9,547,984 8,987,917 8,353,351 SHAREHOLDERS' EQUITY 647,798 558,071 532,387 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $10,195,782 $9,545,988 $8,885,738 =========== =========== =========== Taxable-equivalent basis.
GROWTH RATES ----------------------- ONE YEAR FIVE YEARS -------- ---------- ASSETS Earning Assets Loans and leases Commercial 3.4 % .1 % Real estate-commercial (3.1) 11.2 Real estate-construction 11.2 (10.8) Real estate-residential (.6) 6.2 Consumer 10.1 5.1 Credit card 12.9 16.6 Foreign (70.9) (51.5) Total Loans and Leases 2.8 4.9 Investments in debt and equity securities Trading (21.9) (1.2) Taxable (3.9) 14.9 Tax-exempt 2.6 4.3 Total (3.5) 13.8 Short-term investments Federal funds sold and repurchase agreements (25.8) 11.4 Due from banks-interest bearing (40.2) (9.4) Total Short-term Investments (29.1) 4.8 Total Earning Assets - 7.1 Non-earning Assets Cash and due from banks (2.3) 2.4 Bank premises and equipment .5 4.5 Due from customers on acceptances (17.0) 4.5 Other assets (14.2) (3.0) Reserve for possible loan losses 6.6 7.5 Total Assets (.6) 6.4 LIABILITIES Acquired Funds Deposits Non-interest bearing (5.0) 7.9 Interest bearing demand 3.8 14.7 Money market accounts (1.6) 13.4 Savings 4.5 13.9 Consumer time certificates under $100,000 (11.9) .7 Other time (58.5) (14.7) Total Core Deposits (5.1) 7.0 Time certificates $100,000 and over (.3) (8.9) Foreign - 26.7 Total Purchased Deposits 15.6 (5.8) Total Deposits (4.1) 5.9 Short-term borrowings 27.6 6.3 Bank notes - - Long-term debt 6.3 3.6 Total Acquired Funds (1.4) 5.9 Other Liabilities Bank acceptances outstanding (17.0) 4.5 Other liabilities (10.9) 3.3 Total Liabilities (1.6) 5.9 SHAREHOLDERS' EQUITY 11.3 13.8 Total Liabilities and Shareholders' Equity (.6) 6.4 Taxable-equivalent basis.
67 60 INVESTOR INFORMATION [COMMON STOCK PRICE RANGE GRAPH] NEW YORK STOCK EXCHANGE: MTL -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK INFORMATION
1994 1993 1992 ----------------------------- ---------------------------- ---------------------------- MARKET PRICE MARKET PRICE MARKET PRICE -------------- DIVIDEND -------------- DIVIDEND -------------- DIVIDEND HIGH LOW DECLARED HIGH LOW DECLARED HIGH LOW DECLARED ---- --- -------- ---- --- -------- ---- --- -------- 1st Quarter $34 1/8 $29 7/8 $ .28 $35 5/8 $30 5/8 $.24 3/4 $27 3/8 $23 1/8 $.23 1/4 2nd Quarter 38 1/8 31 1/8 .28 37 5/8 29 3/8 .24 3/4 29 1/2 25 5/8 .23 1/4 3rd Quarter 39 1/4 34 7/8 .28 34 3/8 31 5/8 .24 3/4 29 3/8 25 3/8 .23 1/4 4th Quarter 36 7/8 29 1/2 .28 34 5/8 29 1/8 .24 3/4 32 1/8 25 7/8 .23 1/4 ----- -------- -------- $1.12 $.99 $.93 ===== ===== =====
-------------------------------------------------------------------------------------------------------------------------------- SELECTED DATA
DECEMBER 31 DECEMBER 31 1994 1993 1992 1994 1993 1992 ---- ---- ---- ---- ---- ---- Market Price $31 1/4 $30 1/8 $32 1/8 Average Shares Dividend Yield 3.58% 3.29% 2.89% Outstanding 43,091,152 42,439,298 39,492,237 Price Earnings Ratio 8.36X 10.76x 13.61x Year-end Shares Book Value $24.72 $22.40 $20.25 Outstanding 43,207,524 42,802,322 42,031,973 Market Price to Shareholders of Record 13,585 13,778 14,469 Book Value 126.42% 134.49% 158.64% Average Daily Volume 52,926 68,561 95,147
-------------------------------------------------------------------------------------------------------------------------------- DEBT RATINGS
THOMSON STANDARD MOODY'S FITCH BANKWATCH & POOR'S ------- ----- --------- -------- MERCANTILE BANCORPORATION INC. Issuer Rating B Commercial Paper P-2 TBW-1 A-2 Subordinated Debt 7.625% Subordinated Notes, due 2002 Baa1 BBB + BBB MERCANTILE BANK OF ST. LOUIS N.A. Bank Notes, due 1996 A1/P-1 A 6.375% Subordinated Notes, due 2004 A3 A- A- BBB + 9.000% Mortgage-backed Notes, due 1999 AAA Certificates of Deposit TBW-1 A-/A-2 Letters of Credit TBW-1 A-/A-2 --------------------------------------------------------------------------------------------------------------------------------
DIVIDEND INFORMATION Dividends are normally paid the first business day of January, April, July and October. If you wish to participate in or want further information concerning the Dividend Reinvestment Plan or Dividend Direct Deposit, please contact KeyCorp Shareholder Services, Inc., One Mercantile Center, Suite 2120, St. Louis, MO 63101-1673, telephone 314-241-4002. ANNUAL MEETING The Annual Meeting of Shareholders will be at 10:00 a.m., Thursday, April 27, 1995, at the Cervantes Convention Center at America's Center, 801 Convention Plaza, St. Louis, MO 63101, Lecture Hall. A notice of the annual meeting and proxy materials will be mailed under separate cover to shareholders. INVESTOR RELATIONS AND FORM 10-K Analysts, investors and others seeking financial data about Mercantile are invited to contact Ralph W. Babb, Jr., Vice Chairman, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, MO 63166-0524. A copy of the Corporation's Form 10-K (Annual Report) filed with the Securities and Exchange Commission may be obtained without charge upon written request. [FN] Generally appears as MercBcpMO or MercBc in newspaper stock tables. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES 68 61 DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS RICHARD P. CONERLY, Retired Chairman Orion Capital Inc. HARRY M. CORNELL, JR., Chairman and Chief Executive Officer Leggett & Platt, Inc. EARL K. DILLE,, Retired President Union Electric Company J. CLIFF EASON President, Network Services Southwestern Bell Telephone Company BERNARD A. EDISON, Director Emeritus Edison Brothers Stores, Inc. WILLIAM A. HALL Assistant to the Chairman Hallmark Cards, Inc. THOMAS A. HAYS,, Deputy Chairman The May Department Stores Company WILLIAM G. HECKMAN, Chairman Emeritus Arch Mineral Corporation THOMAS H. JACOBSEN, Chairman and Chief Executive Officer Mercantile Bancorporation Inc. JAMES B. MALLOY, Chairman and Chief Executive Officer Smurfit Packaging Corporation CHARLES H. PRICE II Chairman Mercantile Bank of Kansas City HARVEY SALIGMAN Managing Partner Cynwyd Investments CRAIG D. SCHNUCK Chairman and Chief Executive Officer Schnuck Markets, Inc. ROBERT W. STALEY Vice Chairman Emerson Electric Company ROBERT L. STARK Dean University of Kansas Regents Center PATRICK T. STOKES President Anheuser-Busch, Inc. FRANCIS A. STROBLE Retired Chief Financial Officer Monsanto Company JOSEPH G. WERNER President Werner Investments JOHN A. WRIGHT President and Chief Executive Officer Big River Minerals Corporation [FN] Member of Audit Committee Member of Compensation and Management Development Committee Member of Executive Committee Member of Nominating and Board Affairs Committee Member of Community Relations Committee Member of Credit Policy Committee ----------------------------------------------------------------------- EXECUTIVE OFFICERS THOMAS H. JACOBSEN Chairman and Chief Executive Officer RALPH W. BABB, JR. Vice Chairman W. RANDOLPH ADAMS Senior Executive Vice President and Chief Financial Officer JOHN Q. ARNOLD Senior Executive Vice President and Chief Credit Officer JOHN H. BEIRISE President and Chief Institutional Banking Officer Mercantile Bank of St. Louis N.A. RICHARD H. GOLDBERG Executive Vice President Operations MICHAEL J. GORMAN Chairman Mercantile Bank of St. Louis N.A. RICHARD C. KING President and Chief Executive Officer Mercantile Bank of Kansas City JOHN W. MCCLURE Senior Executive Vice President Community Banking JON P. PIERCE Executive Vice President Human Resources JON W. BILSTROM General Counsel and Secretary PATRICK STRICKLER Executive Vice President Public Affairs ARTHUR G. HEISE Senior Vice President and Auditor MICHAEL T. NORMILE Senior Vice President Finance and Control KENNETH E. SCHUTTE Senior Vice President and Treasurer MERCANTILE BANCORPORATION INC. 69 62 APPENDIX 1. There is a vertical bar graph titled "Net Interest Rate Margin" on page 18 of the printed Annual Report. The graph plots fiscal quarters from the first quarter of 1993 through the fourth quarter of 1994 on the x-axis; the y-axis plots the net interest rate margin as a percentage. This graph indicates the net interest rate margin for each quarter from the first quarter of 1993 through the fourth quarter of 1994 at the top of the bar. These figures correspond to the net interest rate margin listed in Exhibit 36, "Quarterly Financial Summary," which is on page 41 of the printed Annual Report. 2. There is a vertical bar graph titled "Taxable-Equivalent Net Interest Income" on page 19 of the printed Annual Report. The graph plots fiscal quarters from the first quarter of 1993 through the fourth quarter of 1994 on the x-axis; the y-axis plots taxable-equivalent net interest income in millions of dollars. This graph indicates taxable-equivalent net interest income from the first quarter of 1993 through the fourth quarter of 1994 at the top of the bar. These figures correspond to taxable-equivalent net interest income listed on Exhibit 36, "Quarter Financial Summary," which is on page 41 of the printed Annual Report. 3. There is a vertical stacked bar graph titled "Sources of Funds" on page 23 of the printed Annual Report. The graph plots fiscal years from 1990 through 1994 on the x-axis and average dollars in billions on the y-axis. The "Sources of Funds" graph is a multi-color bar graph which stacks the average dollar balance in billions of: 1) core deposits; 2) purchased funds, which represents purchased deposits plus short-term borrowings; 3) long-term debt plus other liabilities; and 4) share- holders' equity for each year from 1989 through 1993. The top of each bar represents the sum of one through four as described in the previous sentence. These figures correspond to average balances provided on the "Six Year Consolidated Average Balance Sheet," which is on pages 66 and 67 of the printed Annual Report. 4. There is a vertical stacked bar graph titled "Core Deposits" on page 24 of the printed Annual Report. The graph plots fiscal years 1990 through 1994 on the x-axis and average dollars in billions on the y-axis. The "Core Deposits" graph is a multi-color bar graph that stacks the average dollar balance in billions of: 1) non-interest bearing deposits; 2) interest bearing demand, money market accounts and savings deposits; 3) consumer time certificates under $100,000 and other time deposits for each year from 1990 through 1994. The top of each bar represents the sum of one through three as described in the previous sentence. These figures correspond to average balances provided on the "Six Year Consolidated Average Balance Sheet," which is on pages 66 and 67 of the printed Annual Report. 63 5. There is a vertical stacked bar graph titled "Earning Assets" on page 27 of the printed Annual Report. The graph plots fiscal years 1990 through 1994 on the x-axis and average dollars in billions on the y-axis. The "Earning Assets" graph is a multi-color bar graph which stacks the average dollar balance in billions of: 1) loans and leases; 2) investments in debt and equity securities; and 3) short-term investments for each year from 1990 through 1994. The top of each bar represents the sum of one through three as described in the previous sentence. These figures correspond to average balances provided on the "Six Year Consolidated Average Balance Sheet," which is on pages 66 and 67 of the printed Annual Report. 6. There is a vertical stacked bar graph titled "Loans and Leases" on page 29 of the printed Annual Report. The graph plots fiscal years from 1990 through 1994 on the x-axis and average dollars in billions on the y-axis. The "Loans and Leases" graph is a multi-color bar graph which stacks the average dollar balance in billions of: 1) commercial; 2) real estate - commercial; 3) real estate - construction; 4) real estate - residential; 5) consumer; and 6) credit card for each year from 1990 through 1994. The top of each bar represents the sum of one through seven as described in the previous sentence. These figures correspond to average balances provided on the "Six Year Consolidated Average Balance Sheet," which is on pages 66 and 67 of the printed Annual Report. 7. There is a vertical bar graph titled "Non-performing Loan Coverage" on page 32 of the printed Annual Report. The graph plots December 31 from 1990 through 1994 on the x-axis and the reserve for possible loan losses as a percentage of non-performing loans on the y-axis. These figures correspond to the reserve balance to non-performing loans ratios listed on Exhibit 25, "Reserve for Possible Loan Losses," which is on page 32 of the printed Annual Report. 8. There is a vertical stacked bar graph titled "Other Income" on page 36 of the printed Annual Report. The graph plots fiscal years from 1990 through 1994 on the x-axis and dollars in millions on the y-axis. The "Other Income" graph is a multi-color bar graph which stacks: 1) trust income; 2) service charges; 3) credit card fees; and 4) all other income for each year from 1990 through 1994. The top of each bar represents the sum of one through four as described in the previous sentence. These figures correspond to income amounts reported on the "Six Year Consolidated Statement of Income," which is on pages 64 and 65 of the printed Annual Report. 64 9. There is a vertical stacked bar graph titled "Other Expense" on page 38 of the printed Annual Report. The graph plots fiscal years from 1990 through 1994 on the x-axis and dollars in millions on the y-axis. The "Other Expense" graph is a multi-color bar graph which stacks: 1) personnel; 2) occupancy and equipment; and 3) all other expenses for each year from 1990 through 1994. The top of each bar represents the sum of one through three as described in the previous sentence. These figures correspond to income amounts reported on the "Six Year Consolidated Statement of Income," which is on pages 64 and 65 of the printed Annual Report. 10. There is a vertical bar graph titled "Common Stock Price Range" on page 68 of the printed Annual Report. The graph plots fiscal years from 1990 through 1994 on the x-axis and dollars on the y-axis. The "Common Stock Price Range" graph indicates five years of market price ranges for each year from 1990 through 1994. Each bar indicates the dollar range of the stock price for the year. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT NO. 21 MERCANTILE BANCORPORATION INC. SUBSIDIARIES AS OF MARCH 10, 1995
State or Other Jurisdiction of SUBSIDIARY Incorporation ---------- ------------- Mercantile Bancorporation Incorporated of Illinois . . . . . .Missouri Alton Downtown Parking, Inc. . . . . . . . . . . . . . . . .Illinois Mercantile Bank of Illinois National Association . . . United States Mercantile Bank of Illinois . . . . . . . . . . . . . . . .Illinois Mercantile Bank of Centralia . . . . . . . . . . . . . United States Mercantile Bank of Carlyle . . . . . . . . . . . . . . . . .Illinois Mercantile Bank of Mt. Vernon. . . . . . . . . . . . . . . .Illinois First Service Corporation. . . . . . . . . . . . . . . . . .Illinois Ameribanc, Inc.. . . . . . . . . . . . . . . . . . . . . . . .Missouri Mercantile Bank of St. Louis National Association. . . United States Manley Investment Company . . . . . . . . . . . . . . . .Missouri Mercantile Bank International . . . . . . . . . . . United States Mercantile Business Credit, Inc.. . . . . . . . . . . . .Missouri Mercantile Investment Services, Inc.. . . . . . . . . . .Missouri Merc Mortgage Inc.. . . . . . . . . . . . . . . . . . . .Missouri Mercantile Center Associates. . . . . . . . . . . . . . .Missouri Mercantile Center Redevelopment Corporation . . . . . .Missouri Mercantile Properties, Inc. . . . . . . . . . . . . . . .Missouri Mississippi Valley Advisors Inc. . . . . . . . . . . . .Missouri Sangamon Investment Company . . . . . . . . . . . . . . .Missouri Metropolitan Savings Service Corporation. . . . . . . . .Missouri Lending Express, L.P.. . . . . . . . . . . . . . . . .Missouri Mississippi Valley Life Insurance Company. . . . . . . . . . Arizona Mercantile Bank of Kansas City . . . . . . . . . . . . . . .Missouri MBTC Services, Inc. . . . . . . . . . . . . . . . . . . . .Kansas Mercantile Bank of St. Joseph. . . . . . . . . . . . . United States Coffey Bancorporation, Inc. . . . . . . . . . . . . . . .Missouri Mercantile Bank of Jefferson County. . . . . . . . . . . . .Missouri Mercantile Trust Company, N.A. . . . . . . . . . . . . United States Mercantile Bank of Boone County. . . . . . . . . . . . . . .Missouri Mercantile Bank of Missouri Valley . . . . . . . . . . . . .Missouri Mercantile Bank of Trenton . . . . . . . . . . . . . . United States Mercantile Bank of North Central Missouri. . . . . . . . . .Missouri Mercantile Bank of Northwest Missouri. . . . . . . . . . . .Missouri Mercantile Bank of Franklin County . . . . . . . . . . . . .Missouri Mercantile Bank of Pike County . . . . . . . . . . . . . . .Missouri Mercantile Bank of Plattsburg. . . . . . . . . . . . . . . .Missouri American Property and Casualty Co.. . . . . . . . . . . .Missouri Mercantile Bank of Phelps County . . . . . . . . . . . . . .Missouri Mercantile Bank of Lake of the Ozarks. . . . . . . . . . . .Missouri American Insurors Company . . . . . . . . . . . . . . . .Missouri United Savings Bank. . . . . . . . . . . . . . . . . . . . .Missouri Southwest Realty Services Inc... . . . . . . . . . . . . .Missouri United Southwest Service Agency, Inc.. . . . . . . . . . .Missouri American Bancorporation Inc. . . . . . . . . . . . . . . . .Missouri Ameribanc Data Services Corporation. . . . . . . . . . . . .Missouri American Investment Center, Inc. . . . . . . . . . . . . . .Missouri 2 Mercantile Acquisition Corporation of Kansas I . . . . . . . . .Kansas MidAmerican Corporation. . . . . . . . . . . . . . . . . . . . .Kansas Mercantile Bank of Topeka . . . . . . . . . . . . . . United States Mercantile Bank of Lawrence . . . . . . . . . . . . . United States Mercantile Bank of Kansas. . . . . . . . . . . . . . . . . . .Kansas Kaw Valley Building Corporation, Inc. . . . . . . . . . . .Kansas Kansas Trust Company. . . . . . . . . . . . . . . . . . . .Kansas MidAmerican Insurance Agency Inc.. . . . . . . . . . . . . . .Kansas MidAmerican Building Corporation . . . . . . . . . . . . . . .Kansas Crown Bancshares II, Inc.. . . . . . . . . . . . . . . . . . . .Kansas Mercantile Bank of Cape Girardeau. . . . . . . . . . . . . . .Missouri Mercantile Bank of Doniphan . . . . . . . . . . . . . . United States Mercantile Bank of Flora . . . . . . . . . . . . . . . . United States Mercantile Bank of Joplin . . . . . . . . . . . . . . . United States Mercantile Bank of Memphis . . . . . . . . . . . . . . . . . .Missouri Mercantile Bank of the Mineral Area. . . . . . . . . . . . . .Missouri Mercantile Bank of Monett . . . . . . . . . . . . . . . United States Mercantile Bank of East Central Missouri . . . . . . . . United States Mercantile Bank of Perryville. . . . . . . . . . . . . . . . .Missouri Mercantile Bank of Poplar Bluff. . . . . . . . . . . . . . . .Missouri Mercantile Bank of Ste. Genevieve. . . . . . . . . . . . . . .Missouri Mercantile Bank of West Central Missouri . . . . . . . . . . .Missouri Mercantile Bank of Sikeston. . . . . . . . . . . . . . . . . .Missouri Mercantile Bank of Stoddard/Bollinger Counties . . . . . United States Mercantile Bank of Willow Springs. . . . . . . . . . . . . . .Missouri Mercantile Bank of Wright County . . . . . . . . . . . . . . .Missouri Mercantile Bank of Springfield . . . . . . . . . . . . . . . .Missouri So-Mo Investments. . . . . . . . . . . . . . . . . . . . . .Missouri Mercantile Insurance Services, Inc.. . . . . . . . . . . . . .Missouri Franklin Finance Company . . . . . . . . . . . . . . . . . . .Delaware Convenience Financial Services Inc.. . . . . . . . . . . . . .Missouri Mercantile Card Services Inc.. . . . . . . . . . . . . . . . .Missouri Mercantile Bancorporation Inc. of Iowa . . . . . . . . . . . . . .Iowa Mercantile Bank of Northern Iowa . . . . . . . . . . . . . . . .Iowa
EX-23 5 CONSENT OF EXPERT 1 EXHIBIT NO. 23 Independent Auditors' Consent ----------------------------- The Board of Directors Mercantile Bancorporation Inc.: We consent to the incorporation by reference in the Registration Statements No. 2-78395, No. 33-15265, No. 33-33870, No. 33-35139, No. 33-43694, and No. 33-57543, each on Form S-8, and No. 33- 45863, No. 33-50981, No. 33-52986, No. 33-50579, No. 33-55779, No. 33-57489 and No. 33-56603 each on Form S-4, of Mercantile Bancorporation Inc., of our report dated January 12, 1995, relating to the consolidated balance sheets of Mercantile Bancorporation Inc. and subsidiaries as of December 31, 1994, 1993, and 1992, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of Mercantile Bancorporation Inc. s/KPMG Peat Marwick LLP ----------------------- St. Louis, Missouri March 30, 1995 EX-27 6 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 683,259 234 112,514 14,299 269,232 2,750,244 2,669,460 8,114,845 170,940 12,241,794 9,053,859 1,582,699 149,641 287,345 0 0 213,552 854,698 12,241,794 647,004 178,462 9,540 835,006 257,032 324,343 510,663 33,472 405 412,369 253,118 253,118 0 0 161,029 3.74 3.74 4.67 22,641 18,160 2,662 24,502 168,651 61,567 30,384 170,940 103,970 0 66,970